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Friday, August 17, 2018

Long-Run GDP Growth Prospects Are Poor

Last month, the IMF pubslished its 2018 Article IV Report on Greece and it was widely commented in the media. I have now read the full 80+ pages and can only recommend others to read the full report. It can be found under this link (under the caption Electronic Access, click on Free Full Text).

I focus here on Annex VI about Greece’s Long-Term Growth Potential and I reproduce it below. A summery statement would be: "Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades. Labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output). Long-run GDP growth prospects are thus poor, absent a major change in policies. Structural reforms to raise TFP growth and employment are therefore the only option to achieve higher long-term output growth."

Below is the Annex VI about Greece's Long-Term Growth Potential.

1. Greece is set to experience dramatic population aging over the next several decades. In its 2018 Aging Report, the EC projects Greece’s working age population to fall by about 35 percent between 2020 and 2060 due to a shrinking and rapidly aging population. This is among the largest such declines in the Euro Area, and three times the average fall for the Euro Area. Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades.

2. Greece’s productivity growth has historically been poor. Greece’s underperformance relative to peers is often associated with relatively low openness of the economy and a high share of labor allocated to non-tradable sectors. Total factor productivity (TFP) growth over the last 47 years averaged just ¼ percent annually, by far the lowest in the Euro Area. Assuming this historical average TFP growth rate going forward, labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output).

3. A pickup in investment could provide a short-run boost to growth, but productivity and demographics will dominate in the longer run. Investment is bound to recover from its highly depressed level once Greece emerges from the crisis, but the growth effect of this will wane once the capital stock returns to its long-run level. Staff’s medium-term projections already assume a temporary boost to GDP growth from higher investment (with real GDP growth rates averaging close to 2 percent during the investment recovery). Once the transition to the new, higher capital ratio is completed, however, the impact of increased investment will fade and growth dynamics will be determined by the evolution of output per worker and of the number of workers.

4. Long-run GDP growth prospects are thus poor, absent a major change in policies. As a starting point, combining the historical growth in output per worker of 0.4 percent with expected growth in the number of workers of -1.1 percent would imply long-term annual growth of -0.7 percent. This simple result is broadly similar to other recent findings in the literature, which estimate Greece’s baseline growth rate (before the effect of reforms) at -0.4 percent during 2024–2043.

5. Structural reforms to raise TFP growth and employment are therefore the only option to achieve higher long-term output growth. Estimating the gains from structural reforms is technically difficult, and results are necessarily imprecise. The empirical evidence suggests that the GDP growth gains from reforms are somewhat modest and transitory: while studies have documented an impact on output levels of 3 to 13 percent over the initial decade, the impact of reforms on growth tends to fizzle out afterwards.

 • The 2016 WEO estimates the GDP level gain from past episodes of product market deregulation in 26 advanced economies over 1970–2013 at about 3 percent on average, with gains accruing over a period of eight years, suggesting a GDP growth gain of about 0.4 percentage points per year during the eight-year period.
• Adhikari et al. (2016) looks at case studies of major past reformers in both labor and product markets—Australia, Denmark, Ireland, Netherlands, and New Zealand in the 1990s, Germany in the 2000s—and finds that the GDP effect of reforms ranged between 0 and 34 percent over a period of 5 years. Excluding Ireland, which is a clear outlier, the average impact was 0.6 percentage points per year over the five-year period, and in two out of six cases, there were no significant gains. Permanently raising growth would require a period of reform implementation that exceeds in both ambition and duration what Greece has achieved so far. While Greece has initiated numerous structural reforms in the context of its adjustment programs—from labor markets to energy, judicial reforms, closed professions, and others—implementation has sometimes lagged. The country’s key accomplishment has been a cornerstone labor market reform adopted in 2011, but this is set to be partially reversed after the current program. Other legislated reforms have faltered at the implementation stage. For example, numerous attempts at privatizing state monopolies in the energy sector are yet to reduce significantly the state’s share in this sector; judicial reforms have been slow moving, with continued high court backlogs; reforms to liberalize close professions have fall short from expectations in terms of both pace and scope; and; the investment licensing reform, which started in 2011, is still not fully completed. Given demographics, the impact of structural reforms will need to be substantial to achieve an overall long-term GDP growth rate of 1 percent over the next half century. Lifting long-term growth from its baseline of –0.7 percent to 1 percent requires reforms to add 1.7 percentage points to growth per year for the next decades. The OECD (2016) estimates that full implementation of a broad menu of structural reforms could raise Greece’s output by about 7.8 percent over a 10-year horizon, which translates into an increase in annual growth of some 0.8 percentage points for about a decade. Bourles et al. (2013) estimate this gain to be slightly higher, at about 0.9 percentage points per year, while Daude (2016) finds that reforms focused on product markets and improving the business environment in Greece could boost growth by about 1.3 percentage points per year for a decade.

9. In conclusion, achieving staff’s assumption of 1 percent growth in the face of adverse demographics and historically weak productivity growth will require that the Greek authorities and people commit to an extended period of profound structural reform. Implicitly, the 1 percent growth projection presumes that Greece would manage to increase labor force participation to levels that exceed the Euro Area average (to offset the significant projected decline in Greece’s working age population) and that would generate TFP growth rates permanently far above Greece’s historical average. This underscores the importance of rapid and decisive action on the part of the authorities to tackle the many bottlenecks that constrain growth and limit the country’s ability to prosper in the Euro Area. 

Tuesday, July 31, 2018

Pierre Moscovici Interviewed About Greece

A short article in the Ekathimerini referred to an interview which EU Commissioner Pierre Moscovici had given to the Austrian magazine Profil. Here is the original interview.

Right in his first response, Moscovici made the bold prophecy that "the Greeks will now see that their sacrifices mattered." His argument seemed to be that Greece now has more flexibility to provide for more social justice but he gave no specifics. In that same response, Moscovici described pre-crisis Greece as follows: the country's economy had been very weak, taxes were not paid, public administration was inefficient as evidenced by the fact that there was not even a nationwide real estate cadastre. A superficial reader could interpret this to mean that now, after 8 years of reforms, the economy is strong, taxes are being paid, public administration is efficient as evidenced by a nationwide real estate cadastre. Well, Moscovici didn't say that, of course. Instead, he reverted to the common phrase that "much progress has been made but there are still steps to be taken."

"The market now have confidence in Greece again. Greece has recovered the freedom to pursue its own policies. We have stopped the growth of debt" - bold statements by Moscovici.

Moscovici blames the German Finance Minister Schäuble for having been too aggressive in 2015, for having brought the idea of Grexit into play. At the same time, Moscovici believes that Schäuble's aggressiveness was in response to the unfortunate conduct of the Greek Finance Minister Yanis Varoufakis. And that brought the conversation to the subject of Varoufakis.

"Varoufakis is a brilliant and eloquent person, but he is a fake. He was the wrong person at the wrong time in the wrong place. I have had many meetings with him. At least in the beginning we had a good relationship. But he was never interested in a true compromise. He always lectured all the others. His methods were not those of a statesman but, instead, of a spy. He secretly recorded conversations and negotiations. That may perhaps help the sale of his books but one doesn't generate trust that way. Furthermore, all his talk about Plan B increased the danger of a Grexit. It's alright if you have disagreements with some of your friends but if one disagrees with everyone, then one is a lone wolf."

Moscovici praised the recent debt relief agreement, emphasizing that Greece will not have to pay any interest until 2032. Presumably, he only referred to the ESM debt here. Moscovici also mentioned that the subject of debt relief might be revisited in 2032.

Moscovici was quizzed about the figure of 50 BEUR which, at one time, was used as the target for privatizations and which now is obviously unrealistic. Moscovici sidestepped this question by saying that the EU Commission had never mentioned this figure.

Finally, Moscovici was quizzed about Greece's military expenses. The interviewer tried hard but he/she could not get Moscovici to say that Greece's military expenses were too high.

Bottom line: an uninformed reader could well come to the conclusion that Greece had been in deep trouble 8 years ago, that 8 years of EU-guided reforms had delivered positive results and that a bright future was ahead for Greece.

Monday, July 30, 2018

No Longer A Task Force To Turn To!

One expression keeps recurring whenever some form of disaster strikes Greece (be that the refugee crisis, forest fires, etc.), namely that "the Greek state is dysfunctional."

One conveniently tends to forget that there once was an EU Task Force for Greece whose mandate it was, among other things, to help the Greek state to become more functional. Its mission statement proposed that "the Task Force is a resource at the disposal of the Greek authorities as they seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

Whether it is a nation-wide real estate cadastre with zoning maps, emergency plans for natural disasters, waste management, etc. etc. - all that and many, many more things fall into the category of an 'efficient public administration'.

The trouble with the TFGR was that it was "at the disposal of Greek authorities" to be used by the Greek authorities "as they seek to build a modern and prosperous Greece." It couldn't have any authority on its own because that would have been considered an interference with Greek sovereignty.

There no longer is a TFGR which the Greek state could turn to for assistance but it is highly doubtful, in my opinion, that the Greek state, on its own, can accomplish something within a short time frame for which other countries have required decades and centuries of experience and culture to develop - a well-functioning state and public administration. The TFGR falls into the category of missed opportunities.

Wednesday, July 18, 2018

A Lesson From Fraport's Success

Fraport Greece, the 14 regional Greek airports which were acquired in 2017, reports records in revenues and earnings. Pre-tax earnings were 20,4 MEUR. Since after-tax earnings were 14,4 MEUR, mathematics would indicate that the Greek state shared in Fraport's success to the tune of 6 MEUR. Total revenues were 233 MEUR and the target for 2018 is 300 MEUR. One doesn't need a calculator to figure out that this is VERY substantial growth!

From the distance, I can visualize my Greek friends, with whom I discussed Fraport on many occasions, blaming the government for having given away such a profitable company on the cheap. I cannot judge this because I don't know the details of the transaction but I would guess that as long as the Greek state shares 30% of Fraport's earnings, it sounds like a reasonable deal.

My point is a different one. The idea of foreign investment is not only to share in the success (albeit it a very important goal!). The principal idea of foreign investment, from the beneficiary's point of view, should be to obtain something which could not have been obtained otherwise (in addition to tax revenues). Things like new investment, new employment, etc. The most important derivative of foreign investment is the transfer of know-how in all respects, above all know-how in management, so that the foreigners' experience can be leveraged-up into domestic progress.

What is Fraport doing differently than before? Is it really only the access to capital? Very unlikely. Access to capital can be destructive when that capital is invested and managed poorly. One of the great secrets of China is that they acquire (and often steal) foreign know-how. When investments are managed well and profitably, capital will come on its own.

Tuesday, July 17, 2018

Comparative Charts About Greek Pensions

I came across the below selected charts in a paper by the Austrian think-tank Agenda Austria where they analyze Austrian pensions. They come to the conclusion that Austria should switch to the Swedish pension model (both, higher pensions and lower contributions than at present). Perhaps someone will some time compare the Greek pension system to the Swedish model. The source of the graphs is the OECD:

1. Actual vs. Legal Retirement Age

The dots show the legal retirement age and the bars the actual one. For men, the legal retirement age in Greece is 65, the actual is about 3 years below that. That puts Greece roughly in the middle of the group. Interestingly, for women, the legal and actual retirement ages are identical at 60.

2. Contribution Rates

Here, too, Greece is in the middle of the group with 20% of gross salaries. One wonders how there can be such huge differences among pension systems (33% in Italy, 16% in Belgium).

3. Pension Gap

The table shows pensions as a percentage of the former gross income. Here, too, Greece is in the middle of the group with a rate of 70%. I am highly suspicious of the chart because the 90% for Austria seems far from reality and the 101% for the Netherlands seem unreal.

Sunday, July 15, 2018

Bloomberg's Model Shows Dramatic Decline In Greek Interest Expense

The source of the below graph is Bloomberg, as presented in this article. The graph shows annual debt payments broken down into bond maturities, loan maturities and interest on both. What stands out is the interest payments shown in this graph. It's a bit hard to tell from the width of the bars how much the underlying interest is in Euros but a full column represents 5 BEUR. And there is at best one column (2019) where the interest bar spreads over half a column, i. e. interest in the area of 2,5-3 BEUR.

In recent years, Greece has spent on average about 5,5 BEUR on annual interest. The Bloomberg graph would suggest a dramatic decline in interest, much more so than I read in the recent debt relief agreement. So either Bloomberg's numbers are wrong and/or they know something which the world hasn't been told yet. If someone from Bloomberg reads this, a clarification would be welcome.

Saturday, July 14, 2018

The Farce Of EU Elites' Jubilation About Greece

Tansparency International has published a report on the "Evaluation of the Level of Corruption in Greece and the Impact on Quality of Government and Public Debt." Here are the highlights (very interesting reading!) and here is the full report.

The highlights list 10 "other key facts" (other than corruption) which underline my previous argument that the recent jubilation by EU elites about Greece having turned the corner were rather a farce.