Exporting firms urgently need to improve competitiveness

The current account balance may be less important in Greek macroeconomic policy today than it was in the era before the Economic and Monetary Union (EMU) though it is a useful measure of the country’s international competitiveness. Current account and trade deficit figures released by the Bank of Greece on Friday confirm a deterioration in the competitiveness of Greek exports and stress the need to take measures to address the problem, especially in labor intensive industries which have been hit the most. The Greek central bank said Greece’s current account deficit in the January-September period widened by 406 million euros compared to a year earlier, and reached 5.7 billion euro. A decrease in import payments by 178 million euro did little to avert the widening in the trade deficit. This came on the heels of a considerable drop in export receipts to the order of 570 million euros, which, along with a smaller transfers surplus, the result of a fall in European Union transfers, accounted largely for the current account balance’s deterioration in the first nine months of the year. This development is hardly surprising, especially on the export side, given the significant economic slowdown in the EU, where a good chunk of Greek goods are exported, as well as in non-EU European countries and, to a lesser degree, by the euro’s appreciation in trade weighted terms over the last few months. Still, it puts into doubt the official projection for a smaller current account deficit, accounting for 6.0 percent of GDP this year compared with an estimated 6.2 percent in 2001. It should be noted that the current account deficit was even larger in 2000, accounting for about 7.0 percent of GDP, on the back of higher oil prices and non-oil imports, as Greece outperformed its main trading partners in economic growth. It was much lower, however, in 1999, standing at 4.1 percent of GDP. Economists have noted that last year’s improvement in the current account deficit compared to 2000 was not just the result of a drop in oil prices but also a surge in Greek exports to Balkan and other Central European countries. The figures cited by the Greek central bank confirm this trend though Greek exports as a percentage of total exports to EU countries fell to 1.14 percent in 2001 from 1.40 percent in 1999. It is estimated that the Greek share has fallen even further in the first nine months of 2002 to about 1 percent or even lower. Export realignment To some economists, such as EFG Eurobank’s Plato Monokroussos, this means that «Greek exports are losing significant share in traditional labor-intensive branches while gaining ground in capital and technology intensive branches characterized by economies of scale and high added-value products such as energy and chemicals.» This, explains Monokroussos, has important implications because, on the one hand, Greek exports in capital intensive industries are largely unable to compete successfully in other EU markets while, on the other, Central and Eastern European countries are likely to increase demand for capital intensive products and therefore turn in the years to come to other EU countries that offer a better combination of high-quality, low-cost products. This raises the issue of the export sector’s competitiveness in the absence of the traditional foreign exchange policy tools. Everybody agrees that constant investment spending in increasing productive capacity, upgrading facilities and equipment is a must for every export-oriented company that wants to preserve and increase its market share. This, along with spending on research and development (R&D) and new marketing techniques to enhance the demand for the products, are considered essential at the microeconomic level. Sometimes this can be attained more efficiently and effectively through a merger or an acquisition of a rival firm in the domestic market or abroad. This is true for all firms and especially those that produce capital intensive goods. For companies, however, that produce labor intensive goods, another major issue is significant: unit labor costs, which are the difference between wage and labor productivity. Unit labor cost growth is higher in Greece than in other EU countries and this partly explains the country’s higher inflation rate. Although some progress is expected next year when Greek unit labor cost growth is expected to decelerate to 2.0-2.5 percent on the back of slower wage growth, it will still be higher than the 1.5-2.0 percent growth seen in other EU countries. This, in turn, means Greek traditional exports will continue to have a hard time maintaining their market share in main EU export markets. Things would have been much better had wage growth better reflected productivity gains and local market conditions. However, much-needed wage differentiation at the business level is not allowed yet by labor laws. The problem is further complicated by social security contribution rates widely agreed to be among the highest in the EU, accounting for more than 34 percent of gross labor costs in 2001. The competitiveness of Greek exports continues to erode and should be cause for alarm as it will inevitably lead to the loss of output and jobs. If making the best use of available resources to produce high-quality products at low prices is the responsibility of the firm, ensuring a sufficiently flexible labor market and lower social security contribution rates to make labor intensive exporting firms more competitive is the responsibility of the government.

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