Greece’s limited potential for attracting foreign investment

Criticism over Greece’s dismal record in attracting foreign investment in recent years has been mainly focused on the previous government’s inadequate policies and piecemeal solutions. It should be apparent that the issue relates largely to a broad set of factors and prevailing conditions, such as the quality of public administration, the taxation system, production costs, transport and telecommunication networks, the size of the market and the country’s geographical position. Of these, the suffocatingly bureaucratic public administration, which is also marked by a high degree of corruption, and the complicated, unstable and outdated taxation system belong directly to the government’s sphere of responsibility. A senior business figure takes the view that anyone who believes that Greece today can attract large foreign investment schemes is naive. This, he explains, is not so much due to the Greek economy’s lack of competitiveness and productivity, as to the other factors that objectively deter likely investors. If we exempt, he continues, sectors such as tourism, financial services or energy, it is difficult for other areas of the economy to attract new and large foreign investors. Perhaps the most effective tool that the government could use toward this aim is that of privatizations, but even in this field, interest is restricted to specific sectors and dependent on the new government applying an effective policy, which would also make a contribution to public finances. Senior staff of the Bank of Greece believe the completion of large infrastructure projects and the drastic restriction in red tape could also function as poles of attraction but cannot offset the disadvantage of the small size of the market – a basic criterion. «Greece’s potential for large foreign direct investment schemes has dried up. The period when firms like Pechiney invested here has gone and, besides, the country is not seeking such investments anymore.» They argue greater flexibility is required in the labor market and that steps toward enhancing part-time employment rules are positive. Another issue is that of shop business hours. «We must at last adapt to market requirements,» they stress. In its recent report on monetary policy, the central bank estimates that the growth rate of private investment in 2004 will fall to 4.5-5 percent from about 7.5 percent in 2003. The high rate in 2003 was mainly due to preparations for the Olympic Games (predominantly investment in hotels and infrastructure), but the central bank’s forecast partly reflects a degree of uncertainty as regards demand after the Olympic Games, with a deterring effect on company investment. Nevertheless, the slowdown is projected to be transitory, as profitability is forecast to improve in 2004 and the low level of interest rates is expected to maintain favorable terms of finance. Finally, the Bank of Greece considers that the projected global recovery in 2004 will bolster Greek exports despite their weak competitiveness; exports are projected to grow at about 7 percent.