Saturday, October 06, 2012

Ten Surprising Facts About Greek Economic History

A year ago, I wrote a post about the ten most surprising things that I had learned about Greece in the course of writing my blog. As I dug deeper into the country’s recent economic history while conducting research for my book on the Greek crisis, I came across a few more. Here are the things that most surprised me during that research (relying heavily on the OECD’s Economic Surveys of Greece dating to 1962).

Fact #1: Employment in the public sector grew ~40% in the 1980s. The Greek state admitted at some point that it was not quite sure how many people it employed. Getting a full picture on this subject has been tough, but the 2001 OECD report was instructive: “Between 1981 and 1990 public sector employment increased at an average annual rate of about 4 per cent – around four times as fast as in the private sector.” The graph in the report shows that employment went from just over 500 thousand in 1981 to just under 700 thousand in 1989. Through 1999, employment declined some periods (1989-1992 and 1996-1999) and it rose in others (1993-1996). The data then stops. In 2009, the earliest year for which I have seen numbers, employment was ~715 thousand. That is higher than the 1989 peak or the 1999 point of ~640 thousand. Judging from state spending patterns, this final growth likely came in 2006-2009.

Fact #2: Remittances beat tourism and shipping as a source of foreign exchange. The OECD notes that 1.25 million Greeks emigrated from 1950 to 1974. The money they sent back trumped tourism or shipping receipts as a source of foreign exchange through the late 1970s. For every dollar earned by remittances in 1960, shipping provided 74 cents and tourism 33 cents. In 1970, the gap was narrower for tourism (40 cents) but larger for shipping (68 cents). From 1970 to 1978 tourism and shipping grew faster than remittances, and so, by 1978, tourism brought in $1.12 and shipping $1.02 for every dollar of remittances.

Fact #3: Minimal foreign direct investment. From 1954 to 1976, foreign direct investment was ~$620 million in total – which was equal to the amount of remittances received by the country on an *annual* basis at that time. Modest FDI did not really start until 1976, and even since then, it averaged less than 1% of GDP a year (with a peak of 2% in 2% in 2006).

Fact #4: Liabilities linked to public enterprises accounted for 50% of GDP by the late 1990s. From the 1998 OECD report: “The cost [of public enterprises] to the economy consists not only of an annual drain on the budget of about 3 ½ per cent of GDP … if accumulated over the past decade and half, and added to other government liabilities due to public enterprises, they represent a burden equivalent to about 50 per cent of GDP.” Enough said.

Fact #5: The importance of industry peaked in 1973. Greece is a service-based economy – in fact, services provide a greater fraction of GDP than in almost every other EU country. But this wasn’t always the case. Of course, services have always been important. But in the 1960s and 1970s, the relative decline of agriculture came together with a growth in industry. Then, industry peaked in 1973, and after some fluctuation, its share of GDP reached a second peak in 1979, at 31%. It then started to decline with few interruptions down to 18% in 2011. Since agriculture also fell, this meant that services, which made up ~56% in the 1960s and early 1970s progressively edged up to 78% in 2011.


Fact #6: Tax evasion became a read headache towards the late 1970s. I was interested to see the point at which tax evasion shows up as a major problem in Greece. This graph is both imperfect and instructive: it shows the word count for “evasion” in each OECD survey of Greece since 1962. Until 1978, the word shows up sporadically. Then the 1979 survey mentions evasion as many times as all the previous 12 surveys combined. After a few quiet years (6 mentions per survey), its presence spikes to a new plateau of ~13 per survey from 1986 to 1996. At that point evasion shows up either a lot (~27 times) or a little (~7 times) before reaching a whole new level in 2009-2011 with an average of 42 mentions per survey.


Fact #7: The bifurcation of the Greek economy. It is no secret that there are two very distinct, almost parallel economies in Greece. But the extreme divergence between the productive and the non-productive Greece still surprised me. From the 1993 OECD report: “Greek manufacturing industry is composed of two distinct sub-groups – dynamic private firms, with very high profit rates, and ailing (mainly state-controlled) firms, cumulating losses year after year.” By 1982, the losses of the loss-making firms exceeded the profits of the profitable firms and the overall profit rate turned negative through 1986. Yet throughout the 1980s, anywhere from 55% to 74% of the country’s 3,000+ firms were profitable and their return on equity was very high (20%).

Fact #8: Greece is a deep rentier economy. In an April 2011 post, I noted that Greece could be understood as a rentier state where work and reward were becoming disconnected. Mostly, I had in mind state spending for public employment and benefits. But delving more into the history of the Greek economy, I saw that the extent of rentierism was much deeper: large EU transfers in the 1980s and 1990s; sizeable remittances especially until the mid 1980s; and the massive boom in construction that created a pure “rentier” class, where rents form a household’s largest source of income (~10% of tax returns in recent years). So much revenue unlinked to work and effort.

Fact #9: The Olympics cost too little to explain Greece’s debt. The 2004 Athens Olympic Games cost around €8.954 billion, not including spending on projects that were going to happen anyway but that were accelerated for the Olympics. This is paltry compared to Greece’s debt of €298 billion at year-end 2009. Maybe the Olympics were a luxury that Greece could not afford – but they are not a cause of the current crisis.

Fact #10: For 25 years, Greece’s growth was the second highest in the OECD. In the past, I had written that Greece’s economy was vibrant not too long ago; yet this comment from the 1992 OECD report still surprised me; referring to the impact of the 1980s, the OECD noted: “after having recorded the highest GNP growth rate, next to Japan, in the OECD for about 25 years, Greece fell to the bottom place at the beginning of the 1980s and has remained there since. At the same time, the public sector debt reached one of the highest levels in the OECD area (113 per cent of GDP), representing a heavy burden for the economy in the future.”

4 comments:

  1. Fact #2 supports with numbers what I have felt intuitively all along, namely that Greek guest-workers made an incredible contribution to Greece's increase in living standards during the 1960s/1970s. I am not sure that Greek society has ever recognized them for that in a sufficient manner.

    It's not just the money they sent back home. Greek guest-workers everywhere built up the reputation of being extremely hard working, conscientious, honest, loyal, correct, etc. Respectful people. Udo Juergens wrote his famous ode to the Greek guest-workers ("Griechischer Wein") which became a hit and still is a hit today.

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  2. One thread you're picking up is how the Greek state managed to "milk" major powers for subsidies. The EU is certainly prominent, and it's noticeable to this very day what with massive infrastructure spending and numerous grants through ESPY.

    But recall how Andreas Papandreou threatened to pull out of NATO and close the American bases. In the end he didn't but I think he got something even better--more aid transfers. He even got the Soviet Union to open a repair station for their Navy on Siros, if I recall correctly.

    The point is that Greece itself became a rentier state in the most absolute sense of the word.

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  3. Nick, regarding fact #7, you can have a very high ROE on paper if your E is relatively small after you've been through years of high inflation.

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  4. Fact#11 is that Greece has been living like it is a western European country when, in fact, it has a third-world social and economic structure.

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