Thursday, 5 May 2011

Why are Greek exports that low ?

I have lately been thinking about the large current account deficit that Greece has and the fact that our merchandise exports (not services exports), are so low compared to other EU countries. They are rather low even when compared with other peripheral countries. But what is the structural reason behind that?

source: United Nations

As a result I’ve been rummaging through the EU KLEMS Database again, since it offers an excellent sectoral breakdown of output and employment, in my quest to make sense of this Greek peculiarity. The only shortcoming of these data is that they run only up to 2007.

In all high income countries, during the last 10-20 years, the tradeables sector (manufacturing, agriculture) is diminishing relatively to the non-tradeables sector (services). Hence, a smaller/larger tradeables sector could partly explain a lower/higher merchandise exports figure. The only objection I have to this is that some services can be offered to “overseas” residents, so they can in fact be “exported”.

source: EU KLEMS database

When looking at the charts, it is evident that Greece has a lower part of total output derived from manufacturing by both Ireland and Portugal. This differential amounts to more than 10% with Ireland and to about 7% with Portugal. This in part explains the lower value of merchandise exports for Greece, another part should be explained by the international competitiveness of Greek merchandise.

source: EU KLEMS database

What Greece and Portugal seem to share is the fact that a significant part of the labour force is employed to the primary sector (agriculture etc.) with a disproportionately lower part of gross output originating there. One simple explanation could be that a part of production flies under the radar, meaning that it’s informal. I don’t know if that is the case or if this observation can be attributed to the fact that farming land per producer in Greece is notoriously small, as well as it is divided in numerous miniscule properties, hence the production process is both costlier and lower-yielding than it could be. We shouldn’t forget though, the fundamental truth that labour could be employed much more efficiently in other sectors where labour productivity is higher. Hence, a less efficient allocation of resources could be part of the reason that the tradeables sector is so small in Greece.

source: EU KLEMS database

Another thing that all three countries charted here have in common, is the fact that a lot of workers are employed by the public sector, about 25% on average. This is a textbook case of not effective allocation of resources which lowers the potential output of the country. Of course, a large part of the services are offered by the public sector for social reasons, something more than desirable,  but couldn’t the same amount of output be generated if a lower chunk of the labour force was attached there? I think, that in the case of Greece the answer is undoubtedly affirmative…

Some more evidence of sub - optimal allocation of resources is the fact that Greece’s output derived from retail and wholesale trade (as well as restaurants and the recreation sector) is the largest of the three countries pictured here. I leave hotels out of the present argument. A lot of the actual output produced by these sectors could be informal, which if true would make the sector’s total output much higher, something that helps explain why such a large part of resources are allocated there. Such  high returns are difficult for entrepreneurs to turn down.

For the Greek merchandise exports to rise and the trade balance deficit to contract, structural changes have to occur first. A larger part of resources has to be channeled to the tradeables sector. The current situation makes something like that possible but even that process has its limits. People’s idiosyncrasies have to be considered and Greek people preferences are definitely different from those of Northern Europeans and are tilted towards more entertainment. As a result, even now that disposable income is undergoing a sizeable reduction, these preferences have not changed and at first could just result to some pent-up demand. The present situation has to persist for very long, for such intrinsic qualities of people’s idiosyncrasies to be  remarkably altered.

The second facet of the non-tradeables sector issue is the abnormally large and inefficient public sector. It definitely has to shrink and to become less bureaucratic and dysfunctional, if we want Greece to offer a better business environment and should we want to take better advantage of the resources available. For this to happen, someone has to find the right moment and the political courage to do so, since this is not a matter that will be resolved quietly. 

Moreover, theoretically, labour could be lifted from the primary sector and channeled elsewhere, but for something like that to happen, unique problems, like the small amount of farming land per producer, have to be addressed. All these are not easy to solve and in order to succeed they must be backed by all the parties involved, something that I can’t see happening today. In the case that Greece defaults, since we have a deficit in the food balance, temporarily more resources could be diverted to agriculture in order to feed the Greek people. 

As far as the Greek tradeable sector is concerned besides the part of competitiveness explained by productivity that I have discussed in older posts (here and here), another part is explained by wages which are being lowered right now (but whose effect domestically is being partially offset by indirect taxes being raised and other disruptions in the supply chain). Again, in the case that Greece defaults in some point, then wages will have to be lowered dramatically. But this is not the whole story. Few Greek companies have iconic brands, that could withstand heavy competition by low cost producers and could gain competitiveness for other reasons not associated with costs.

I think that it is evident, that if we want to increase Greek products and services competitiveness abroad than we are talking about a long-term process, that has to happen along with changes in people’s values. I have to say that I am not that optimistic about all these, but truth is that there is potential, we just don’t have a good record of making the most of it…  

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