Export-led Growth for Greece?

Gennaro Zezza | March 8, 2014

In a recent post, Daniel Gros asks why Greece has failed to get out of recession through an increase in exports, as he claims happened in Portugal, Spain and Ireland.
He is suggesting that the problem lies in the economy resisting structural reforms:

“In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated”

“So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.”

Gros is therefore endorsing the Troika vision: European peripheral countries with a large current account deficit, and large government deficits, should use austerity to improve the public sector balance, and wage and price deflation to improve export competitiveness.
These policies have been devastating for Greece. Our first chart reports the level of real output: real GDP in Greece has fallen by almost 25 percent, relative to 2007, the last year before the recession started. Indeed, as we have argued, the recession in Greece has been worse than the 1929 Depression in the United States. In the other GIIPS countries the recession has been severe, but the fall in output has been much smaller. When capacity is reduced by a shock comparable to that of a war, it is hardly suprising that the exporting capacity is compromised as well.
Real GDP in GIIPS countries
Yanis Varoufakis, on Twitter, rightly commented on Gros’ post that Greek firms have been experiencing a severe contraction in credit, which is an additional reason to prevent any expansion in production and sales on foreign markets.
In addition, Greek exports were a smaller fraction of GDP, compared to the other GIIPS countries. The pattern of the response of the exports to GDP ratio during the crisis has been similar in Greece, Portugal or Spain, but as the next chart shows, exports in Greece were only 23 percent in 2007, compared to about 32 percent in Portugal or 27 percent in Spain, not to mention Ireland.
GIIPS share of exports on GDP
Last, but not least, our estimates of price elasticities for Greek exports suggest that they are low, so that increasing exports only through wage and price deflation will take a long time, and may even generate a fall in export revenues as long as the volume of exports does not grow sufficiently to outweight the fall in export prices.
Since Greece cannot expect to recover from exports (besides, export-led growth requires that your trading partners are willing to increase demand fo your products!), recovery can only come from government intervention, in one of the forms we have discussed in our last report.

Comments


3 Responses to “Export-led Growth for Greece?”

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  1. Comment by Jamel SaadaouiMarch 27, 2014 at 9:14 am   Reply

    Dear Gennaro Zezza,

    I would like to thank you for this very interesting post.

    You implicitly refer to the Marshall-Lerner condition when you say that volume effects of trade prices would be stronger that price effects of trade prices. Does the Marshall-Lerner condition hold for the Greek economy?

    Since 2008, we observe an INCREASE (not a decrease) of export prices measured relatively to the euro area partners. The real effective exchange rate based on export price deflator moves from 115 to 125 (calculations based on European Commission data, basis 100 in 2000).

    In these conditions, it is quite difficult to argue that the Greek economy has regain competitiveness against its main trade partners…

    • Comment by Gennaro ZezzaMarch 27, 2014 at 9:24 am   Reply

      Jamel, according to our simulations, the Marshall-Lerner condition holds, but the sum of elasticities is not so high.
      I agree on the fact that Greece has not gained price competitiveness yet on a sufficient scale. Our point is that if this has to be achieved trough wage compression, the impact on domestic demand is substantial, while the impact on prices in foreign markets takes much longer to materialize.

  2. Comment by Jamel SaadaouiMarch 27, 2014 at 9:50 am   Reply

    Gennaro, thanks for the information on the Marshall-Lerner condition for the Greek economy.

    I agree on the fact that “competitive austerity” is self-defeating because external adjustment through prices and wages compression are partial and painful especially for a relatively closed economy as you said initially.

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