The likely layoffs of hundreds of employees from some of Greece’s well-known firms have brought back the issue of competitiveness to the forefront of economic debate, highlighting the need to address it seriously. The current account deficit continues to widen and above-average Greek inflation and unit labor cost growth relative to average European Union (EU) levels are often cited to underline the loss of international competitiveness. Although all these observations are correct to some extent, competitiveness seems to be more a question of quality rather than price and may not be as bad as advertised. The latest central bank figures indeed show that the Greek current account deficit widened further by 624 million euros in the first quarter. It reached 3.269 billion euros on the back of an increase in the oil trade deficit, an increase in net payments for interest, dividends and earnings and lower transfers from the EU. This development raises concerns that the current account deficit-to-GDP ratio may exceed the 6.5-percent level this year. It is noted that the current account deficit stood at 6.1 percent of GDP in 2002 versus 6.2 percent in 2001 and 6.8 percent in 2000. High labor costs blamed The majority of analysts, central bank and even government officials blame comparatively higher inflation and associated faster unit labor cost growth for the loss of international competitiveness. Bank of Greece Governor Nicholas Garganas warned last Saturday that unless Greece brings down inflation to average EU levels, it risks slower economic growth and higher unemployment in the years ahead as Greek goods and services become less competitive. Indeed, Greece’s EU-harmonized consumer price inflation averaged 3.9 percent in 2002 and 3.7 percent in 2001 versus average EU inflation of 2.2 percent and 2.4 percent respectively. This augmented the Greek-EU average inflation differential to 1.7 percentage points in 2002 from 1.3 points in 2001 and 0.8 points in 2000. Moreover, Greek consumer prices continued to rise faster on average than in the EU in the first four months of 2003. Nevertheless, it should be pointed out that the calculation of inflation figures relies both on the prices of tradeable and non-tradeable goods and services. Figures show that the prices of non-tradeables, which are not really exposed to international competition, rise much faster than the prices of tradeables, helping pull inflation to much higher levels than it would have otherwise been. For example, taxi fares, ship fares, medical services and hospital costs rose faster than tradeables in the first few months of this year and the year before. In that respect, the Greek-EU inflation differential does not provide an accurate picture of competitiveness. It is estimated that non-tradeables account for about half of the inflation differential and therefore inflation continues to play an important role in determining the economy’s international competitiveness. Even if labor unit cost growth is used to gauge international competitiveness, Greece loses out. Greek unit labor costs grew by 3.2 percent in 2002 versus 2.8 percent in 2001 on the heels of larger increases in nominal wages. It is estimated that EU unit labor costs rose 2.2-2.4 percent in 2002 versus 2.7-2.8 percent in 2001, that is, relatively slower than in Greece. Even more qualitative figures point in the same direction. According to the global competitiveness report 2002-2003 of the World Economic Forum (WEF), Greece ranked 38th and 43rd among 80 countries in growth competitiveness and microeconomic competitiveness. Greece was in the 36th position among 49 countries in the World Competitiveness Yearbook of the International Institute for Management Development (IMD). It should be noted, however, that the accuracy of their findings have been disputed by Alpha Bank which claims they have used the wrong figures. A study by the National Bank of Greece (NBG) on Greek exports of goods and services paints a different picture. Greek exports have increased their share of their trading partners’ markets to 6.5 percent in 2001 from 5.3 percent in 1990, mainly thanks to the strong performance of services, mostly tourism, which comprised 62 percent of total exports in 2001 compared to less than 40 percent in the 1980s. Although there are no updated figures for 2002, it is reasonable to believe the trend was maintained. Quality exports There is no doubt that the opening up of EU as well as new Balkan and other Eastern European markets has contributed to this favorable outcome, which runs counter to the common notion of loss of international competitiveness as shown by persistent Greek-EU inflation differentials and accompanying large current account and merchandise trade deficits as a percentage of GDP. However, it seems to be the gradual change in the structure of Greek exports toward higher quality products such as chemicals, pharmaceuticals and telecommunications and the move away from commodities, along with better tourist services, which help explain the paradox. These structural changes, which have gone largely unnoticed by many commentators and analysts, help explain why Greece’s above-average inflation has failed to stop local exports from grabbing a larger market share. Higher quality has made them less sensitive to price differentials. Indeed, the NBG shows that the income elasticity of Greek exports has risen to about 1.5 from 0.7 in the last decade. It attributes this to tourism, which accounts for a larger chunk of Greek exports of goods and services. This, of course, does not mean Greece will have to give up on bringing down inflation to average EU levels. It simply shows that the loss in competitiveness may not be as great as some fear. There may be no loss at all after all, but simply a structural change in the composition of Greek exports most of us have failed to adequately appreciate. This underscores the fact that emphasis on prices as a means of competing may be misplaced in the sense that Greek products cannot compete so much on prices as on quality, laying more emphasis on services than products. There is no doubt Greece will have to use all available means to slash inflation to improve its competitive position. Deregulation and liberalization are keys to attaining this goal. It is equally important, though, for the country to cut the red bureaucratic tape, improve its infrastructure and make investments in sectors where it enjoys a comparative advantage easier in order to increase quality and therefore competitiveness.