The dream of real convergence and the Irish model of attracting investment

The government is tossing into the pre-election battle getting under way promises of handouts and plans to upgrade the Greek economy onto a par with more advanced ones in the eurozone. Time must be pressing for Prime Minister Costas Simitis, who appears to be attempting to make voters forget the tribulations of the last three years. The dream of real convergence with the rest of Europe (a concept of rather unclear content) is back in the news and the government believes it still has a lot to offer. (For the record, we may recall that Economy Minister Nikos Christodoulakis’s predecessor, Yiannos Papantoniou, estimated real convergence would be attainable around 2010. Christodoulakis himself puts it around 2015 and Bank of Greece Governor Nikos Garganas at around 2030). Greece’s high growth rate, around 4 percent, mainly attributable to the inflows of EU investment subsidies and Olympic projects, is the government’s strongest card in advertising the prospects of the economy; it can promise an equalization of Greeks’ purchasing power with other Europeans’ in a short space of time. But the chances of this coming true are about the same as someone staying dry in the middle of a thunderstorm! IOBE report In an older report on convergence, the Institute for Economic and Industrial Research (IOBE) noted: «Greek income per capita (as estimated by GDP per capita in terms of purchasing power) was equal to 60.5 percent of the EU average in 1991. It is now estimated to exceed 70 percent. In total, the rise in real incomes in the 1991-2003 period is estimated to approach 17.6 percent, while economies such as France’s and Germany’s are projected to show a decline.» This analysis leads to two basic questions, IOBE said. «What is the time required for Greece’s convergence, in terms of GDP per capita, with the EU average and what are the conditions for achieving it?» «As regards the first question, it is a given that the wider Greece’s GDP growth rate diverges from the EU average, the longer the time required for convergence. For it to be achieved by 2010, the Greek growth rate must exceed the EU average by 3.5 percentage points for 10 consecutive years.» The IOBE report went on to offer the estimate that if the black economy in Greece was taken into account, this difference narrowed down to 2.5 percentage points. This is considered feasible, the experts said, on condition that significant changes in economic policy are made that will boost productivity. But a rise in productivity in essence entails a different mentality in society and the country’s political forces, which by and large remain hooked on central government interventionism. In the recently announced revision of investment incentives, Christodoulakis did make a valiant effort to attract foreign capital by offering a stable tax regime for 10 years. This is in line with the Irish model, which Christodoulakis ended up adopting after seeing his dreams of national economic «champions» evaporate. The Irish model Despite the prime minister’s occasional knocking of the model, Christodoulakis knows that Ireland is particularly attractive to investors and that a stable tax regime plays an important role; there, investors know in advance the tax they will pay for the next 20 years and can plan accordingly. A comparison between Greek and Irish data is interesting: 1. From an average annual 62 percent of the EU average in the 1967-1976 period, Ireland’s GDP per head reached 118 in 2001. By contrast, Greece’s remained about the same over this time, at about 65 percent. 2. Ireland puts into practice many of the declarations of the Greek Socialist government which still seem like a distant dream here. Unemployment fell from 14.7 percent in 1991 to 3.8 percent in 2001, while in Greece it rose from 8.9 percent to 11.9 percent over the same period. A characteristic example of the progress in Ireland is that unemployment among the young fell from 23 percent to below 9 percent; by contrast, in Greece, it rose from 23 percent to more than 30 percent. 3. Greece exports the least advanced technological products, which have accounted for an average 3.44 percent of total exports in the last 10 years. Portugal’s respective rate is 4.9 percent and Ireland’s 34.43 percent. Lower competitiveness Notwithstanding the prime minister’s unfavorable references to Ireland, Greece’s low competitiveness is responsible for the growing deficit in the current account balance (6 percent of GDP in 2002). By contrast, the other members of the eurozone posted surpluses ranging from 0.4 percent to 1.1 percent of GDP. Greece also posted the rather odd phenomenon of 0.2 percent and 0.3 percent declines in employment in 2000 and 2001 respectively – two years of high growth. In 2002, the number of jobs was estimated to have risen by 0.3 percent, against a eurozone average of 0.4 percent. According to the latest Eurostat figures, Greece is a laggard in all EU structural indicators. Inflation in 2001 was 3.9 percent, against 2.3 percent in the EU. Public spending on education averages 5 percent of GDP in the EU, but is only 3.5 percent in Greece. Labor productivity is 83 percent of the EU average. Greece’s unemployment rate stood at 9.9 percent in 2002, against an EU average of 7.6 percent. The main concern for Greece is how to achieve a rise in incomes; this has to be addressed by the present and the next government. It can only come about by opening up the economy to new practices and minimizing state control.

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