Greece 2021

The new Growth Model

1. Introduction

 
During the decade that preceded the recent economic crisis Greece was growing at an average rate significantly higher than the EU average. However, partly induced by an inaccurate assessment of the consequences of joining the EMU, this growth was driven primarily by the expansion of private and public consumption and financed by external public sector borrowing, eventually leading to a gradual increase in the fiscal deficit and debt.

This borrowing allowed for wage increases that exceeded productivity growth. These increases, combined with lack of progress in the structural reforms front, resulted in deterioration in competitiveness for the Greek economy and led to large current account deficits.
 

With the outbreak of the crisis, external borrowing stopped, Greece was cut off from international capital markets and needed the support of her partners through the MoU.

During the last four years, Greece managed to remedy both internal and external economic imbalances.

Fiscal adjustment in Greece is the largest ever recorded in an OECD country,

while numerous structural reforms were adopted.

However, these adjustments came at an enormous socio-economic cost, in terms of a plunging GDP, spiking unemployment and reduced disposable household income.

Quantitative and qualitative indicators show that the downward trend of the Greek economy has stalled. Still, fiscal adjustment without growth prospects leads to enduring austerity – an option that is neither desirable nor viable, be it from an economic or a social perspective.

Therefore, the attainment of high growth rates aiming at the improvement of living standards,
increase in employment as well as fostering public debt sustainability is of paramount importance.

2. Strategy

 

The above make it clear that the economic model followed by Greece in the period before the crisis was unsustainable. In order to be viable, the new model should be based on a gradual decline in the share of private and public consumption in GDP (stabilized or mildly increased in real terms), coupled with an increase in the share of private and public investment and, gradually, net exports – especially given the fact that Greece has been, and still remains a relatively “closed” economy.

This new model which effectively implies a shift from the production of non-tradable to tradable goods and services, will rely on boosting productivity,

competitiveness and promoting export orientation of the Greek economy and will eventually lead to higher employment.

The main goal is the country's establishment within the global division of labor under a more pronounced role in producing, rather than consuming, high

value-added products.
 
Under the new growth model, the role of the State will be radically revamped and will be limited to supervision, regulation and support to growth initiatives, while as far as production is concerned, it will be limited to the provision of social services, defense and public order.

In order to delineate with sufficient precision various dimensions of the new growth model, the government commissioned a number of studies and, further, used the conclusion of similar studies carried out before the crisis.

The findings of these studies to a large extent coincide and result in policy recommendations of both “horizontal” and “sectoral” character. Many of

the suggested policies have been underway in recent years.

For all individual “horizontal” and “sectoral” policies, detailed action plans have been or, are being elaborated, parts of which have already begun to be implemented.
 

3. Horizontal Policies
 
Horizontal and structural policies play a fundamental role in the transition to a competitive and socially equitable economy aiming at encouraging entrepreneurship and investments, reinforcing competitiveness, attracting foreign direct investment, boosting extroversion, providing high quality public services and securing social and regional cohesion in the country.

The Greek Government has already designed and implemented reforms and

horizontal policies in order to emphasize:

1. Fiscal consolidation:
The effort in this direction has been continuous, consistent and seamless. All horizontal and sectoral policies aim at achieving this objective.
 
2. Creation of favorable investment climate and facilitation of business activities:
Further support to investment and business activities is achieved through the
simplification of administrative licensing procedures, as well as complex bankruptcy legislation and the elimination of investment barriers. Moreover, the administrative cost borne by enterprises is declining through the reduction in red tape, increase in transparency, simplification of taxation and rationalization of tax administration.
A number of steps in this direction have already been taken and the first results are tangible.

3. Elimination of barriers to entry – reinforcement of competition and
competitiveness:
The efforts towards market liberalization and elimination of competition distortions that started in the early phases of the Economic Adjustment Program, continues and will soon be completed. It aims at reducing production cost and prices, thus increasing the competitiveness of the economy, through the entrance of new market players and the development of sound competition.
The expected
outcomes include increases in both production and employment.

4. Valorization of public property – privatizations:
After a long period of stagnation,the pace of privatizations has accelerated, aiming at raising revenues for reducing
public debt and, mainly, improving the prospects for growth and employment. In
parallel, new long-term strategies have been adopted in order to supplement the
fundamental reforms that have taken place in major sectors like transportation and
energy, preceding privatizations.

5. Facilitation of international trade – extroversion:
Major reorganization and redesigning of administrative structures and processes under the “Enterprise in Greece” institution have been implemented. The development of “economic diplomacy” assists in the same direction, as well as the rationalization and digitization of custom controls.

Reforms will be expanded in order to include the unification of imports and pre-custom procedures into a consolidated national system of one stop shop (national single window). Furthermore, the possibility of creating specialized mediation firms (trading companies), thus assisting extroversion, is under examination.
 

6. Improvement of tax policy:
In conditions of severe economic crisis and imperative need of saving resources, the reduction of tax rates is difficult. However, in the following years, as the economy recovers and the measures to fight tax evasion continue producing results, a gradual reduction of tax rates will be implemented, with explicit developmental targets. Initially, the aim is to gradually decrease corporate
profit taxation.

Then, following the large cut in Social Security contribution that has

already been implemented, it will be examined whether there is room for further cuts in Social Security contributions. In addition, the reduction of taxes on indirect factors of production (e.g. energy) in the context of liberalization and rationalization of the relevant markets will also be pursued. Finally, targeted actions will be promoted for “relieving” from the tax burden specific economic activities like research and development, as well as gradually decreasing the tax rates of individuals.
 
7. Increase labour market flexibility and security:
A series of policies have been adopted for supporting labour mobility, promoting an efficient system of wage determination, reducing labour cost, fighting moonlighting, eliminating biases in taxation and social security policies in favour of self-employment and encountering the lack in affordable child and elderly care, so as to increase women’s participation in the labour market. Efforts in promoting further such actions will continue in the future in order to increase flexibility and security in the labour market (“flexicurity”).

In addition, an important comparative advantage of Greece, in the current context, is the existence of a large number of highly qualified workers with competitive wages, the employment of whom, in knowledge-intense sectors, is likely to create strong positive multiplier effects for the economy.

By increasing the future prospects and employment chances for these groups of individuals in Greece, especially through young entrepreneurship programs, the brain drain risk that can have strong negative effects can be mitigated considerably.
 

8. Emphasis on innovation:
A pivotal role in new developmental model is attributed to the upgrading of the adaptive capacity of the economy to broader technological changes. This, in turn, requires the amelioration of the capacity of the economy to produce, acquire and use knowledge in order to innovate.

The new framework for entrepreneurship and innovation has already been evaluated, aiming at establishing a coordinator for entrepreneurship and innovation (CSO – Chief Scientific Officer) at central level, promoting “firm incubators”, as well as supporting youth entrepreneurship through “business angels”.
 

9. Reorganization of public administration and improvement of the services to the citizens:
The ongoing reorganization of public administration includes the
implementation of an integrated strategy for the administration and management of human resources, the introduction of e-administration, as well as policies and actions related to ITC. In this context, information systems used in public procurements and controls are integrated, aiming at maximizing the efficiency of public administration.

In the same framework, evaluation and accountability, incentives and, where possible, a close link between public sector wages and productivity, will play an important role.

10. Investment in human capital:
Reforms under implementation already improved the rationalization of the educational system. Nevertheless, a long-term and ambitious strategy for further improvement, streamlining and rationalization is necessary.

An important target is the closer link of the education with the labour market – an area where Greece lags substantially behind her European partners and contributes to the high rates of youth unemployment. In this context, it is planned to upgrade vocational training in direct link with market needs.


11. Fight against corruption and enhancement of reliability and transparency: The government adjusted the legislation in order to align the framework against corruption to international standards and designed and implemented an integrated strategy against fraud and corruption.

Following a series of interventions, the taxation system and revenue administration were rationalized, leaving less room to corrupt practices.


Priorities for the near future include improvements in transparency, digitalization,
simplification of procedures and capacity building.

12. Acceleration and improvement in the justice system:
Justice reform is being implemented with consistency, in order to secure efficient and timely execution of contracts, application of the competition law and regulations, increase of court efficiency, rationalization of procedures of administrative courts and reinforcement of extrajudicial processes. These efforts are expected to lead to the acceleration in the award of justice and, as a result, to have beneficial effects on investment.

Moreover,in the longer term, a constitutional amendment is being considered that might give a further boost to this reform.


13. Reinforcement of social cohesion:
During the recent crisis, the unemployment rate in Greece reached unprecedented levels, while at the same time the lack of an efficient social safety net became apparent.

The experience of other countries, that encountered in the past such extremely high unemployment rates, indicates that a substantial period of time will be necessary until unemployment drops to normal levels. Until reaching that point, a significant effort has to take place for redirecting the resources of social policy towards the most vulnerable groups through the establishment of a Means-Tested Minimum Income Support Program.

Particular attention is paid to the group of the unemployed and, especially, the long term unemployed. The main tools take the form of vocational training policies and temporary employment policies, in order to sustain the links of the unemployed with the labour market. The financing of such policies is frontloaded in the framework of Structural Policies.

In the field of public health, a major reform is being implemented that changes radically the health care system by transferring the burden to primary

health care, improving the provision of services to the citizens and rationalizing public expenditure.

4. Sectoral Policies
 
Empirical studies show that Greece has comparative advantages in a number of specific sectors of economic activity. Indicatively, such sectors include tourism, the primary  sector and the processing of agricultural products, fish farming, energy, logistics, technology and applied R&D, pharmaceuticals, metal and building materials industries and a series of activities related to shipping. In addition, there is wide scope for extending production in a few sectors that produce primarily non tradable goods and services such as the retail trade and financial
sectors.
 
The aim of the new growth strategy is not limited to increasing the quantity of production in these sectors but also at improving product quality as well as increasing the level of synergies between sectors of economic activity. As noted above, studies have been conducted or are being conducted for specific sectors or sub-sectors, on the basis of which detailed policy measures will be drawn.

Obviously, not all of the sub-sectors of the aforementioned sectors

have the same comparative advantages or the same potential, while there can be other subsectors in which Greece has or can have a comparative advantage.

In short, the new growth model will be based on the following pillars:


• Tourism:
Greece already claims a strong share in the international tourism market.
To increase this share, the country is targeting more investments by developing the necessary infrastructure, using existing resources in a more efficient manner, and by promoting its cultural heritage, while ensuring that synergies in the sector are effectively established.
Due emphasis is placed on the diversification and the quality upgrade of tourism by developing new products such as medical tourism, religious tourism and elderly-care.

• Primary sector and agro-food industry:
A large number of Greek agricultural products are known for their quality. In this respect, there is wide scope for increasing domestic added value by increasing the percentage of manufacturing and the promotion of Greek processed foods to international markets, placing particular emphasis on standardization and quality control.
 
Energy:
The Greek government has launched an ambitious strategic plan which will
serve as a guideline for the next years to optimize the energy mix, administer mineral wealth, exploit renewable sources in a sustainable manner, manage waste efficiently, and promote energy savings and the extroversion of the energy sector in an environmentally friendly fashion.

• Logistics and interoperability:
The geographical location of Greece makes it an ideal logistics hub, in particular between Asia and Central-Eastern Europe. The necessary road, port and railway infrastructure is already being developed while progress is made in the privatizations of ports and railways. The licensing procedures for storage facilities are simplified and the legislation for freight centers has been modernized.

• Research, technology and Innovation:
The only way Greece can exploit its highskill human capital and create products and services of high added value is by investing in research, technology and innovation. The provision of incentives through well-targeted policies is expected to help in achieving these targets and in making Greece a regional R&D center in the wider Mediterranean.
 
• Pharmaceuticals:
The Greek pharmaceutical industry is strong in the production of generics and other inputs for foreign producers. Supporting this sector by promoting
R&D policies will increase its potential, offering at the same time substantial benefits to the broader economy.

• Metal and construction materials Industries:
The mineral wealth of the country and the leading metal and construction materials industries are expected to play a key role in the new growth model of Greece. The synergies between this sector and other sectors such as transport, R&D, energy and, obviously, the construction sector can produce serious multiplicative effects.
 
• Shipping and related services.
Greece’s leading position in international maritime will be combined with the development of an active shipping center in the country by providing the appropriate incentives. Related services that can be developed include
financial services, insurance, training, maintenance, shipbuilding and maintenance.
 
• Tradable services: Taking advantage of the fact that many Greek firms are
established in neighboring countries, while a substantial segment of the Greek labour force is highly qualified Greece can evolve into a regional center for the provision of specialized services in the wider Balkan and Eastern Europe area.

The development of new services such as Cloud Computing, Big Data and Business Analytics provide new opportunities for Greek as well as foreign firms to establish their services centers in Greece, provided that the appropriate investment climate is in place.
 

5. Financing
 
In order to achieve the high rates of economic growth that are essential for the country’s recovery and decline in unemployment, high rates of investment are required. The financing of investment presupposes the existence of significant savings.
However, during the crisis the Greek banking system lost a large part of its deposit base, while the banks were cut off from the international capital markets and underwent substantial deleveraging.
As a result, lack of liquidity constitutes the largest impediment to economic recovery.
The recent restoration of the credibility of the Hellenic Republic in international capital markets that led to a significant decline in sovereign bond yields, is expected to have a positive impact on the financing of the real economy and the return of deposits to the banking system.
At the same time, recently recapitalised Greek banks are beginning to re-gain access to the international capital markets, while an increasing number of large Greek enterprises have issued corporate bonds for the first time. While these trends are expected to continue
and even intensify in the near future, they do not suffice to cover the financing needs of the Greek economy.
 
Therefore, the attraction of private financing, especially from abroad, plays a decisive role in the realization of Greece’s new growth paradigm. Under the current circumstances, it is even more important to attract foreign, mainly direct, but also indirect investment in the country.
Even in the years that preceded the crisis, foreign direct investment in Greece was
particularly low compared to the other EU countries. Foreign direct investment is particularly desirable not only for financing purposes but also because it creates numerous other synergies, leading to increased productivity that is critical in the current conjunction.
 
The provision of liquidity to the SMEs that constitute the overwhelming majority of Greek enterprises, is particularly important. The new growth strategy seeks to create opportunities for the growth of SMEs so that they exploit to the largest possible extent economies of scale and scope and become internationally competitive.
Furthermore, a core objective is the support of existing and the creation of new financing tools for start-ups that are created by young entrepreneurs both in leading-edge technology sectors and in traditional sectors of the Greek economy.

The European Union already provides means for the facilitation of investment financing in various forms, although experience shows that there is room for more effective use or design of the financing schemes.
The main actions envisaged to increase the effectiveness of EU funds include:
 

• Mobilisation and absorption of capital that can contribute to the liquidity of SMEs
within the framework of EU Structural Funds of the programming period 2007-2013 (50% from the European Regional Development Fund and 50% from banks), available to SMEs until the end of 2015. Already, Greece has improved considerably the absorption of resources from EU Structural Funds.

• Frontloaded and targeted design of the financing tools for the new programming
period. The resources that will flow in the country from EU Structural Funds in the
following years are expected to play a crucial role in the financing of public investment and act as a catalyst for private investment technical assistance. For the period 2014- 2020, the design is frontloaded so that during the crucial initial period more financial resources are available.

This programming reflects both the horizontal and the sectoral policies mentioned above, taking also into account regional development priorities. The discussions between the Authorities and the Commission on the Partnership Agreement

are ongoing, including the priorities and the allocation of resources that will be attributed to Greece for the period 2014-2020 (€19 billion).
 
• Optimization of European Investment Bank (EIB) involvement. The EIB finances
public and private investment of approximately €1.5 billion on an annual basis, which could provide an important source of liquidity for Greece, including the Credit Guarantee Fund for Greek SMEs and the recent commencement of trade finance facilitation.
 
• The Institution for Growth (IfG), which will very soon become operational, is designed on three basic pillars of activity: financing of SMEs, provision of equity capital to SMEs and financing of infrastructure projects.
Furthermore, there are more opportunities for channelling financing to Greece, combining different types of financing (European Structural and Investment Funds, loans from European and international financial Institutions, national and multilateral development banks and private investors) so as to better exploit synergies in the Greek economy:
 
6. Epilogue
 
Based on the above strategy, we expect that the structure of the Greek economy will be radically different within a decade. Significant resources will be directed to investment rather than consumption, employment will have increased substantially and a large share of output will be exported, thus ensuring a sustainable convergence with the rest of the Eurozone.
 
In the above context, Greece’s partners in the Eurozone and the EU can contribute to accelerating the growth process in two ways that have already been discussed in the Eurogroup.

First, via their participation in the Institution for Growth (IfG). The IfG has the form of an umbrella-fund operating strictly under commercial criteria, initially investing via both debt financing and equity financing in SMEs and through debt financing in infrastructure projects.
It will be highly flexible, allowing for the participation of new partners after starting operations and allows for the creation of additional sub-funds under its umbrella, if there is sufficient demand for financing high quality projects in other sub-sectors of economic activity.
 
Second, by means of technical assistance provision. It goes without saying that technical assistance will be provided upon request from the Greek authorities, it will aim at obtaining high-level expertise and its recommendations should be fully harmonized with the policies of the Economic Adjustment Program.

Necessary conditions for the successful provision of technical assistance are the active involvement of the Greek public administration and domestic experts in the design and implementation of policy recommendations. 

This story was posted on Capital.gr