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[Markets] Greece Never Really Recovered From Its Financial Crisis Greece Never Really Recovered From Its Financial Crisis

Authored by Petropoulos Delis Fotios via The Mises Institute,

Now that Greece’s bailout program has ended, what are the prospects for economic growth and development in Greece? These two definitions are different, as economic growth is the increase of income while economic development includes factors as increased schooling, life expectancy etc. However, economic growth is mandatory for economic development. There are many theories in the international literature about economic growth. The fundamental theory is  Robert Solow’s that combines two variables — capital and labor — but there are many other such as the theories of Romer and Lucas which focus on human capital and innovation. I am going to examine investment, savings and labor as variables of economic growth in Greece scrutinizing data of Greece from the latest years before I reach a conclusion.

Greece has made numerous efforts to attract foreign investment. While the benefits of foreign direct investment are controversial, as they depend on the kind of investment, this effort seems not to have had significant results in Greece. The first graph depicts the foreign direct investment per year. The straight line shows the trend of foreign direct investment that is almost a horizontal line, there is no sizable increase.

The second graph shows the Foreign Direct Investment as a percentage of GDP from the World Bank. Over the last two years, the FDI does not exceed 2% of GDP:

From my point of view, there are three main factors that have led to this failure.

First, it is worth mentioning that Greece has the fifth-highest corporate tax rate in Europe (29%). This reduces the profit margin of a potential investor. It is 5.7 percentage points higher than corporate tax rate in Euro area (23.3%) while the rate of the neighboring countries is on average 14.2%.

Another drawback is the public bureaucracy. It is a problem that governments have tried to solve in recent decades, but little has been done. In any case, the facilitation of potential investors is crucial in order to attract investments.

Finally, political instability undermine investment and growth. The World Bank provides data from which an index has been created that depicts political stability. 2.5 points of the index indicates strength political stability and -2.5 points indicates political instability.

The picture below proves the political instability of Greece.

Savings are vital in economic growth according to economic theory as an increase in savings increases the capital stock which is one of the two variables in Solow’s model. A simple way to understand the importance of savings is that someone’s saving could be someone else’s funds for investment. Financial institutions play the role of closing the gap between them. The following graph depicts the savings in Greece per year. Domestic savings have been reduced from 2008 to date dramatically due to consumption needs as Greeks’ income has decreased.

This reduction has a negative effect on economic growth and it is a necessity the savings start to increase again.

The last variable we'll examine is labor. Labor force participation has decreased over the last ten years. An explanation behind this may be the frustration that unemployed citizens feel from the high unemployment rate that the Hellenic Statistical Authority has approximately calculated at 19.9%. This increased by 12.1 percentage points from 2008. But the quantity of the labor force is not the only important factor. One must also consider the quality.

Unfortunately, the quality of workers may be getting worse: approximately 400.000 Greeks have emigrated the last eight years in order to work abroad, the majority of them not only graduates of universities but also holders of a master’s degree. This brain drain has a huge impact on economic growth as affects productivity and innovation, both significant for economic growth. There are many factors that affect productivity but surely education is one of them. Also, according with the European Commission, the innovation performance of Greece from 2010 to 2017 has decreased by 0.9% and Greece is considered as modest innovator. Needless to say, it is the same period that brain drain was more intense. The next graph depicts the trend of labor force participation rate.

Greece still faces many headwinds. Investments have not increased sufficiently, savings are going down, and the labor force is not only reduced compared to previous years, but highly educated Greeks have emigrated.

Taking everything into consideration, it seems that Greece will have to change course to improve capital stock (via investment and savings), and labor, in order to achieve higher levels of productivity and actual production. Both are key in improving economic growth — and thus the Greek standard of living.

Tyler Durden Sat, 10/05/2019 - 15:00
Published:10/5/2019 2:29:40 PM
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