Missing Greek Exports --- Really a Puzzle?

The timing of my latest piece on the dismal Greek export situation turns out to have been fortuitous: it almost coincided with the EU Commission's publication titled "The Puzzle of the Missing Greek Exports". The conclusion of that paper is identical to mine --- the Greek export situation is dismal!

In ancient times, that is before cross-border services like tourism or transportation had arrived, the formula for a country was quite simple: if you wanted to import products from abroad, you had to export an equivalent amount of products. If you had nothing to export, you would not be able to import anything. Tough luck for domestic consumers desiring perfumes or tea from Asia but --- a fact of life.

2013 was a banner year for Greece's Balance of Payments in as much as a current account surplus of 1,2 BEUR could be achieved. Even more importantly, the trade deficit could be reduced to 17 BEUR, still an enormous amount but sensationally lower than the 44 BEUR in 2008.

And yet --- one has to bear in mind that, even in the banner year 2013, exports accounted for only about 55% of imports! Yes, that is a significant improvement over the 2000s when exports accounted for only 40-45% of imports but one has to take a step back and think of the dimensions: for every Euro that Greece exported, it imported two Euros in exchange (more or less). The USA have been criticized for their trade deficit but exports always covered close to 80% of imports. In crisis-stricken Italy, that ratio is closer to 90%.

My understanding is that Greece has not ever in its modern history exported much, for whatever reasons. That's fine and dandy as long as one accepts the consequence of not being able to import very much which, in turn, leads to the consequence of having a low standard of living. My first visit to Greece was in the mid-1970s and I remember a rather poor country outside metropolitan areas. Fair enough --- you offer little but you also don't demand a lot. A combination of factors (notably the EU membership with its subsidies and the Eurozone membership with its cheap loans) allowed Greece to demand very, very much without a corresponding pressure to offer something in exchange.

The EU Commission's paper is a very academic piece: it applies something called the 'gravity model of trade' and it makes all sorts of most sophisticated regression analyses. However, the bottom line is quite simple to understand: Greece could - and should! - offer substantially more in exchange than it is presently doing. To quote:

"Greece's export potential could be enormous. Greece controls 16% of international shipping, making it the world's largest shipping nation. It is located along one of the world's busiest international shipping lanes - the Suez Canal and the Mediterranean - and at the crossroad between three continents. This makes it a natural gateway for trade between Asia and Central Europe. As part of the EU, it is a member of the world's wealthiest free trade area. It is plentifully endowed with sun, beach and culture, making it a prime tourist destination country".

This reminds me of a statement which I made frequently in the early phases of this blog, namely: 'If only the Greek economy developed the right way, I could see - even without an ouzo - Greece as the economic power house of the Eastern Mediterranean within one generation'.

The paper suggests that Greece's exports fall short by 33% of potential. Thus, Greece ranks only 31st among 39 countries analyzed in the paper. But the really interesting thing is that the paper does not put the blame for that on any lack of skills or competitiveness. Instead, the conclusion is that about three-fourths of the shortfall are accounted for by institutional deficiencies in Greece. To quote:

"For Greece, we find that structural reforms that improve the institutionial framework to the average level of our EU/OECD country sample have the potential to close the exports gap - the difference between actual exports performance and gravity to model prediction by between 54% and 78%, depending on the choice of institutional indicator. Rule of law is required for contract enforcement and the willingness of banks to provide trade credit. Sophisticated exports rely on access to the international value chain and the ability to import requiring light customs procedures".

That, of course, sounds rather theoretical and is difficult to prove in practice. Still, I once took a first-hand look at the practice and I would conclude that practice confirms theory in this case. This is what a successful private export consulter told me a little over a year ago: "The public export promotion agency (which is quite large) is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them".

In late 2013/early 2014, the Greek government had elevated the primary surplus to the status of a life-or-death-issue. Fine, let the technocrats have their fun as long as they understand that a primary surplus has nothing directly to do with the functioning of the Greek economy. Going forward, I would strongly recommend that the Greek government elevates the export performance to a life-or-death-issue because that will have a direct impact on the standard of living of Greeks!