The Greek economy contracted by 25% since 2008, unemployment soared to 27% and Greece appears as an outlier in the eurozone crisis. In our view the nosediving GDP, apart from being critical for its debt sustainability, should be explained by referring to the buildup of a large structural imbalance between the tradables and the non-tradables sectors of the Greek economy. The distinction between internationally tradables and non-tradables presents important interest as regards the current structural-economic crisis of Greece.
“Internationally tradable” goods can be transported and consumed away from where they are produced according to the real “comparative advantage” of each country, at the “efficient frontier”, along the supply curve of the global economy (which could be the “cost-efficient frontier” for Bangladesh clothing industry or the “technological frontier” for US internet companies). Internationally non-tradable goods and services can be consumed only in the vicinity of the point of their production and, therefore, their price is determined locally.
The “endogenous” growth potential of the economy is closely related to a, more or less, vibrant sector of tradables. However, the non-tradables are not irrelevant to development, since they are also used as productive inputs. Given that their supply is limited by the current productive capacity of the local economy, their special feature is that in case of a sudden surge in their demand, their supply cannot increase in the short run, and the market has to clear through an upward price adjustment. In the medium to long term, though, productive resources of the economy can move from the tradables sector to the non-tradables to take advantage of widening profit margins, thus generating a rise in their produced quantities.
This phenomenon is stronger in a “small open economy” which is a “price taker” (as is the case for Greece). Even an increase in total aggregate demand that is not particularly directed to the non-tradables, will increase their relative prices in the short term (which is equivalent to exchange-rate appreciation) and will transform the production structure, with a proportional overgrowth of non-tradables sector in the medium to long run, provided that excess demand persists.
Strangely enough, this process can be perceived as a course of “growth” or “development”. According to some views of the 2000-2009 period it was a particular kind of development: the “Mediterranean” which was driven by “consumption”(!), that supposedly made it different from the other kind of “development”, the “Asian” which, on the contrary, was driven by “production”. Life, and the Greek crisis, finally revealed that there is only one type of development, with no need of geographical prefix, the one solely and closely related to improving the productive capacities of an economy.
Of course, the extensive recourse to imports, in order to satisfy the augmented demand for tradables, and the subsequent widening external deficit (along with the brushing inflationary pressures) would have forced a depreciation/devaluation of the national currency to reequilibrate the internal balance between tradables and non-tradables. But this is not the case for countries not dealing in their own national currency, as they are members of a monetary union. The current Greek crisis is the product of such a process.
When Greece was to join the euro system, in 2000, its sector of internationally tradable goods and services, according to our calculations, corresponded to 25% of its GDP, a very low ratio, actually the lowest in the EU 15 at the time. Instead of high productivity that could explain that lowest tradables share, Greece had the lowest productivity of the industry sector in the EU-15 as well. The balance of trade and the current account, both, presented significant deficits (in 2000 at -9,5% and -11,2% of the GDP respectively). The small size of the tradable sector of the Greek economy was not the corollary of high productivity but of a structural deficiency, well known for a long time.
What happened to that structural deficiency since then? In 2009, when the Greek economy started collapsing, the tradables sector had shrunk to 20,5% of GDP. Was that shrinkage, in one way or another, connected to the 2009 failure of the Greek economy? Or was it simply the natural result of the improvement of overall productivity, and had nothing to do with the nose-diving income levels and the severe Greek depression that today runs in its sixth year?
To answer this we have to better understand the movement of tradables between 2000-2009. We further divide them into two subcategories. The first consists of goods that are produced with technological methods which do not improve dramatically over time and, more or less, belong to the cultural or natural “endowment” of the national economy. Their supply and price are not determined essentially by the evolution of the technological input but, rather, by global demand. The path of their supply curve is closely correlated with the trend and the cycle of global economy. We call these “Dutch disease goods”. This subcategory of the Greek economy comprises the sectors of mining, international maritime transportation and of tourism – all moving in a procyclical way with the global economy and following its long run trends.
The second subcategory is the one producing goods that we could call “Baumol goods”, i.e. from branches where productivity improvements are of prime importance and where the producer, in order to remain in the market, must always operate on the edge of the “technological frontier”. Those are the manufacturing branches, but also the IT branches of the economy. The “Baumol goods” sector, where “learning by doing” is the way to operate, is the part of the economy where the level and the strength of “endogenous” growth can be properly gauged.
The statistical evidence suggests that the production of “Dutch disease goods” in 2000 accounted for 9% of Greek GDP. In 2009 their share of GDP was exactly the same: 9%. On the contrary the “Baumol goods” that in 2000 accounted for 16%, in 2009 contracted to 11,5% of Greek GDP.
To have a more firm assessment of those structural transformations of the Greek economy, we explore three different angles: a) the external balance and current account movements; b) the productivity growth in the industrial sector, which is indicative for the entire productivity growth of the economy; and c) international comparisons.
The trade balance and the current account have not only remained in deficit in 2000-2009 but it had further deteriorated in the late years of the period (the current account, for instance, from -11% of GDP in 2008 to -14,7% in 2009).
There are an infinite number of studies denoting the plummeting of competitiveness of Greek industry during the first period of Greece’s eurozone participation. That the Greek industry, in 2000-2009, was simply collapsing, and not advancing with big strides of productivity growth becomes evident if we consider the knowledge input and the technical ingredient of its products, which in 2000-2009 had regressed to the level of other Balkan economies with much lower per capita income.
International comparisons are also revealing. All other European “small open economies” of a higher level of productivity than Greece, display a higher, and not a lower, percentage of “Baumol goods” in their GDP, which is tantamount to a proof that the flimsiness of the tradables sector in Greece is not the result of extremely advanced productivity.
Table 1 : Share of “Baumol Goods” in GDP, 2009
Source: OECD National Accounts
Note: * With this type of data, Greece’s percentage of “Baumol goods” relative to GDP is slightly different than in the case of NACE tables.
In the current severe crisis that Greece faces the weakness in its tradables sector is of key importance. During its first decade in the eurozone, excessive public but also private borrowing, with very low interest rates, was overcompensating for the chronic inability of the tradables sector to provide to the economy the liquidity of the common European currency that was necessary to sustain an hypertrophic consumption pattern. Yet, when at the end of 2009 the overborrowing became evident, and the market mood changed abruptly, aggregate demand in the Greek economy plummeted and the balance between the two sectors shifted. The current Greek crisis is nothing more than a violent process by which the relative prices of non-tradables to tradables readjust in line with fundamentals. Sadly, the main way that the forces of economy know to do that is through unemployment and “liquidations”.
If it was a “Dutch disease” that hit Greece, then, the question arises: what was this particular good or commodity, with such a short life, that generated all this turbulence? It was not tourism or shipping. Both these sectors, although by nature contain an element of “Dutch disease”, have remained at a constant ratio to GDP throughout the period and today represent two of the main hopes of Grecovery. The commodity that tipped the balance was something else; actually it was not a tangible good or commodity at all, but rather a virtual quality or even virtue. It was the “prerogative” for Greece of being a eurozone member during the first decade of the 21st century.
Due to steadily increasing public and private borrowing from abroad, under the illusion of both lenders and borrowers that a member of EMU cannot go bankrupt or risk insolvency, economic agents in the Greek economy were operating under an entirely erroneous, but at the same time firm, belief that the level of aggregate demand they were facing represented genuinely and correctly the level of development of the economy, despite the irrational swelling of the non-tradables sector, while their relative prices were sending all those wrong signals to economic agents.
Although the Greek crisis initially appeared as, and is still considered to be, a fiscal crisis, its severe and prolonged repercussions are due to the fact that beneath its fiscal element there is a more important structural one generated by the irrevocable collapse of its non-tradables sector.
The problem with excessive fiscal borrowing is not that much related to a certain theoretical debt “threshold” and the supposed impediment that the burden of servicing it in the future would constitute to the growth rate of the economy. The most important problem is that the procedure of amassing an excessive (public and/or private) debt undoubtedly equates to forming a structurally unbalanced economy with an inherent inability to last longer than the triggering of a “liquidity” (at a first stage) and a “solvency” immediately (after that) crisis. This is the natural outcome of the fact that excessive borrowing becomes excessive demand that distorts the relative prices between tradables and non-tradables at the expense of the former. Hence the economy is infected with an almost mortal idiosyncratic “Dutch disease”.