Thursday, July 23, 2015

Greek economy: How terrible was it?

It has become conventional wisdom that the Greek economy desperately needs massive structural reforms, lest it be doomed to eternal Third World status.  Or something.  And among the Wise Old Heads of Europe, it is agreed that the current crisis offers an opportunity too good to miss: a chance to force structural reforms on Greece, undoubtedly for its own good.

But, prior to the crisis itself, exactly how terrible was the Greek economy?

One indicator we might want to look at is Greece's per capita output compared with that of the EU as a whole, on a price-harmonized (i.e. purchasing power parity) basis.  Conveniently, Eurostat publishes exactly that, expressed as an index for each country with the annual EU average pegged at 100.  Here's what it looks like, with Germany included for comparison.

From 2003 to 2009, Greece averaged 93 (i.e. its per capita output was around 93% of the EU average), with no particular trend evident.  That is, a slightly below-average performer, but basically keeping up with growth in the EU as a whole.  Note in particular that the 2008-9 recession didn't hit Greece any harder than the average EU country.

The train wreck, of course, occurred in 2010 and beyond -- that is, the "bailout years."  By 2014, "reforms" had reduced Greek output per capita from 94% of the EU average (in 2009) to 72%.  (Aside 1, Aside 2)

So let's get back to the original question:  How terrible was the Greek economy?  Not terrible at all, it turns out.  Certainly mediocre: it's not hard to find richer or more dynamic countries.  But hardly the crony-socialist nightmare economy you might expect based recent public discussion.

Why, then, all the high dudgeon about the urgent need for radical reform of the ostensibly corrupt and hidebound Greek economy?  It's easy to say that it's self-serving rhetoric, but that begs the question:  why does this rhetoric actually serve anyone?  Why does it go over so well?

That question opens up the issue of the role of moral reasoning in economic policy, which deserves a post of its own.  (OK, probably more than one.)  Because the "rhetoric of reform" has less to do with pragmatic, technical policy-making than with the (moral) intuition that some things are just wrong and must be punished, no matter what the consequences or cost.

Aside 1:  I know, I know: "If only there had been more austerity, things would be different."  Undoubtedly.  Not better, perhaps, but surely different.

Aside 2:  Over the same period, German output per capita grew from 115% of the EU average to 124%.  Well played, Germany!


  1. Your post got me thinking. And I ended up writing a post about my thoughts.

    This is my punchline:

    If Greece produces olives, and imports German cars, an unsustainably high real exchange rate, caused by an unsustainably large fiscal deficit, means an unsustainably high price of olives relative to cars, so Greeks would have unsustainably high purchasing power over cars and olives compared to Germans.

    1. Interesting point; definitely deserves its own post!

  2. You say: "How terrible was the Greek economy? Not terrible at all, it turns out." Now, I remember myself in 2006, during a heated discussion, bringing up points such as "corporatist economy, crony capitalism, rent seeking, regulatory capture, high-cost economy, (lowest in the EU) total factor productivity, decreasing competitiveness". I feel vindicated and insist that it is not only structural reforms my county needs, as I said back in 2006, but also institutions building. Further, I agree with some who say that Greece is a case more for the World Bank than the IMF.

    1. Dimitrios: I actually agree with most of what you say. By all accounts, the Greek government was (and remains) a public administrator's nightmare -- and honest, competent public administration matters a lot. But my reading of the situation is that the irrationally punitive approach being pursued by the Troika has set the cause of reform back by a decade or more, largely because the "reforms" as actually imposed have demonstratively done far more harm to the Greek economy than decades of crony capitalism.

    2. "the Greek government was (and remains) a public administrator's nightmare -- and honest, competent public administration matters a lot"

      Whats competent vs incompetent is the $64,000 question. Running a govt "like a corporation" or "like a household" is incompetent. Recognizing that they are different and exactly how they are different and using that knowledge effectively is competent.