ECONOMY

Structural reforms are the key to improving low productivity

Two important surveys published recently prove that the development of our economy runs into obstacles not due to inherent weaknesses but to financial policy errors. To this extent, the findings of these surveys are actually consoling, as they confirm the dire need for structural changes so that our economy returns to growth, and vindicates the government’s insistence on reforms. The first survey, by the Financial Studies Department of the Bank of Greece, found that the main aim of the economic policy, i.e. the convergence of Greece’s living standards with that of the other 14 old EU member states, will not materialize for some time, as per capita income in Greece in purchasing power units amounted in 2004 to just 75 percent of the average in the EU-15. The largest part of this 25 percent gap is attributed to the lower productivity per worker in Greece, the rest being due to the relatively smaller Greek labor market than in the rest of the EU. «The possible reasons for the lower productivity are sought in the business environment, the lack of competition, the small size of Greek enterprises, the delay in adopting new technologies and the weaknesses of the educational system,» the survey suggests. This clear diagnosis posits a well-known remedy. The only key for convergence is structural changes that will create a favorable business environment in Greece, so that private investments can increase. We cannot have a more favorable environment without less red tape, more flexible labor relations and a simpler tax system. The survey shows how the effects of a mistaken economic policy can have a negative impact on productivity, highlighting that the rise in productivity in the last 30 years reached its lowest point in 1982-1985, when PASOK nationalized one company after another, and in 1990-1995 when tax burdens discouraged productive investments. The second survey is by the international consultancy firm Ernst and Young, polling 672 high-level officials at multinational companies about the attractiveness of investment destinations globally. Europe emerged as the best investment destination for 2005, with Western Europe drawing service sector investments, while Central and Eastern Europe mainly attract industrial investment through their cheap and highly skilled labor. Yet Greece has seen virtually nothing of this, attracting only seven foreign direct investments in 2004, just 0.2 percent of the total investment in Europe, down from 0.3 percent in 2003. This leaves Greece in last place among 33 countries, behind Turkey, Bulgaria and even Albania.