I’ve been reading a few papers lately regarding
the Middle Income Trap. It made me think about Greece.
The World Bank runs a classification ofcountries to Low Income, Lower Middle Income, Upper Middle Income and High
Income according to their Gross National Income per capita level. Greece is
currently classified as High Income. This classification of course is desirable
but is it sustainable and was this propelling of Greece to High Income status
built on solid foundations?
Development is a rather wider notion than
growth and it encompasses all kinds of aspects (and as a consequence the
relevant indicators). If I wrote about all these, then the word-count and
probably chart-count would go through the roof, so I’ll narrow it down with the
danger of violating the statement that I just made about development and
growth. So, besides growth metrics and relevant indicators, I’ll include a few
indicators about governance.
If you want to take a look at a definition of
Gross National Income, you can see how the OECD defines it here.
To draw some conclusions I look at Greece,
Portugal and one of the World’s most widely cited success stories, Korea. These three
countries share one feature; they crossed the $12,476 High Income watermark,
the same year, namely, 2003 (Greece is the dark blue dot, Portugal the dark red
one and Korea the light red one).
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| source: World Bank |
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| source: World Bank |
From 2003 to
2008, where the peak for the above countries lies, Greece recorded the highest
growth, followed by Korea, while from 2008 till 2011 Greece registered the
biggest decline too, followed by Korea and not Portugal, maybe skewed by
Korea’s larger reliance on international trade (great trade collapse 2009) and
faster population growth (since this is a per capita figure).
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| source: World Bank, own calculations |
To cut to the chase, I think it is really
interesting and revealing to take a look at a decomposition of growth over the
past 20 years.
Since, there are no data, at least that I know
of, dissecting growth for these particular countries I tried to derive it
myself using a rather primitive method. I took all GDP components, at constant
Local Currency Units (as the World Bank puts it) and calculated each year’s
change. Then I simply plotted the results for each of the three countries. It
is rather facile, but I think that it is adequate to give us an idea of where
growth came from. As a final note I want to remark that I used Gross Capital
Formation, instead of Gross Fixed Capital Formation since the former includes
changes in inventories.
Here’s the chart for Greece.
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| source: World Bank, own calculations |
Now, the
chart for Korea.
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| source: World Bank, own calculations |
Finally,
here’s the respective chart for Portugal.
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| source: World Bank, own calculations |
Now that we have a full picture I can try to
draw some conclusions. Out of the three, Greece’s growth that led to its ascend
to High Income status (1993 – 2003), was mostly based on internal sources, i.e.
private final consumption, Gross Capital Formation and to a lesser degree
General Government Final Consumption. For a limited number of years (1997 – 2000),
Exports made a satisfactory contribution. After Eurozone accession, growth came
almost entirely from internal sources, namely, private final consumption and gross
capital formation.
Now, what about Korea? Before the Asian crisis
broke out (1993 – 1997) growth came from Household Final Consumption
Expenditure, Gross Capital Formation (adding weight to the notion that the fact
that Korea ran a current account deficit during this time was due to machinery
imports since it was building its industrial capacity). After the crisis,
growth was based more on the external sector and to a much lesser extent to
private final consumption. Gross capital formation’s weight was reduced too,
compared to the pre-crisis time, maybe due to the fact that services were
gaining in importance in the Korean Economy.
Now Portugal, is a mid-point between the two
extremes analysed above. Pre-Eurozone membership, growth was based on private
final consumption and gross capital formation (the country underwent some kind
of a boom in the construction sector). After the country exchanged Escudos for
Euros, growth stemming from private final consumption was considerably subdued,
while growth from gross capital formation was totally absent. Exports
contributed more than they did in the previous period.
To sum it up, Greece’s growth after it attained
High Income status came from its internal sources in its entirety, Korea
derived the lion share of its growth from its external sector and Portugal lies
somewhere in the middle.
Something that can and does shapes the
trajectory of growth and where it comes from is governance. Here are some
select indicators from the World Bank’s Worldwide Governance Indicators.
The first indicator is Control of Corruption.
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| source: World Bank |
After entering the High Income group, the said
indicator for Portugal is in broadly constant. The same, unfortunately, cannot
be for Greece, which recorded a very low reading for 2011, while some progress
had been made from the years prior to EA membership. Korea made some progress
compared to the nineties but lately it appears that progress in that particular
field has stalled.
The next indicator is Government Effectiveness.
A look at this indicator will produce some
rather contrasting conclusions. While reading for Korea is in constant ascent,
the same readings for Greece are in free-fall, with the country recording a
very low reading again in 2011, the worst out of the three. As far as Portugal
is concerned while during the first years of Euro membership readings were as
good as those in the run-up to membership, after that, readings receded showing
some complacency after the target was achieved.
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| source: World Bank |
The final
governance indicator that I’ve plotted is Regulatory Quality.
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| source: World Bank |
For Greece, there was some considerable
improvement right after Euro accession compared to earlier years but a rapid
fall ensued and again the country recorded the lower reading out of the three
in this instance too. Respective reading for Portugal showed a slightly lower
reading after the EZ membership goal was reached and a considerable fall in
2011. On the contrary, Korea is here too steadily rising. I think it is
adequate to say that while the country exhibited the lowest reading for 1996,
it did manage to rank higher than the other two countries in 2011.
Another feature of High Income countries is
usually that their produce possesses a higher technological content. One area
that this can be exhibited is a high % of knowledge intensive services (I’ve
looked into that in an earlier post) but for countries just crossing the High
Income threshold, the main arena that this is manifested is (even after the
sustained de-industrialization that the western world has sustained for decades
now) the % of value added that manufacturing of different technological content
corresponds to.
Here’s Greece.
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| source: OECD |
Here’s Portugal.
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| source: OECD |
And finally, here’s Korea.
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| source: OECD |
A few quick takeaways from the charts are more
than enough to portray a rather clear picture. The technological content of
Greek manufacturing is extremely low and manufacturing accounts for a very low
share of total value added. In Portugal manufacturing accounts for a
significantly larger share of total value added and the technological content
is higher than that of Greece, but still is low. Korea is intensely
industrialized and high tech along with medium-high tech manufacturing takes up
the bulk of manufacturing value added.
There are some common themes that can be
discerned from the charts, low and medium-low tech manufacturing produce an
ever-decreasing chunk of value added. On the other hand in Portugal and Greece
high and medium-high tech manufacturers show more resilience but just that,
while in Korea, until recently they have been growing quite fast.
I would like to include more indicators
painting a fuller picture but, unfortunately, data for these are confined to
the last few years.
To get back to
my original point, my skepticism regarding Greece’s ascent to High Income,
apart from the qualitative aspects outlined above, had to do with the sources
(domestic sector growth) and its sustainability.
The sectoral balances of the engines of Greek
growth, the general government and household sector more specifically, should
give us a hint of the sustainability of Greece’s High Income status.
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| source: AMECO, own calcualtions |
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As the chart makes apparent, Greek households
were and still are overextended (not getting into the reasons here). To acquire
a more sustainable footing, significant scaling down of spending and scaling up
of savings is needed. Given that this was the main engine of growth this past
decade (the High Income decade) it becomes apparent that this is going to have
(and already has) significant negative consequences on GDP and GNI. Portuguese
households are less extended due to higher saving and lower investment but are
significantly leveraged (not shown by this indicator). The trajectory of
interest rates is going to be of paramount importance for Portuguese households
then. Both countries’ household sectors have to scale back (immensely more in
the Greek case) and this is going to be painful. Austerity being applied to
both countries does make households more strained due to deterioration of
incomes and increases in taxation hence making households’ deleveraging immensely
more difficult.
Finally let’s take a look at the general
government.
The said deficit for Greece is still monstrous,
making further austerity-only induced adjustment strenuous. Portugal’s case is
more contained but further adjustment is still going to be very painful due to
the simple fact that not all sector can deleverage at the same time without
monumental pain ensuing.
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| source: AMECO, own calculations |
To wrap this up, Greece did evolve after
crossing the High Income threshold the way only natural resources-rich countries
do. With weak governance, facing a gradual thinning of an already weak and with
low technological content, manufacturing base and an increase in low-knowledge
content services as well. If you’re wondering what played the role that
resources play for aforementioned countries, you just have to take a look at
the two last charts. In the original question that the post posed, my answer is
that should Greece have been in another part of the world, it would have been a
middle income country (and probably one stuck in the middle income trap).
Though, since in my humble opinion location does matter, situated in Europe and
being part of the EU and later the Eurozone (membership played an important
role in Greece’s ascent since it is the reason for lower interest rates and
transfers of EU funds), means Greece can be a borderline High Income country…
