Competitiveness is key

If bringing down double-digit inflation, cutting the huge budget deficit and attaining high GDP growth rates were the main challenges for Greek policymakers in the 1990s, enhancing competitiveness to maintain strong growth rates in the long-run is the challenge of this decade. Will Greece be able to pull off another little miracle? The odds, once again, are not in its favor. A lot though depends on the country’s ability to attract FDI (foreign direct investment) or/and convince Greek businessmen to invest more in the country than they do elsewhere. If somebody forecast in the early 1990s that Greece would have been able to join the European Union’s rich club in less than 10 years’ time, he or she would have certainly been in the minority. Some may have even laughed at him or her, with good reason. The Greek economy was the black sheep of Europe, beset by anemic economic growth, huge budget deficits in excess of 14 percent of GDP, high inflation and lending rates in excess of 20 percent. But Greece managed to prove most people wrong and join the EMU (European Monetary Union) in 2001. Inflation dropped to below 10 percent by the mid-1990s, aided by the anti-inflation policy of the central bank and its hard drachma policy, as well as by more prudent fiscal policies. During the same period, interest rates came down to 4.0 percent from over 20 percent, which, along with the liberalization of the financial sector, helped spur a credit boom. The explosion in new loans still is going strong, boosting private consumption and banks’ earnings in the process. But winning the battle of macroeconomic stability did not mean Greece won the war on economic growth and prosperity. To win this war, Greece has to tidy up its public finances to ensure macroeconomic stability and win the battle of competitiveness. The loss in international economic competitiveness is evident in the readings of the real effective exchange rate index, which takes into account relative real labor costs against Greece’s major trading partners. All relevant studies measuring the real effective exchange rate point to the same conclusion: a considerable loss in competitiveness in the last 10 years or more, exaggerated by the strengthening of the euro since 2002. Other surveys, despite their shortcomings, such as the competitiveness report put out every year by the World Economic Forum at Davos, Switzerland, lead to the same conclusion. According to the latest growth competitiveness report, Greece fell to 37th place in 2004 from 35th in 2003 out of 104 examined. Lithuania, one of the EU’s new entrants, was just ahead of Greece, while Cyprus ranked below, in 38th place. Finland ranked first, followed by the US and Sweden. Greece did even worse in the business competitiveness rankings, since it was in the 41th place, just below Bahrain and just above Hungary. Compressing inflation to the EU-15 average of about 2.0 percent is definitely important but not an easy task. Greek unit labor costs, which take into account labor productivity as well as nominal wage growth, continue to grow faster than the EU average, while a number of output and input markets are shielded from competition by laws. With other EU and neighboring countries having much lower labor costs, price competitiveness is definitely not Greece’s strongest point. So, the country must compete in other areas, such as tourism, where it still enjoys a competitive advantage and provide more emphasis on product quality rather than price. This relates directly to heavy investments in human and physical capital and the acquisition of sufficient know-how. Although Greece can look forward to receiving billions of euros from the Third Community Support Framework (CSF III) through 2008, it has yet to convince objective observers of its ability to absorb them and put them to correct use. Even if it succeeds in getting most of the money earmarked for the country in the next few years, it cannot expect to get more than half of the Third CSF’s money after 2006, the official deadline, with the 10 new EU members jockeying for funds. In this respect, attracting FDI or/and investments from Greek businessmen becomes essential. Although Greek businessmen are surely fond of Greece and would like to help, they are not the kind of idealists who would simply ignore other opportunities abroad to come to the rescue of the homeland. Sometimes, there are other reasons making the realization of investments in Greece more difficult. In the case of Greek shipping tycoons, who admittedly have made lots of money in the last few years due to the booming shipping business, the strong euro may be a problem. After all, they receive dollars and have to convert them into euros at an unfavorable exchange rate to invest here. So waiting may be an option for them regardless. However, the history of some large FDI investments in the country, pending for years, reveals some other less well-known obstacles. This is mostly about investments in the tourist industry, real estate development, renewable energy sources and others. All of them have suffered because of a combination of legislative and regulatory hurdles, which even successive Greek governments have been unable to remove. At the core of the problem lies a judicial system that is generally very slow in taking up cases and, in some few instances, as demonstrated lately, corrupt. Undoubtedly, the process is complicated by a myriad of laws which makes it more difficult to reach decisions. In addition, some regulations seem to favor local companies and give the right to local authorities to play a non-constructive role, making it harder for a foreign investor to choose Greece as an FDI destination. This does not mean there has been no improvement on all sorts of fronts the last few years. Many businessmen describe the country’s new development law as friendly to investors and government officials, including the premier’s economic office, have shown a genuine interest in doing their best to remove all legal and bureaucratic obstacles to FDI making investment, pending and new, possible. Will they succeed? Time will show, of course. At this point, the odds are changing but are not still moving in their favor neither are Greece’s efforts to enhance international competitiveness and win the war toward prosperity for the years to come.