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VI. Conclusions

Over the past decade, expansionary fiscal policies and inappropriate government interventions in markets have generated mounting macroeconomic imbalances and microeconomic distortions, impeding the resumption of sustained non-inflationary growth. Not only was the growth of GNP extremely slow in the 1980s by international standards and compared with previous long-term trends, but it was also accompanied by sizeable foreign borrowing, with the result that Greece is not burdened with heavy external debt. In the last couple of years there was a growing recognition that the unsatisfactory configuration of slow growth, high inflation and large balance-of-payments deficits was no longer sustainable and that a change in policy course was urgently needed. Moreover, whereas in the past foreign credits were relieving the external constraint, in the last year foreign creditors appeared to be hesitant to continue to finance large external deficits stemming from the Greek economy's strong consumption bias, especially in the public sector.

The situation was critical when the new government was formed in April 1990. The PSBR at 22 per cent of GDP and inflation that was running at 23 per cent were seemingly out of control, undermining confidence and exacerbating balance-of-payments tensions. The new government took certain measures of fiscal and monetary restraint to begin with, but as the size of the imbalances started to become evident, macroeconomic policies became increasingly restrictive during 1990. In addition, the new government has embarked on a wide-ranging programme of market-oriented structural reforms, which together with the macroeconomic targets and policies were embodied in the Medium-term Adjustment Programme, 1991-1993, presented in February 1991.

The principal objective of the Adjustment Programme, on which the realisation of the other targets depends, in the reduction of the PSBR (cash basis) from 19.5 per cent of GDP in 1990 to 3 per cent in 1993. Parallel to this is the fall of inflation from 23 per cent at the end of 1990 to 7 per cent at the end of 1993, accompanied by a swing from a large deficit to a small basic balance of payments surplus before the end of the period. These very ambitious targets also reflect the government's concern that, unless inflation and the PSBR converge to EC levels before the mid-1990s, Greece would not be in a position to participate in the next phase of the economic and monetary union of the EC. To achieve these targets the authorities intend, apart from fiscal consolidation, to maintain tight credit conditions, and these combined with the positive effects of supply-side reforms are expected to reduce the economy's inflation proneness while boosting profitability, a prerequisite for sustainable growth.

The OECD short-term projections point to a market improvement in underlying conditions helped by growing business confidence and a better social climate following the recent conclusion of a two-year wage pact entailing a sharp de-escalation in wage growth. However, given delays in curbing tax avoidance and fraud and in privatisation, the official goal of a PSBR of 13 per cent of GDP in 1991 may be difficult to achieve. Despite this shortfall, OECD's 1991 projections give a lower inflation and external deficit than official plans, partly because the considerable tightening in policy stance is expected to have a greater depressive effect on activity in 1991. The positive effects on output may be more evident from 1992 onwards, mirrored in the rebalancing of the growth process, as both investment and exports gradually take over as the main elements of strength, thereby boosting the growth potential as well. The full extent of the Adjustment Programme's dynamic effects on real and financial trends are difficult to predict, and the temporary adjustment costs may be higher than projected here. However, even though the benefits of the Adjustment Programme may show up later than officially assumed, it is essential that the Adjustment Programme is pursued vigorously and in full, so as to put the Greek economy back on a sustainable growth path.

As analysed in Part I, the oversized public sector associated with a high and rising PSBR has produced pervasive negative effects, largely explaining the stagnation of the productive base and the fall in total factor productivity, the only example in the OECD in the 1980s. Correctly, the Adjustment Programme places the emphasis on fiscal retrenchment and public sector reorganisation. The planned sizeable increase in public revenues hinges on the successful fight against tax avoidance and fraud. However, given the slow introduction of certain tax measures, the confidentiality of bank accounts, and inadequacies in the tax collection system the goals sought may not be achieved. A rationalisation of the tax system, including more uniform and equitable treatment of wage-earners, employers, self-employed and farmers than presently envisaged, would not only yield more taxes but would also reinforce social cohesion, as the experience of countries with high deficits in the past (such as Portugal and Ireland) has shown. In this context it should be recalled that there is much greater scope for increasing taxation on farmers than the planned 2.3 per cent of their expected net incomes by 1993, which is more than four-fifths less than the tax burden of wage earners.

As the proposed 10 per cent cut in public sector employment includes the effects of privatisation, both the expenditure-reductions of the general government and the efficiency-gains from a healthier and slimmer public service, though welcome, may be insufficient. Following the 30 per cent growth in government employment in the 1980s there is, indeed, a need for reducing overmanning more than planned. The recent courageous pension reform should bring a pause in the upward trend of pensions in relation to GNP, while strengthening incentives to work. However, as pensions for many categories are still excessively generous the authorities should speed up the preparation of the national conference on the social security system and its financing, in particular on the pension system. As in most OECD countries, there is a need first for the pensionable age to be raised to 60-65, second for pensions to be more closely linked to contributions and third for them to be significantly lower as a rule than the last salary. Cuts in subsidies both to the private sector and public enterprises are also welcome, as they will help to bring the PSBR down and force enterprises to increase productivity.

In order to ensure the realisation of the budget targets, it is essential to review budgetary-control procedures. Although, there was some progress in 1990, strict cash expenditure limits on voted appropriations should be introduced and centralised control over the different public bodies should be strengthened. A more general issue, also affecting the implementation of policies, is the efficiency of public administration and productivity of the public sector in general. The recent law on the reorganisation of the public sector redresses many of the inconsistencies and systemic deficiencies of the previous system. Though positive, results may, however, be less than hoped for unless greater recognition is given to professionalism by, among other things, modifying the wage structure and by limiting political influence on appointments so as to attract competent people. Recognising these problems the government announced that appropriate measures will be taken before the end of 1991.

Greater efforts than presently envisaged both on the tax and expenditure side may be necessary to the extent that a shortfall in net privatisation receipts may occur and in order that the government does not delay the much needed planned increase in infrastructure investment. Indeed, without a marked increase in infrastructure investment the projected expansion of the private sector will be difficult to realise. In order to minimize costs, the government should contract out as much as possible. Besides ameliorating the transport and telecommunication systems, as planned by the government, there is also a need to invest in education, the importance of which is not always recognised. In particular, professional formation programmes, still in their infancy, should be promoted in close co-operation with enterprises, as is the case in countries with successful experience in this domain.

The structural and microeconomic reforms underway are an indispensable complement of the macroeconomic stabilisation programme. In this context, privatisation is particularly important, especially of public enterprises in competing sectors, as it would not only facilitate fiscal consolidation and strengthen the financial position of the fragile state-controlled financial institutions but would also improve the chances of survival of many of these enterprises, thus helping to arrest the deindustrialisation process. However, reflecting bureaucratic obstacles, practical difficulties and legal impediments, privatisation seems to be lagging. The government has started to liberalise product and labour markets from the burdensome regulatory framework built up over the years. The introduction of flexible shopping hours, the planned complete liberalisation of rents by 1993 and the announced deregulation of the oil market are important steps in this direction. Even so, government interference in price formation is still important and further progress has to be made to strengthen competition in product markets.

Labour market reforms of the last couple of years are expected to increase labour market flexibility considerably, thereby helping to reduce the costs associated with structural adjustment. Enhanced possibilities for part-time work, a fourth shift, etc. coupled with wage moderation would stimulate employment creation but also indicate a significant change in business-labour relations. In effect, the positive response of the unions for a two-year wage pact (the first long-duration wage agreement for many years) has been an encouraging development as it makes for continuity and sets the basis for a much-needed improvement in the social climate. And, as the experience of both Spain and Portugal has shown, without improving the social climate it would be difficult to attract sufficient foreign investments to supplement the low domestic savings. In fact, without foreign capital the sizeable expansion in productive investment required to restore strong growth rates is unlikely to be achieved.

Even though financial deregulation has progressed at a fast pace in the last five years, there are still important distortions in financial markets, largely related to the high PSBR. Given also that competitive pressures are likely to increase considerably in the mid-1990s, in the wake of the establishment of the EC single financial market, the reform process should be both faster and more extensive than presently planned. In order to further competitive forces and minimise crowding-out effects, a reduction of the obligatory investment ratio for banks on the outstanding stock deposits should be considered. For the same reason the extension to Treasury bills of the 10 per cent tax on interest payment should be envisaged. Likewise the privileged status of the Specialised Credit Institutions, most of which belong to the wider public sector, should be phased out so that they compete on equal terms with commercial banks. Over the medium term the Bank of Greece will be called on to play a more active regulatory role in financial markets and in monetary management through open market operations, by strengthening its supervisory role, especially for prudential purposes. Moreover, in order to ensure a properly functioning financial system it is necessary to further reduce government interference in the running of the state-controlled financial institutions, which account for about four-fifths of total credit. Otherwise, policy continuity in these institutions will not be ensured, the much needed major reorganisation will be difficult to carry out, and the criteria and the pace of divestment of non-banking activities will remain inadequate, thereby aggravating the fragility of some of these institutions.

Evidently, the implementation of the Adjustment Programme requires the authorities to take a determined stand on a broad range of issues of both macroeconomic and microeconomic policy. It is equally important that all economic, social and political players should become fully aware of the Programme's significance for the future of the economy and act accordingly. For this reason, too, it would be advisable that the government's intended policies be fully carried out, as this would result in a more equitable distribution of the adjustment costs, especially of the tax burden, and thereby make the social partners more willing to accept the inevitable temporary sacrifices involved.

During the 1980s a gap opened up between Greece and the rest of the OECD area not only with regard to economic performance but also in terms of governments' approaches to economic policy-making. In putting forward its Medium-term Adjustment Programme, aimed at restoring macroeconomic stability while improving supply-side responsiveness by wide-ranging structural reform, the new Greek government has indicated its intention to pursue the same kind of strategy as those followed to good effect over the last decade by virtually all other OECD countries. The Programme's aims are ambitious, but no more so that they need to be if Greece is to start to close the gap with other OECD economies and participate meaningfully in the process of European integration in the 1990s. What is important now is for the Programme to be implemented as fully and rapidly as possible.

Notes and references

[ 1.] For a detailed analysis on the role of the public sector, see OECD Economic

Survey of Greece, January 1990.

[ 2.] See Nicoletti G., "A cross-country analysis of private consumption, inflation

and the |debt neutrality hypothesis|", OECD Economic Studies, Autumn 1988.

[ 3.] See OECD Economic Survey of Greece, January 1990, Annex II.

[ 4.] The year-on-year inflation fell from 25 per cent at the end of 1985 to less than

15 per cent in early 1988 while the current external deficit and the PSBR also

decreased as a per cent of GDP from 10 per cent to less than 3 per cent and

from 18 per cent to just over 13.6 per cent respectively between 1985 and 1987.

[ 5.] An extraordinary surtax on personal incomes, worth 5 per cent of taxes paid in

1989, and a 5 to 7 per cent special levy on net profits realised in 1988 were

imposed. The excise taxes on alcoholic drinks, cigarettes, cars and petrol were

also raised. The increases in public utility tariffs ranged between 12 and 33 per


[ 6.] The principal measures were estimated to yield the following, measured as a per

cent of GDP: income tax surcharges 0.6 per cent, petrol 1 per cent, VAT 0.7 per

cent, wage cuts 0.6 per cent and reduction in subsidies 0.6 per cent.

[ 7.] The overshooting of the target for credit expansion to the private sector in 1989

(and hence the overshooting of the M3 target) is largely due to the lifting of

controls on credit to the domestic and import trade, which led to an increase in

bank credit to trade by more than 50 per cent in 1989, more than three times

the average in the previous four years.

[ 8.] The short-term lending rate by commercial banks has stabilised at around

29 per cent since the summer of 1990, but including the tax on bank transactions

(8 per cent on nominal lending rates) the effective interest rate paid by

borrowers (including some commissions) is 33 per cent.

[ 9.] The Athens Stock Exchange index increased by nearly 250 per cent during the

first seven months of 1990 and there were also important new equity issues.

Despite the decline after August, attributable to the Gulf crisis, the index

reached 932 at the end of 1990 compared to 432 a year earlier and there were

also further new equity issues in the second half of the year. In 1990 as a whole

new equity issues amounted to Dr. 200 billion in 1990, or nearly one-third of the

domestic commercial bank credit expansion to the private sector.

[10.] Resident demand for ECU-indexed bonds weakened considerably in the second

half of the year as devaluation fears waned and interest rates on drachma

denominated government paper increased. Foreign demand also declined,

reflecting the world-wide credit tightening during this period and some hesitancy

on the part of foreign investors owing to the bleak balance-of-payments

outlook during the Gulf crisis.

[11.] In 1990 the ceiling for full indexation (ATA) was raised from Dr 70 000 to

Dr 130 000. The two intermediate income brackets to which partial indexation

applied were abolished. Instead for the tranche in incomes in excess of

Dr 130 000 three-quarters of the full ATA minus imported inflation was

accorded. In 1989 for the income tranche in excess of Dr 100 000 one-half of the

ATA minus imported inflation was accorded.

[12.] ATA increases were mandatory as a minimum for the private sector in the first

four months of 1990.

[13.] It appears that many Greek immigrants from the Soviet Union with practically

no savings import expensive cars that are registered in their names but are in

effect owned and driven by other people who have financed the purchase of the

cars. This illegal practice is expected to be greatly reduced after the adoption of

a law in 1991 obliging immigrants to keep in their names the car for at least five

years before they can sell it (before the duration was one year).

[14.] As a result of the recent surge private investment in machinery and equipment

(less transport) reached some Dr. 28.7 billion (1972 prices) in 1990, compared

with Dr. 17.2 billion (1972 prices) on average over the fourteen years to 1987.

[15.] Despite the lay offs in the last four months of 1990, public sector employment,

which was already excessive in relation to output, was 3 1/2 per cent above the

end-1988 level at the end of 1990.

[16.] The average size of manufacturing firms is very small. The average number of

workers per manufacturing plant is only five, and only 1 per cent of plants

employ fifty workers or more.

[17.] See Part I for a detailed discussion of structural factors. Given the extensive

underground economy and associated measurement difficulties productivity statistics

do not purport to show exact levels or trends but broad orders of magnitude.

In recent years published data may also under-record the growth rates as

an increasing number of employees, especially public sector employees have a

non-declared second (part-time) job.

[18.] Even though published figures of the different components may be subject to a

relatively large margin of error the published overall unemployment rate as well

as changes appear to give a good indication of actual levels and trends. On the

one hand there is considerable under-employment (in particular in rural and

semi-rural areas) and an important discouraged worker effect (notably in urban

areas) and on the other hand many people work in the underground economy.

[19.] It is worth noting that the natural increase in population had been on a steeply

declining trend since the end of the 1970s and, for the first time in 1989 there

was actually a natural decrease in population and the same probably occurred in


[20.] Many Greeks living in communities which have existed in Russia for centuries,

some dating back to the Byzantine Empire in the fifteen century, have been

settling in Greece since the "Perestroika".

[21.] The sizeable changes in net indirect taxes explain the significantly slower

increase in 1989 of the GDP price deflator at market prices (14.1 per cent) than

that of the GDP price deflator at factor cost (16.4 per cent).

[22.] Reflecting the increase in VAT rates and stricter fiscal controls the increase in

receipts from VAT added nearly 3 percentage points to the increase in consumer

prices during the year, whereas the increase in taxes on oil in the summer of

1990 and public utility tariffs in the course of the year each added nearly

2 percentage points.

[23.] Profits in the non-agricultural sectors, as presented in the Greek national

accounts, also include all non-wage incomes from self-employment. Owing to

the very big proportion of self-employed in the total remunerated non-agricultural

labour force (one-third) and their high average earnings, the total income

from self-employment is probably only somewhat smaller than the total wage

bill (excluding employer's contributions). Therefore, changes in profits, as

defined in the Greek statistics, have a considerably greater impact on inflation

than in the rest of the OECD. Even though earnings of self-employed in the

non-agricultural sectors are not properly speaking indexed to wages, they tend

to follow developments on the wage front. Likewise, as entrepreneurs try at least

to maintain their profit margins, profits properly speaking are also influenced by

the changes in the wage bill. As in other countries with high inflation, there are

strong indexation elements in the Greek economy, which tend to perpetuate the

inflationary effects of shocks, be this an increase in ATA or in import prices.

[24.] Because of strict foreign exchange controls on capital movements the flight of

capital does not show up in the capital account of the balance of payments. The

usual channels are through tourism, shipping and emigrant transactions and

hence take the form of reduced foreign exchange receipts from these sources.

The unofficial foreign exchange market is functioning relatively smoothly, making

it in effect a parallel market to which both companies and individuals have

easy access. The premium, which can vary from 5 to 15 per cent in extreme

cases, is very sensitive to supply and demand.

[25.] In the first four months of 1990 the current account deficit tripled to $ 2.5 billion

compared with $ 900 million a year earlier. The improvement in confidence

was followed, despite the Gulf crisis, by a marked reduction in the deficit in the

last eight months of 1990 to $ 1 billion compared with $ 1.7 billion a year


[26.] There are big divergences in trade data between the customs basis and balance

of payments basis (derived from financial transactions, including suppliers' credits)

presented by the Bank of Greece. Although both sets of data have drawbacks,

the data presented by the Bank of Greece seem to be a better indicator

for value changes. Likewise, volume changes based on customs data are subject

to large margins of error. Therefore the volume changes analysed in the main

text are derived from value figures given by the Bank of Greece, to which are

applied the wholesale price and foreign indices (e.g. commodity prices, of

manufactures estimated by the OECD).

[27.] Emigrant remittances come either directly from abroad or by drawing on the

foreign exchange deposits that most emigrants keep in Greece (often in a joint

account with the recipient of the remittance, e.g. parents, children and other

relatives). In the latter case there is a two stage transaction. There is a withdrawal

of foreign exchange from the foreign exchange account recorded as a

capital outflow and then this is converted into Drachmae and recorded as a

credit item in the invisible account.

[28.] The prevalent opinion is that a three-tier pension system may have to be

introduced ultimately - the first tranche of retirement pensions would be based

on needs corresponding to a minimum pension and would be mainly financed by

taxes, the second tranche should be on pay-as-you-go basis financed by flat rate

contributions and the third on a funded basis financed by voluntary contributions.

In addition, among the issues to be discussed is the retirement age, which

given the increasing life expectancy may have to be raised significantly for both

men and women, and also the level of pensions, which may have to be lowered,

especially in the wider public sector, which sometimes exceeds the last salary by

a wide margin.

[29.] Now the ratio of the take-home pay between top and low civil servants is barely

above 2 to 1. In the law reorganising the entry into the public sector in the first

half of the 1980s family status (number of children, family income, etc.) and

place of birth weighed more than professional qualifications and experience. In

the same law advancement and wage increases were quasi-automatic depending

on the years of service, and many senior posts were filled by elections. This gave

a particularly large influence to the political cells (representing the three main

parties) in the various ministries and other public sector agencies as well as to

the trade unions who tended to share the various posts by ensuring the elections

of their own nominees, whose main qualification was the allegiance to the cell or

to the union.

[30.] In 1988 out of 1 134 industrial firms with losses of Dr. 130 billion, there were 58

firms of the wider public sector (in which the state and state-controlled financial

institutions have a majority share) with losses of Dr. 40 billion. In 1988 the

negative rate of return of these public sector industrial firms was 30 per cent.

Excluding the public sector firms, the rate of return was 7 per cent in the rest of

industry (including private loss-making firms). On the other hand, the rate of

return of profit-making firms (two-thirds of total industrial firms) was 19 per

cent. The public-sector firms covered by the sample survey prepared by the

Confederation of Greek Industries are firms in which the State or public agencies

have the majority of shares. In addition, public sector bodies, principally

state controlled banks, even though they hold a minority interest in a large

number of other loss-making firms, exert effective control. Accordingly, the

number of loss-making firms under state control considerably exceed published


[31.] The IRO is planned to be liquidated by mid-1991.

[32.] Important shareholders who controlled certain firms before the virtual nationalisation

took place in the first half of the 1980s have appealed to EC courts

challenging the nationalisation procedures. Moreover, some of these firms owe

considerable sums to public enterprises (including the Electricity Corporation)

and there is ambiguity as to the treatment of this kind of debt (e.g. whether the

non-payment constitutes a subsidy or not).

[33.] In many cases the book value of the assets seems to be significantly higher than

the actual value. First, many firms include dubious claims in assets and second,

potential investors have the alternative option of building a new factory from

scratch, and thereby also take advantage of the various aids aimed at promoting

investment, as well as being less constrained by the existence of a (sometimes

oversized) workforce, which may not always be up to required standards.

[34.] For more details on the financial system before the reforms see OECD Economic

Survey of Greece, January 1986, Part IV, "Financial Reforms". For changes up

to 1989 see OECD Economic Survey of Greece 1989/1990, Part II, Section on

Financial markets.

[35.] The high risk and cost of providing loans to SMEs and the low interest rate

attached have discouraged this kind of bank loan. Banks prefer, especially since

the liberalisation of interest rates on government paper, to invest the unused

funds earmarked for SMEs in Treasury bills.

[36.] Many state-controlled financial institutions showed no profits in 1990, while the

insignificant profits shown by other institutions are probably due to the inclusion

of dubious claims. By contrast, profits of private banks (including some small

banks mainly owned by the National Bank of Greece and operating on profit

criteria, e.g. ETEVA) increased markedly further in 1990.

[37.] Some state-controlled financial institutions over the years have acquired (or

effectively control) a relatively large number of firms in all sectors (agriculture,

mining, manufacturing, construction, trade, tourism, etc.), often taken over at

the instigation of the government which did not wish their liquidation or their

restructuring to occur, involving a large number of lay-offs. The great majority

of these firms are either loss-makers or have considerably smaller profits than

similar private firms. In addition, it was not uncommon for state financial

institutions to give loans to firms on political considerations, subordinating

banking criteria to other more general criteria. This, combined with the fact

that receivers very often assimilate these institutions to government agencies

providing disguised grants, explains the relatively high proportion of non-performing

loans in the books of state-controlled financial institutions. Agricultural

cooperatives owe some Dr. 700 billion to the Agricultural Bank of Greece (7 per

cent of GNP), of which non performing loans are nearly Dr. 200 billion. Many

of these cooperatives are either unable to service these loans or simply refuse to

do so, counting on their political weight. With regard to loans to farmers the

proportion of dubious loans is even higher.

[38.] A floor has been imposed on social insurance contributions for part-time

employees (not lower than one-third of the minimum contributions for full-time

workers), but part-time workers enjoy full health coverage irrespective of hours


[39.] Under the previous system the mediators were government officials and the

cases not solved by them were submitted to an arbitration court composed of

three members representing the government, labour unions and employers. In

general the decisions of the arbitration courts, usually setting minimum wage

increases at the industry or professional level, closely followed government

guidelines and were binding.

[40.] If mediation fails, in most cases arbitration procedures will be initiated and the

arbitrators' decision will definitively settle the dispute if it is at the level of a

company. Disputes at a national, professional or sectoral level cannot be

brought to arbitration if the union disagree, contrary to the old system when all

disputes were brought to arbitration. When a case is brought to arbitration

strikes are not prohibited. Until the completion of the new institutional set-up

mediators will continue to be government officials and arbitration will be exercised

by arbitration courts. The other provisions of the law will be applied. Up to

now there have not been any reports of cases under the new procedures. It is

expected that the new system will be in full operation in 1992.

[41.] The European Court of Justice ruled (Dec. 1990) that the regime of trading

quotas and the approval by the Greek authorities of the annual programmes of

supply of the oil marketing companies do not comply with the EEC treaty.

[42.] With the aim of influencing expectations and wage negotiations the Bank of

Greece announced the targets some four weeks before the beginning of the year

and not 6 weeks after, as was the case in the past. Moreover, due to the fact that

interest rates on loans by the Agricultural Bank of Greece and the National

Mortgage Bank are still partly subsidised and that the first institution has very

low and the second is exempt from obligatory investment coefficients the Bank

of Greece imposed restrictive credit ceilings on both of them.

[43.] Even though monetary policy should remain overall non-accommodating, some

easing in the course of 1992 could be envisaged provided the dynamics of

disinflation, associated with a marked reduction in the PSBR, have been firmly

established. In particular, if the Drachma were to stop appreciating in real

terms, this would support the recovery in activity.
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Title Annotation:Greece; about the economy
Publication:OECD Economic Surveys - Greece
Date:Jun 1, 1991
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