A favorable climate for FDI is the answer for loss in competitiveness

First, the good news. Greece has a lot of money yet to absorb from the European Union (EU) under the so-called Third Community Support Framework (CSFIII) by 2008, at the latest, to spur investment and keep its economy growing. It may even be possible to count on a few more billion euros in EU structural funds till 2013-2015 under CSFIV from 2007 to 2013. Now, the bad news. The prospective EU funds to be paid out in the latter period will be less, perhaps much less, than the 21 billion euros or more earmarked for the country under CSFIII given the comparatively lower per capita income in most of the 10 new EU members. Therefore, Greece has no option but to create the proper conditions for local and foreign businesses to invest here to help it close the gap and improve its competitiveness. Time may not be running out but it is certainly not on Greece’s side. Although there are different ways to measure a country’s international economic competitiveness, perhaps the most common approach is to use its real effective exchange rate index, which takes into account relative real labor costs against its major trading partners. According to a study which utilized this index – put out by IOBE, the Foundation for Economic & Industrial Research, last year – the Greek economy’s loss of competitiveness amounted to about 13 percent in the 1988-2002 period. It is generally considered to have worsened further last year because of the appreciation of the euro and the comparatively faster growth rates in Greek unit labor costs. Chronic trade deficit Some even point to Greece’s chronic trade deficit to make their point about the loss of competitiveness. It is noted that the trade deficit widened to about 10.08 billion euros in the first five months of 2004 but the current account deficit, which also includes tourist and shipping receipts as well as inflows from the EU, shrank 20.3 percent to 4.038 billion in the same period. However popular it may be, the trade deficit may not be the best gauge. After all, Greece is importing raw materials as well as machinery and other equipment that go into the production process and keep the economic engine rolling. Of course, Greece’s loss in international economic competitiveness is not disputed, although there are differences of opinion as to its magnitude. Some well-known foreign reports paint a rather dark picture, but others question their conclusions by pointing out their poor forecast record. One such report is the economic competitiveness report put out every year by the World Economic Forum at Davos, Switzerland. The latest report on competitiveness produced by the World Economic Forum ranked Greece 35th in terms of growth competitiveness among more than 100 countries from all parts of the world in 2003, with Botswana ending a notch lower. Jordan was just ahead of Greece in the 34th place, making a leap from the 44th place in 2002. Greece’s standings deteriorated from a year earlier, when it ranked 31st. Finland occupied first place both in 2003 and 2002, followed by the USA and Sweden in the third place. Among major EU countries, Germany gained one notch last year to rank 13th while the United Kingdom dropped to 15th place compared to 11th place a year earlier. Interestingly enough, Ireland, considered a model of economic growth by many pundits, fell to the 30th place in 2003 from 23rd in 2002. As one may imagine, Greece did even worse in the business competitiveness rankings, although it improved its general standings compared with a year earlier. It ranked 39th in 2003 compared to 43rd in 2002. Again, Finland, USA and Sweden occupied the first three spots with Germany in fifth place and the UK in sixth. Ireland lagged behind, having slipped to 21st place from 20th in 2002. Aside from disagreements over the scale of competitiveness losses, Greece has no option but to deal with the problem. The best way to do so is to experience double-digit growth in investment spending for several years with private businesses’ market share increasing at a constant rate. Of course, improving the mechanisms in place to speed up the absorption of EU funds under CSFIII and engaging more private firms in projects is necessary but not adequate for sustaining the high investment growth rates in the future. This is so because the EU funds earmarked for Greece under CSFIV may be reduced substantially over the 2007-2013 period. The country should try to attract foreign direct investments (FDI) to take up the slack. The country’s major strides in attaining macroeconomic stability and modernizing its basic infrastructure in the last 10 years or more are both a plus but cannot alone convince foreign investors to take the risk. Greece essentially lost an opportunity to improve its image as a destination for FDI by not taking advantage of the Olympic Games. It still tries through the Athens Business Club 2004, but this may be too little, too late. So, what do you do? It is relatively simple. The country should push forward with a comprehensive package of measures, including tax and development laws, eliminate red tape and create a real one-shop stop for attracting foreign direct investment to compare favorably with more risky East European destinations enjoying a comparative advantage in unit labor costs. Given the limited amount of resources, it should focus on certain sectors and embark on a long campaign to advertise the new friendly environment for doing business in the country. It is true that Greek labor laws may be more rigid than elsewhere, the local population may not be as young on average or have English as its native language as was the case with Ireland. It is, however, highly educated and skilled, well versed in foreign languages and very productive if given the proper incentives that can help boost the return on equity of foreign direct investment projects. Greece has no option but to face up to the reality of losses in international competitiveness and try to tackle the problem by sustaining high growth rates in investment spending by attracting FDI to make up for the slack before EU funds are reduced significantly. To succeed in this effort, the government has to offer a stable and attractive microeconomic environment; the sooner, the better.

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