Professor Giorgos Kallis is an environmental scientist working on ecological economics and political ecology at the Catalan Institution for Research and Advanced Studies. This article was intially posted on the site Greeklish (in Greek). It is republished here with permission (translation by TPPi).
A few years can seem like centuries. In 2004 the Economist was applauding the miracle of Ireland, the ‘Celtic Tiger’, and wanted to see its example replicated elsewhere. In 2008, the year that Barcelona arrived, Zapatero’s Spain was celebrating because the country’s GDP had surpassed Italy’s for the first time. That same year the IMF informed us that the Greek economy was blossoming and that it would remain strong for the coming years.
The subsequent developments are more or less known to everybody. A few years later the tigers had transformed into the PIGS. Prophets after the fact, the analysts now suddenly remembered the small reservations that they had included as footnotes to their triumphant projections: Greece was hiding its increasing fiscal deficit, Spain and Ireland had real-estate bubbles. According to the dominant narrative, together with the glorious growth there were also faults which led to the growth’s demise. But are we certain that these problems were independent of growth and not results, or prerequisites, of the growth itself?
Examining why some economies were hit much harder by the crisis than others, Karl Aiginger, the Director of the Austrian Institute of Economic Research (WIFO) found a statistical correlation between how hard a country was hit by the crisis and the extent of its borrowing (public and private) as well as its trade deficit prior to the crisis. No surprise here. In contrast, much more interesting and unexpected is the finding that the higher the growth rates of a country before the crisis, the more intense the recession afterwards. How is that possible?
Let us focus on the example of Greece which we know best. In the mid-1990’s our country went through an extended period of stagnation in average per capita income (pdf). The stagnation had begun in 1974 with the oil crisis, but the policies of wealth redistribution of the Andreas Papandreou government and its investments in public goods, in parallel of course with an increase in the debt, allowed the living standards of the average Greek to rise despite no growth in national income. Greece was not fundamentally different from other developed OECD economies, which during and after the 70s also saw a drop in the rate of GDP growth following the end of the ‘golden’ post-war period. Growth rates, according to economic theory, are higher when an economy is recovering from a catastrophe, or when a relatively poor economy, like China today, converges with richer ones. But following the completion of the basic process of growth, the tendency is to stabilize at a lower growth rate. It is easier for a country which has only one car to add another than it is for a country which has 1 million cars to turn them into 2 million cars, then 4, then 8, and so on.
How each country responded to the conditions of the structural economic stagnation explains how it was affected by the crisis. For Greece, as for the other comparatively poorer countries of the EU, the issue at the beginning of the 90s wasn’t only its emergence from stagnation, but its ‘convergence’ with the larger economies in light of the coming monetary union. For the Simitis government the goal of convergence was the aim of all of its policies. Indeed from 1995 until 2007 the rates of growth in Greece were exceptionally high for a developed economy – on the order of 3-4% per annum peaking at the positively ‘Chinese’ rate of 6% in 2004, the year of the Olympic Games.
How did this ‘miracle’ happen? Very simply through an increase in public borrowing which funded state spending. Entry into the monetary union and the euro increased Greece’s creditworthiness and reduced the cost of borrowing. We should not be fooled here by the fact that state expenditures did not appear to increase as a percentage of GDP from the years following Greece’s entry into the monetary union until the crisis. They were increasing at the same rate as GDP (that is why the ratio remained stable), something which is not necessarily the case, unless the increase in GDP is a direct result of state spending.
(Photo by Charles Barilleaux via Flickr)
We didn’t do anything worse than Ireland or Spain or even the United States or Great Britain – countries which relied on private instead of public borrowing and property bubbles to maintain their growth rates. The only difference is that, given the peculiarities of the Greek economy which passes largely through the state, here it was the state which was borrowing whereas in other countries it was employers and households. Throwing money into the market, the state ended the period of stagnation. The money was channeled through various subsidized ‘national development programs’, the Olympic Games and the state-fed domestic private companies and banks which were developed, exactly as Mr Simitis hoped, ‘in the region of Southeastern Europe’ (link in Greek).
On the surface, at least until the crisis arrived, nobody saw anything wrong given that the public debt, even without creative accounting, remained stable as a percentage of GDP. And so the praise from the IMF in 2008. The entire economy however was built on a cycle of lending and growth: we borrow to grow and we grow to maintain the debt at a stable proportion of GDP. The cycle was broken when the global crisis brought growth to an end, causing the cost of borrowing to skyrocket.
I don’t think that the Greek state had such a degree of control over the economy to determine how much growth it wanted and when. I am referring primarily to a dynamic, and a confluence of circumstances, which the pre-crisis governments promoted to a certain degree through state spending and which it certainly didn’t do anything to prevent as it could have done. The growth allowed increases in wages and their convergence with those in the rest of Europe which was a pressing need following the dramatic increase in the cost of living which the euro brought. Why would a government put the brakes on the economy which was ‘growing’ and ‘converging’ – which was the goal and which everyone was praising?
It wasn’t growth itself, some might say, but the fact that the growth in Greece had rotten foundations. We need ‘healthy growth’ according to some or ‘smart growth’ according to others. Unfortunately I am not aware of a developed economy, smart or stupid, which can grow at rates of 2-3% per year with healthy foundations. With the collapse of the financial bubble, so too collapsed the myths of the supposed increased economic productivity in the USA during the 1990’s or the ‘technological miracle’ of Ireland. Despite the revolution in the information technology sector and even with the huge bubbles which gave misleading figures for GDP, the rates of growth of the USA over the last decades pale in comparison to those of the 50’s or the 60s. If economists like Robert Gordon are right, the age of continual growth has come to an end for developed economies. Even politically conservative economists such as Robert Lucas, who consider themselves optimists in comparison to Gordon, looking forward to neverending technological progress, speak of growth rates on the order of 1.5 to 2% per year.
For Greece to begin to reduce its debt, it requires growth rates higher than the interest rate – that is the rate at which the debt increases. In the best case scenario we hope for an low interest rate on the order of 5%, that is to begin to pay off the debt we need roughly growth rates greater than 5%. Such an unnatural growth rate may be achieved for a short period in an economy recovering from a catastrophe. However to be maintained it requires new bubbles and new loans. However as Aiginger’s research shows, the greater the bubble, the greater the subsequent destruction.
When I hear about new, grandiose programmes of growth and modernisation I feel like I entered a time machine. History repeats itself. Unfortunately not as a farce but as a continuation of the tragedy.