Consumer-driven economic growth model needs changes, not overhaul
Greece may have outpaced the core eurozone countries in GDP growth rates during the past 16 years but has been unable to solve its chronic economic problems such as large budget deficits and public debt. So, a number of bankers, economists and others are calling for a new economic model that will be based more on investment and exports rather than consumption to boost the Greek economy. It is easier to lay out the facts before making a judgement. In this respect, it should be pointed out that the Greek economy grew faster than its eurozone peers from 1996 through 2008 and slower from 1981 through 1995. The Greek economy grew by an average of 3.7 percent in the last 16 years, compared to a little more than an average 2 percent in the other countries of the eurozone during the same period. This enabled the country’s per capita income to come closer to the average of the rich countries of Europe last year. It is estimated that Greece’s per capita income amounted to about 90 percent of the eurozone average at the end of last year. In contrast, the Greek economy grew by about 1 percent on average from 1981 through 1995, compared to about 2.2 percent in the core countries of the eurozone. In both periods, consumption played an important role since it accounted for more than 84 percent of GDP between 1981 and 1995 and more than 88.5 percent in the 1996-2008 period. In both periods, the share of consumption spending in Greek GDP was higher than in any other eurozone country. From 1981 through 1995, investment spending represented more than 20.5 percent of GDP, rising to more than 22 percent of GDP in the 1996-2008 period. If one looks at the export-import side, one sees that exports accounted for more than 19.3 percent of GDP and imports for more than 28.5 percent from 1981 through 1996. By the same token, exports did slightly better while imports exploded to more than 30 percent of GDP in the last 16 years. It is clear that higher consumption spending and increased investment expenditure underpinned the country’s economic outperformance of its peers during the last 16 years of superior economic growth, whereas the external sector played a lesser role. Moreover, this combination has helped Greece weather the effects of the global economic crisis better than its peers. The crisis teaches that the country would have suffered much more if it were more dependent on exports to boost its economy than now. In soccer, they say you should not change a winning team. Perhaps you replace some players and change tactics to fit the needs of the game but you do not change the entire team and the entire game plan. This also applies to Greece’s «old» economic model. The trick is to preserve the good part of the model and make sufficient changes to meet the challenges of the new era, which is more likely to be characterized by lower economic growth rates than previously, while tackling the chronic problems of fiscal laxity and low competitiveness. This can be done by embarking first of all on a comprehensive plan with a clear timetable to reduce public consumption. This will cut the budget deficit, raise gross savings and help slash the current account deficit as a percentage of GDP. Second, by proceeding with a wide range of reforms in the public sector, labor market, education, health and the country’s ailing social security system. After all, it was reforms, slow at times, which differentiated Greece’s 15-year period of economic underperformance from the subsequent 16-year period of outperformance relative to its trading partners. Of course, there may not be a credit boom this time around to partly finance consumption spending and investments. Still, Greece can rely on some 20 billion euros from EU structural funds up to 2013 and the ability of foreign capital to discover opportunities in a dynamic economy. This way, investment spending will be boosted further and the ensuing improvement in productivity and international competitiveness will help Greece export a bigger portion of medium and hi-tech products than it has done so far. These export products are estimated to account for less than 35 percent of total Greek exports today. All-in-all, Greece may not need a new economic growth model. All it has to do is make some sensible adjustments to the existing model, which have helped it outperform its eurozone peers in the last 16 years and better weather the late global economic crisis so far. However, even these economic and other reforms need a government with a clear plan, a binding timetable and political determination.
