Tuesday, 19 April 2011

Greece and the law of comparative advantage

Since lately I’ve been thinking a lot about Greece’s competitiveness, I would like to take a step back and look at the sectors that Greek comparative advantage lays. 

If you don't remember or don't know what the law of comparative advantage fundamentally involves check this link.

The indicator that the graphs in this posts display, is all about the revealed comparative advantage and according to the OECD info, it captures “the intensity of trade specialization of a country within the OECD group of countries”. This is an indicator developed by the OECD and the fact that it takes under consideration only OECD countries means that there are some limitations to it, but I think that it certainly gives us a whiff of what it is supposed to be.
A reading of more than one means that the country is specialized in exports of this particular product and the inverse is true for readings of less than one.

source: OECD

I now want to take a look at how separate sectors the Greek economy are doing. As we can see from the chart above, Greek fish exports are a large chunk of the total as are agricultural products. The Greek manufacturing sector’s exports share is marginally above the OECD average, while those of electricity are more so.  

source: OECD

If we delve deeper into the product-specific breakdown of Greek manufacturing we can see that Greece’s specialization lies mostly in segments that merely process the country’s primary production (tobacco products, food, wearing apparel). The vast majority of these sectors products could be characterized as low complexity. In some cases this means that their added value tends to be low. If I’m wrong here you can say so in the comments section.

When looking at the sector breakdown of manufacturing exports specialization I get the feeling that the fact that so many are borderline specialized means that there actually wasn’t any government policy involving tax breaks or anything similar aiming to lure producers. Another impression I get from looking at the manufacturing segments that Greece appears to be “specialized” in, is that the exports data are skewed by a few large and export-oriented companies. If one keeps in mind that Greek goods exports are pretty small he/she can realize that this can pretty easily be true. So maybe Greece isn’t really specialized in a few of the segments shown in the chart, we just have a few large and export-oriented companies whose sales are too large a chunk of the total goods exports figure. 

On the other hand look at the manufacturing segments that Ireland is specialized in.

source: OECD

Ireland appears indeed to be specialized in these parts of the manufacturing spectrum. What matters for me is that for three out of five segments, their products are highly complex and with high added-value. Due to the negotiations about the EU-IMF bail-out that Ireland received this year it is now widely known that the corporate tax rate is pretty low and stands at 12,5%. 

This fact along with some other factors, I suspect, brought a significant amount of foreign direct investment (FDI) in Ireland. Something that we Greeks are painfully aware that did not happen in Greece. FDI inflows are among the top factors contributing to higher productivity due to the transmission of know-how. I have a follow-up post about competitiveness coming soon. What is worth some thought is the fact that most of the high-tech companies seem to be foreign ones. What happens if the Irish tax-regime becomes less friendly? In what degree have Irish firms taken advantage of the know-how brought on the Irish shores by these foreign players?

For Greece, for the sectors that some relative advantage is displayed, the reasons tend to be long tradition in that area along with the country’s “physical” advantages and maybe the fact that no other sectors have emerged to outshine them. In Ireland, government policies seem to have advocated growth in the sectors that these relative advantages are displayed since office equipment certainly doesn’t grow out thin air...  

1 comment:

  1. A sure blast from the past here, you have a brilliant blog by the way.
    Could you provide the source link for the graphs, or possibly and updated version of these graphs?