Thursday, 14 February 2013


Some time ago I wrote a rather controversial post demonstrating how far divorced Greek output per capita was from from the country's competitiveness levels. I wanted to demonstrate, among other things, how far Greece had left to fall - the difference between the country we were and the country we'd been allowed to pretend we were.

My rationale was simple - an open economy cannot sustain its standard of living indefinitely if it cannot offer the same risk-adjusted returns to human, physical and financial capital as other similarly developed countries. Both money and people are mobile and eventually they will move to where they are best utilised.

So I devised a simple -too simple- test: let's take the ten economies closest to Greece in terms of competitiveness and check out their average per capita product - to smooth out the noise. It suggested some pretty catastrophic stuff.

In fairness, that was a little too alarmist; not that the controversy was about this. Rather, the controversy revolved around the economics of the post, which are admittedly less than rigorous - I've got nothing but intuition to go by and that's never a good guide.

In any case, I thought I'd run a version of the same exercise now, using data up to 2012 and leaving non-European countries out of the equation. I used per capita GDP figures and forecasts from here and WEF competitiveness scores from here. Because I've restricted this to European countries, instead of averaging out countries of 'similar' competitiveness, I can simply fit a curve to the observations - the result is what you can see below:

This rule-of-thumb calculation suggests that, by the end of 2012, Greece was about half-way to the bottom of the well, which is EUR11,550 - that's another 23% left to fall, bringing us to the same real GDP levels as the Czech Republic.  However, in purchasing power standard terms, the Czechs actually live better than we do. Do the math and you'll find that the 23% reduction should bring real standards of living in Greece right below those of Poland.

What this means, in a simple enough comparison, is this - though the 2012 figures will have been worse.

I call this the worst-case scenario, in the sense that it assumes competitiveness will remain at 2007 levels, reflecting zero reform. This is not entirely accurate - since the WEF's index of competitiveness (and real-world competitiveness too) depends heavily on macro stability, our competitiveness has fallen dramatically lower than 2007 levels.

My assumption here is that once the current crisis abates, the impact of macro instability on competitiveness will be reversed, but this is not necessarily true - we might never return to stability, or we may do so at such a profound cost to the country's human and social capital that the 'crisis effect' will become entrenched. I will try to test this in future posts.

In any case, my 'worst-case scenario' could be improved by reforms - Greece would need to return to the competitiveness levels of Italy or Poland (near the 40-41-mark on the graph) in order to regain the real incomes of 2007. It's not entirely impossible, is it?


  1. Dear Manos,

    This is all excellent stats. Thank you.

    However, I need to tell you that your (implicit in this post but explicit in a previous one) definition of odious debt is shockingly over-broad. There is not a dime of Greek debt that could be qualified as odious. To give an example, if Assad creates Syrian debt towards the Russians in order to arm and kill his people, a future free Syrian State could validly qualify this debt as odious. Assad uses the Russian credits in order to commit crimes against against his people and the Russians know it (I'm just afraid these bastards are paid in cash). Conversely, the Greek debt was subscribed by democratically elected governments and it was passed-on to the people in various ways (hence the life standards in absolute contrast with competitiveness). You seem to qualify as odious debt that may arise from corrupt procurement procedures. But this is not even close to the definition (remember the Assad example) simply because, first, it implies that peoples are only responsible for the lawful acts of their representatives and governors (not even remotely the idea of democracy, which goes with objective responsibility) and, second, it doesn't take into account the fact that markets (lenders) cannot be expected to know and not even to ask where a State will affect borrowed money (you 're the market-man, could imagine such a procedure?).

    So, excellent stats, intended as an answer to single-celled "brains" who believe that 250 bn of debt are in some politician's pockets. But nothing to do with odious debt.

    Carry on the good work!

    (a lawyer)

    1. Thanks George - I agree with you. Even the above example stretches the definition of odious debt to breaking point. Still, for the purposes of legitimacy I do believe there is a case for separating debt incurred in following a democratic mandate or the manifest will of the people from debt incurred in pursuit of personal profit alone, if only to show people how much of the former there is. One day we will need reconciliation in this country and it's going to be impossible unless we can agree on some facts. Thanks for your kind words.

    2. Precisely, Manos. There is no such thing as "debt incurred in pursuit of personal profit alone". Even the Tsochatzopoulos case does not fit this definition. Greece paid for military equipment and got it. Tsochatzopoulos became rich in the process but this only reflects a small part of the contracts. Is it conceivable that a bank, which simply lent Greece money in tempore non suspecto and is otherwise completely unrelated to this case, bears the consequence of Mr Tsochatzopoulos' corrupt practices through an over-broad definition of odious debt? In reality the whole odious debt discussion in the Greek context is nothing more than an attempt to justify the unjustifiable. But, more importantly, this discussion is beside the point. That's because Greece's problem is one of trustworthiness. And since the economy is in ruins for good reasons, no ethics-like argument is able to reverse this. Such an argument has a meaning only when refusing to repay debts is a conscious choice and not an unavoidable consequence of insolvency.

  2. Dear Manos,

    I read and commented your post some days ago and, after a cooling-off period, I read it again and I would like to ask a question more related to the “way to fall” issue. As you 've said in a previous post, everyone and his dog have been proposing “obvious” and miraculous solutions for the Greek case but also for the euro crisis. Most of them seem to me that they defy the fundamentals of logic but, as a non economist, I would like to share the following with you. See it as a simple sanity test and let me know if I got it wrong. Some say that a solution for Greece would be exiting the euro and printing its own currency, thus being able to finance any kind of job for the million jobless people. Then, the story goes, investment would come thanks to currency sovereignty and banks financing investments one after the other whereas growth through export of goods and services thanks to devaluation would appear sooner than later. If I'm not mistaken, Mr Weisbrot implied something along these lines in his famous paper "More pain, no gain for Greece", to which you replied in the most relevant terms that "This is not Argentina". Now, I give the champions of such ideas the benefit of ignorance of the situation of the Greek civil service. I thus, leave on one side the fact that Greek State can't make its actual civil servants work, let alone find some meaningful job to a million jobless people in a few weeks time. I also chose to ignore the fact that, as you underlined in a previous post, all kinds of institutional modernisation in Greece had their source in the EU, either because the EU imposed it or because it funded. This last should be enough for people with basic knowledge of modern Greek history in order to drop any idea of leaving the eurozone (which, by the way means leaving the EU altogether) but anyway. I want to focus on the export stuff: People, from he least serious to admittedly more serious, like Mr Weisbrot, suggest that leaving the common currency will spark exports of all kinds. Am I naïve to think that this depends heavily on the structure of Greek exports? In particular, if Greece exports products and services that, in order to be produced and offered respectively, require prior imports such as raw materials, isn’t this meant to have a huge dampening effect on any advantage induced from currency devaluation? Greece produces 3000 barrels of oil a day but needs 150 000 barrels a day. It exports important quantities of processed oil products through its 3 refineries, but those products depend on prior imports of oil (isn’t there a reason why current account balance stats are published in two versions, one including and one excluding processed oil goods?). Greece may export top quality agricultural products but hardly has any seed, fertilizer or pesticide industry. Tourism depends on infrastructure that is predominantly imported. Do you happen to have in mind a survey on these issues? Am I wrong to believe that default and exit would, in these circumstances, not simply make overnight Greeks consume as much as they produce, but in fact far less than that in the sense that from then on they would be able to produce mainly goods and services that do not depend on prior imports. Do I have to remind that Iran was for some time the only country that accepted to sell oil to Greece, since even Azerbaijan and Russia ceased exports for fear of debt redenomination and that EU sanctions on Iran were delayed for six months partly in order to avoid draining Greece? Isn’t it obvious that, without examining the nature and structure of Greek production of goods and services, it is impossible to conclude that exiting the common currency will leave the Greeks better off than they are today? Don’t get me wrong. I am perfectly conscious of the fact that, for reasons relating to the reality on the ground and capable of filling half the Wikipedia pages, leaving the euro is pure madness. But I simply wanted to focus on one the smart guys’ big arguments.

    Thanks in advance.

    (a lawyer)

  3. George - I am not sure it's 'madness' to leave the Euro - if the Greek people understand the costs and risks and still want to take this option I'm all for it. I would strongly advise against it for several reasons.

    To answer your question directly, your hunch is right. This is true of all countries in the sense that much of the value of exports is actually made up of imported value. You can find the statistics you need to discuss this here: http://www.oecd.org/industry/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm

    and here: http://www.imf.org/external/pubs/cat/longres.aspx?sk=40370.0

    Moreover, Greece cannot readily substitute its imports with domestic products. In fact it is the country least able to do this in Europe. The evidence of this can be found on pg 29 here: http://www.ecb.int/pub/pdf/scpops/ecbocp139.pdf

    Finally, one way of limiting the need for foreign inputs in our exports would be to revert to simple products (mostly agricultural products or minerals). Unfortunately there is good evidence that countries can't grow rich by exporting simple products. For instance, see this paper: http://www.levyinstitute.org/pubs/wp_616.pdf

    Finally, the assumption that independent monetary policy would fix our woes is simply ignorant of Greece's economic history. Here's a sample of how well monetary policy worked for us the last time we tried to use it to get ourselves out of trouble: http://3.bp.blogspot.com/-Mrw2Hz9ot4A/UPXs59HYGTI/AAAAAAAAAeg/XNaiyooi9eo/s1600/lostdecade6.png

    People suppose that they could take the pain of Grexit if it was short and sharp. I would argue that the same policies the Grexit advocates would like to see imposed would ensure it would be neither short nor sharp. In fact it would be a long slog just like the one we're currently experiencing.

    I do take people's point though, that Grexit would throw us into a pit from which some people would have the (misguided) hope of emerging one day. The loss of hope is so detrimental to the national psyche that I would trade off a good deal of economic sense to avoid it - except it can't be avoided.

  4. Thanks a million for the studies and the stats, Manos. That’s exactly what I was after. I scrolled them down and now I will take a closer look. Is it wrong to understand that if, on average, 25% of Greek exports’ value is prior imported value, a Grexit making an important bit of said imports practically impossible could have a disruptive effect in domestic production and consequently in exports? Not to mention that, if the new currency devalues two- or threefold vs the euro and the dollar, the imports that will remain possible will be at such a cost that will cancel out a good part of the “competitive advantage” that devaluation will confer.

    So far as my comment on Grexit “madness” is concerned, I trust that the “several reasons” making you advise against Grexit are essentially the same as mine when I talk about madness.

    First of all, the hope you are so correct in valuing as a crucial factor, may vanish within a couple of weeks or so. As you mention in your post, there is theoretically a long way down to the bottom and a Grexit is more likely precipitate the fall. People simply don’t realize this and their depression makes them vulnerable to populism from all directions. People are not happy or unhappy in a vacuum. As Tolstoy said, people always compare between what they and other people have or between what they have now and what they had once. In 1982, Greeks did not suffer from the national depression they suffer today. I don’t think, however, that they consumed more back then than they do now.

    More on the psychological dimension of the issue:

    http://www.psychologytoday.com/blog/the-edge-choice/201303/does-more-money-make-you-happier (the lack of creativity in the title is inversely proportional to the interest I found in the article).

    Second, the eurozone countries are Greece’s most important trade partners. They incarnate most of our export boom hopes in case of a Grexit. Have we assessed the turbulence that a Grexit will cause to our clients and the possible effect of a new European credit crunch to our exports?

    Third, if there is one thing the old Karamanlis was correct about, it was his conviction that belonging to a powerful family will necessarily make us converge with them in both institutional and economic terms. The treaties contained a series of provisions to that effect and derivative EU Law made this happen. Obviously, the socialist fathers of contemporary Greek populism and worthy successors of the colonels’ populist tradition could never accept this at that time, since such an admission would make them politically redundant. They thus spread their miserable parochial fear of “Greeks becoming the EEC’s waiters”. Grexit would mean giving up the most significant political achievement of Greece’s recent history, i.e. EU membership. Shall I remind how difficult it has been to convince the Germans and the Dutch to let us in? http://www.ert-archives.gr/V3/public/main/page-assetview.aspx?tid=96102&autostart=0 Since a common currency has been a landmark objective from the very beginning of the EEC, leaving the euro and causing such turbulence in the heart of Europe will simply show that after all they were right. Needless to discuss whether an isolated Greek State with its political caste and a big chunk of its society deeply eroded will have any power or indeed will to modernize rather than descend to middle-east Baathist standards.

  5. Fourth, in today’s interconnected world, it is all about how much people trust and take you seriously. The euro has big flaws. We all know now. But in 2000 the world total output in goods and services was estimated at around 35 trillion USD. By 2008, it had nearly doubled at 68 trillion USD. This means that in 2008 we lived in a completely different world than the one we knew only 8 years before. The relative importance of the western world diminished rapidly. In this context, a European single currency is as necessary as ever. A common commercial policy, even as enhanced after the Lisbon treaty, no longer suffices to avert the risk of irrelevance for the EU member States. Thus, fixing the various flaws of the Euro is the only way forward and individual go-backs are equivalent to international irrelevance. I am rather confident that once the German elite are satisfied that a minimum of soundness in fundamental issues is achieved, they will address in a pragmatic manner the transfer-union questions that have arisen so acutely last years. Hope the patient won’t be dead by then. It will be grave injustice for the Greek society to be absent after all it went through.

    Grexiters champion a conclusion based on a less than partial analysis of one and only factor (their rather imaginary competitive advantage through devaluation) and ignoring a ton of other factors showing that the euro and the EU is the institutional “natural reserve” in which Greece evolves and that Grexit will harm this reserve and thus Greece as its member, especially taking into account the political elite’s diachronically demonstrated “mood” for reform. But without due consideration of all the relevant factors, no valid conclusion can be reached. Comparing a imperfect theory to a practice that had to face all realities on the ground and deal with every single problem is intellectually dishonest. Besides, the “successful Grexit scenario” rests on a series of premises regarding mechanisms that will hopefully work. The same was true for the applied prescription. A good number of the latter assumptions were proven wrong, either because the Greek government chose to oppose the Troika instead of governing or because they were flawed from the very beginning. But what’s there to guarantee that the Grexiters’ assumptions will work? Nothing. But then, what will be an excuse for the Grexiters does work as one for the Troikans. Another sign of intellectual dishonesty when ideology dominates common sense of reality.


    PS. Since you mentioned quite rightly that knowledge of economic history of the Greek State is crucial:



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