Thursday, 6 October 2011

The Greek tradable sector odyssey

For some time now I wanted to do a post on Greece’s tradable sector (roughly meaning industry and primary production). How did it end up being such a mess? But for something to end up being such a mess things must have been better at some time, is that the case here?

First I want to point out the turning point for the Greek tradable sector, the time when the slide began. Here’s a chart.

source: AMECO, own calculations

Agriculture and other primary production sectors were in constant fall due to the reallocation of resources (mostly human resources at that), mostly meaning internal migration towards cities.

What about industry? Towards the end of the 80s the sector started to decline and it only stopped doing so during the current depression and that is a matter of declining less than the non-tradable sectors. I want to break this decline into two discreet components, the internal-front decline and the external-front decline.

Decline in the external front means the erosion of the Greek industrial sector's international competitiveness. This can be gauged by looking at Greek merchandise exports. Here’s the relevant chart.

source: AMECO

As a look at the chart makes obvious Greek merchandise exports started declining right after the start of the 80s. What is to blame for that? Well, Greece didn’t have many iconic brands back then and its exports were comprised mostly by non-sophisticated products (as thgey still do). Their advantage was being low-cost. The policies followed eroded the low cost advantage for Greece making its exports less competitive. At that they were largely assisted by the fact that developing, low-cost countries started flooding the world with cheap, non-sophisticated products that gradually but steadily displaced Greek merchandise exports.

source: AMECO

In the graph above I have plotted unit labour costs (ULC) for Greece, Germany and Ireland. This is an index reading and as we can see ULCs for Greece rose exponentially since the 80s and up until our country's EMU accession. Since industry is capital-intensive this measure does not adequately reflects costs' evolution but back in the 60s-80s Greek industry was not that capital intensive, plus it is mostly comprised by small-sized firms (SMEs) which also are less capital intensive than large ones. So I think that we can settle for that for the time being.

Let’s take a look at the internal front, the Greek home market. What caused the aforementioned decline there? What’s mostly to blame was the gradual scraping of tariffs due to Greece’s full EU (or whatever it was called back then) membership. Moreover as I think I can discern from the chart, Greece started removing import duties rather abruptly, but then this is just an impression I’m getting off the graph.  

source: OECD

After tariffs started being lowered, meaning post-1981, industry's relative importance started to decline as a % of GDP. Here’s a regression about the relationship between tariffs and the Gross Value Added (as a % of total) by the Greek industrial sector. I think the chart is self-explanatory. I used data for the period 1970-2010, when the sector was not growing in importance anymore and the effect of the fading tariffs protection is more evident.

source: OECD, AMECO, own calculation

One last point I want to make is that for this whole period (1960-1998) the Drachma was depreciating against the currencies of our main trading partners without this being able to halt the loss of competitiveness. It is rather obvious I think that the nature of Greece’s problems is structural and not cyclical.

source: AMECO

To wrap this up, I just want to confess that the post's title is a bit misleading since Odysseus did find its way eventually, while the Greek tradables' odyssey has not ended yet...

 P.S. A few more charts to help us realize just how badly damaged  Greece's competitiveness is along with pointing out some more causes for the current situation of the tradables sector and the economy in general.

source: AMECO

Greece has never (at least in the time span shown in the chart) recorded a trade account surplus. This highlights how deep-seated the country's competitiveness problem is.

source: AMECO, own calculations

Not only is the tradables sector rather small, but also its exporting segment is miniscule, making instantaneous exports-led growth very difficult to occur. To make that possible structural changes have to be implemented first.

source: AMECO

Chosen policies were heavily inflationary. Ignoring the 1973 and 1979 oil crises, it is apparent that the iflation differential for Greece was always positive even when compared with the periphery (of course Ireland was really prudent in that respect) with all the adverse consequences this particular policy stance had on domestic investment among other things. Of course the shortfall in investment has other breeding sources besides iflation, such as the crowding out of the private sector from the public sector in the 1970 - mid 90s period. High inflation prevailing in the 70s - mid 90s also distorted the structure of domestic investment with the lion's share of it being channeled towards housing.

I think that this is enough since the post is already monstrously long. I just hope that you got that far and didn't get bored of all the charts and rambling.

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