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Do we need interventions that improve the structure of the Greek economy? Its worth doing? No one, of course, can predict the evolution of an economy, especially in a volatile global environment. But limits and directions can be set.
The Report of the Pissaridis Commission for development planning distinguishes two macroeconomic scenarios for the next decade. In the first scenario, the economy will grow at an average annual rate of 1.7% in real terms. According to the second, the economy can grow at an average annual rate of 3.5%. The difference in the prosperity of the Greeks and in what the country as a whole will be like ten years from now, in one case or another, is enormous.
The first scenario is close to that of most international organizations, such as the OECD and the IMF. The growth rate is also close to those of recent years, with the expiration of the memoranda, such as 1.9% in 2018 and 2019. The second scenario, although much more optimistic, is possible, as long as an action plan that makes to the public sector and the most efficient markets will be implemented in a timely and consistent manner.
The first scenario includes positive developments that can be expected. After the end of the current deep crisis due to the pandemic, the increase in global demand will lead to a gradual slowdown in unemployment and the improvement in expectations will heat up investment. The absorption of additional European resources will offset the reversal effect of the large budget deficit. However, the scenario does not include substantial institutional improvements in the functioning of the public sector and markets. Thus, after the initial stage of balancing and filling the output gap, there are weak trends that reduce the economy at a rate close to 1% per year, with the result that per capita income in 2030 remains almost the same as the European average . 2019.
But is the second scenario too optimistic? First of all, it must be underlined that, even in this case, Greece is still well below the EU average in income per capita. The current distance is long and, of course, other countries will grow, and some fast. Assuming an average growth rate of 1.5% for the EU countries, per capita income in Greece will increase in the positive scenario from 67% of the European average in 2019 to 81% in 2030.
An average annual growth rate of 3.5%, with the second scenario, can result in a combination of an increase in employment of 1% per year and an increase in labor productivity of 2.5%.
Reducing unemployment from the current extremely high level of 17% will help achieve the employment goal. But there is also a strong trend in the opposite direction: a decline in the working-age population due to demographic aging. This reduction, around 7.5% during the decade, will almost completely offset the increase in employment that will result from the reduction in unemployment.
Therefore, to achieve the employment objective, an increase in the participation rate in the labor market, that is, those who work or seek work, will be essential. The participation rate for men in the main working age (25 to 54 years) is already relatively satisfactory. However, where there is a significant lag with respect to the European averages is the participation rate of women, young people and those close to retirement.
Attracting these groups to the labor market is an important bet for the next decade. It can be achieved through actions such as reducing discrimination against women, developing a preschool education system, strengthening the care system for the elderly, improving the employment training system, linking the education system to the labor market, retirement rules. These actions will also help to reverse the trend of those who leave the country towards those of the most productive ages.
The goal of increasing labor productivity has two parts: increasing capital equipment per employee and increasing productivity given capital equipment.
Based on the experience of previous decades, we estimate that 60% of the future increase in labor productivity, that is, 1.5% per year, should come from the increase in capital goods per employee. This evolution assumes that productive investment, which can be private or public, will amount to 17.5% of GDP, that is, the average for small open economies in the EU. This level of productive investment is higher, although comparable, with that before the ten-year crisis (15% in 1995-2008), but almost double that during the crisis. Raising investment to pre-crisis levels, and even higher, is the most difficult development goal. Achieving this requires significant interventions both in the institutional setting and in funding.
The remaining 40% of the future increase in labor productivity, that is, 1% per year, may come from increased productivity given the capital equipment. There is a relatively recent precedent for a similar development: in the period 1995-2002, this figure increased by 1.1% per year.
It follows from the foregoing that reversing the divergence of the economy and the real convergence to the high European averages is an objective that is not only feasible but also necessary. However, it requires substantial changes that support work and entrepreneurship. In other words, a positive macroeconomic scenario cannot be realized without improving the structure of the economy at the market and public sector level. This is precisely the reason why actions that modernize education and training systems, streamline the administration of justice, drastically reduce the complexity and burden of public administration, and develop the capital market are not an option, but a necessity. , the only way to systematically higher income in the country.
* Mr. Dimitris Vagianos is Professor at the London School of Economics and Mr. Nikos Vettas is Director General of IOBE and Professor at the Athens University of Economics and Business.
