Economic performance in 1990.
A fairly weak and short-lived upswing followed the unavoidable slack during the Stabilisation Programme of 1986-87. Even in 1988, the first year of the recovery, the growth of GDP was lower than the OECD average, with the difference in growth rates becoming progressively larger as the Greek economy again entered into a phase of stagflation in the beginning of 1990, earlier than the slowdown in the rest of the OECD. However, it should be noted that in contrast to earlier years, when consumption was the principal source of growth with fixed investment on a steep declining trend, since 1988 fixed investment has been the main expansionary element with a growth rate nearly three times that of consumption. Another positive development on the real side in this period is the recovery in manufacturing output from the low 1987 level. However, the rebalancing of the growth process has been rather hesitant, and, as the early petering out of the upswing suggests, may be more the lagged response of the earlier stabilisation gains than a sign of more fundamental changes.
The stagnation of output
Following a rapid increase in 1989, household real disposable income grew very little in 1990, reflecting the increase in the tax burden and the contraction in agricultural income in real terms due to drought. All other principal income categories continued to advance in real terms. Bolstered by a small fall in the savings rate, private consumption grew by 2 per cent in 1990 (Table 9). Almost one-half of this increase is accounted for by demand for cars (both in 1989 and in 1990 registrations rose by about one-third). This brisk growth can be partly explained by inflation and exchange rate expectations. In addition, since 1988 the substantial taxes on cars have been reduced significantly for cars imported by Greeks from abroad settling permanently in Greece . [Tabular Data Omitted]
After two years of rapid growth, government consumption showed practically no rise in 1990 thanks to moderate purchases of goods and services (including military equipment) and a slight fall in employment. General government investment, which is easier to change in the short term than other expenditure items, declined by around 6 per cent (in real terms) in 1990, reflecting the growing concern for the rising PSBR. For the same reasons investment by public sector enterprises also fell in 1990, except for big increases in transport and telecommunications fields, partly financed by EC transfers. In total, after two years of real growth total public sector investment fell by just over 6 per cent in 1990, to a level which is almost one-fifth below the average level since 1979 (Diagram 10).
Private investment again expanded rapidly in 1990 as a whole, reflecting the carry over from 1989 and a further sizeable rise in the first eight months of 1990. Subsequently, as for consumption, private investment seems to have flattened out, affected by high interest rates and the Gulf crisis. The upward trend in residential investment levelled off in 1990 reflecting a sharp rise in the price of apartments and credit squeeze. Though decelerating, the growth of private business investment at over 10 per cent in 1990 as a whole remained impressive. Increasing awareness that without modernisation many firms will be unable to withstand growing competition from abroad has been a major motivation behind the revival of business investment in recent years. However, the improvement in profitability since the onset of the 1986-87 Stabilisation Programme seems to have been the most important determinant behind the upturn in investment. Growing EC financial assistance, including grants, has also lent strong support to investment. Lastly, the shift to foreign borrowing at relatively low cost, even allowing for the trend rate of depreciation of the drachma by around 8 per cent in the last three years, and the Stock Exchange boom, which made it possible for firms to raise substantial amounts of share capital, partly offset the negative consequences from the steeply rising domestic interest rates.
Private business investment, as recalled in Part II, was on a declining trend between 1979 and 1986. Around the mid-1980s private investment in machinery and equipment had fallen somewhat below its average level of the previous ten years, suggesting that there was net disinvestment. The sharp recovery since then merely brought private business investment in 1990 back to the 1979 level. Nonetheless, the increase in investment in 1990 mainly reflected an increase in capacity, for the first time since the early 1980s .
In addition to fixed investment, stockbuilding, concentrated in the first half year, also gave a strong boost to domestic demand in 1990. However, as imported goods accounted for most of the increase in stockbuilding, there was a corresponding leakage so that GDP was little affected. Also as a result of the disappointing export performance the contribution of the real foreign balance, though diminishing, remained strongly negative in 1990, which explains the very weak GDP growth. Moreover, allowing for the changes in net indirect taxes and for brisk net factor income payments to abroad, real national disposable income practically stagnated in 1990. Almost all output-based GDP components recorded a markedly slower growth in 1990, with agricultural output actually falling by as much as 10 per cent due to severe drought. The fall in manufacturing production, as the deceleration for other tradeable products and services, reflects the continuing deterioration in cost competitiveness.
Labour market trends
Following three years of slow growth, public sector employment (one-third of dependent employment) grew by 6.5 per cent in 1989, due to massive recruitment of non-permanent employees, largely in the beginning of the year. Recruitment continued at a significantly slower rate up to the autumn of 1990, when the new government dismissed most of the non-permanent personnel recruited in the first half of 1989. Furthermore, in anticipation of the new pension law tightening eligibility criteria a large number of public sector employees retired in 1990. As a result, 1990 saw the sharpest fall in public sector employment (some 2 1/2 per cent) of the last fifteen years , making it the principal factor behind the slow growth in total employment in 1990.
The growth of dependent employment in the private sector was fairly strong due to demand in the service sectors (Table 10). The number of self-employed outside agriculture appears also to have increased by over 1 per cent in 1990, making for a cumulative growth of 18 per cent since 1980. The rapid increase of the already large number of self-employed (who account for one-third of total non-agricultural employment), as is the case for the proliferation of small units, is not only the result of economic factors, but it also reflects the fact that tax fraud is easier for smaller units . The relatively fast rate of growth of business sector employment (excluding agriculture) of 1 per cent in 1990 goes together with the persistence of a very slow growth-trend in productivity in all sectors and in particular in manufacturing, where productivity may have actually declined in 1990. In addition to the cyclical downturn, structural factors have continued to depress productivity in 1990 . Apart from maintaining in operation over-manned ailing enterprises and the insufficient investment in the 1980s, the low productivity of very small units in all activities is also responsible for the disappointing trends. [Tabular Data Omitted]
After remaining broadly stable during the second half of the 1980s the rate of unemployment increased to 7 3/4 per cent in 1990 . Apart from the increase in public sector employment, the stability in unemployment during the second half of the 1980s is explained by one of the slowest labour force growth rates (0.4 per cent on average) in the OECD. In addition to the extension of post-secondary education and early retirement, making for a decline in participation rates, demographic factors also explain the slow increase in labour supply . Without the growing number of Greeks from abroad settling in Greece, mostly from eastern Europe, the working-age population would probably have started declining from 1989 .
The stability in the overall rate of unemployment masks important differences. Firstly, the rate of unemployment in urban areas exceeds 10 per cent, whereas in rural areas it is 3 per cent, but under-employment is the highest in these areas. Moreover, the rate of unemployment in urban areas, which attract the largest number of legal and illegal immigrants has increased in the last few years, whereas it has broadly stabilised in rural areas. Secondly, the rate of unemployment of young age groups, in particular of the 20 to 24 age group is around 35 per cent. By contrast, the rate of unemployment is particularly low for the age group 45 to 64, probably less than 4 per cent (about the level of frictional unemployment), reflecting the large number of permanent employees in the wider public sector and the difficulties of laying off in the private sector as well as early retirement. Thirdly, the search period for a job is particularly long and is reflected in the relatively high incidence of unemployment between 6 to 12 months. At the same time Greece is among the countries with the smallest proportion of long duration unemployment (more than 12 months). This is attributable in part to the fact that unemployment benefits stop being paid after nine months (12 months since 1990), but more importantly anecdotal evidence suggests that most jobseekers ultimately find a job either in the open or underground economy.
There was a significant steepening of underlying inflation trends from the beginning of 1989. However, the recorded consumer price inflation was broadly stable at less than 14 per cent on average in the two years to the end of 1989 (Table 11). There were still some positive effects from the 1986-87 stabilisation and the Greek economy was still benefiting from moderate world wide inflation during most of 1989. More importantly, the apparent stability largely reflected deliberate policies aimed at keeping measured inflation down - administered price increases were continually delayed and indirect taxes were reduced while subsidies grew markedly. As the authorities also tolerated greater fiscal evasion, prices were not marked up by the full amount of taxes and, lastly, the real appreciation of the Drachma damped price advances . As a result, the inflation differential vis-a-vis the OECD as a whole and the EC, measured by consumer prices, changed little in 1988 and 1989 (Diagram 11). [Tabular Data Omitted]
The first strong push to inflation was given in December 1989, when the authorities decided belatedly to adjust administered prices adding in one step almost 2 per cent to the consumer price index. After this, consumer price inflation steadily accelerated, with the year-on-year rise peaking at 22.9 per cent in November 1990, up from 14 per cent a year earlier. This acceleration was largely the foreseen and inevitable consequence of the revenue raising measures taken in order to arrest the growth of the PSBR. These measures added some 6 to 7 per cent to the consumer price index in the first seven months of 1990 . These substantial price rises fed into wages and, as productivity also slowed in 1990, the growth of unit labour costs and of other non-wage costs accelerated sharply in 1990 . Speculative price rises reinforced inflation at the beginning of 1990, but this was largely unwound in the second half-year. Companies, which had been accumulating stocks up to the middle of 1990 and whose cashflow was affected by the growing slack and high interest rates, moderated price advances towards the end of the year. Lastly, almost 1 percentage point of the increase in consumer prices can be attributed to the severe drought, which led to an almost 45 per cent rise in the prices of fresh vegetables and olive oil during 1990.
The steeper growth of average earnings in 1990 is largely due to the sizeable wage increases of government employees, making for a cumulative increase in real average earnings of 17 per cent since 1988 (Table 12). In addition to ATA and the big bonus at the beginning of 1990, the seniority effect in the public sector, where there is quasi-automatic pay rise depending on years of service, is relatively big. This may explain some 3 percentage points of the 1990 increase in average earnings. [Tabular Data Omitted]
Despite wage moderation in the second half year the growth of average earnings in the private sector in 1990 as a whole fell only somewhat behind the rise in prices, after a 10 per cent real gain over the two previous years. The increase in manufacturing wages in 1990 was again considerably larger than in the rest of the private sector, resulting in a small real gain. This rise is difficult to explain on economic grounds and has more to do with the national bargaining system and the government-imposed minimum wages, which leave no room for company or plant wage flexibility. In this context it is worth noting that even problematic firms, some of which are considered non-viable, accorded roughly the same large pay rises as healthy companies. As a result, the growth of unit labour costs in manufacturing accelerated to 21 per cent in 1990, by far the strongest increase since 1984. By contrast, wages in retail trade, the other big category in the private sector, suffered a substantial real decline (4 per cent) in 1990, thereby largely offsetting the real advance in the previous two years.
Growing external imbalances
The large fluctuations of the current external deficit around a trend-level of 5 per cent of GDP cannot be explained without reference to confidence considerations. Uncertainty, falling business confidence and expectations of devaluation provoke massive illegal capital flight (e.g. in 1985), and, conversely, improved confidence not only considerably reduces capital flight, but can also induce a reflow (e.g in 1987-88) . Moreover, whereas in the pastthe shifts in capital flows were almost exclusively affected by confidence and speculative considerations, in the last couple of years the Greek public have become increasingly sensitive to changes in interest rate differentials. This has been caused by the turn-around from negative yields of domestic deposits measured in foreign currencies up to 1987 to sizeable positive yields since then as a result of the rise in domestic real rates and the small depreciation of the Drachma. Loss of confidence and speculation against the Drachma led to a marked deterioration in the balance of payments in the year to May 1990. During the rest of the year improved confidence and, probably more importantly, the rise in interest rates exerted a positive influence on capital flows resulting in a marked improvement both in the current and capital accounts .
In addition to confidence factors and the effects of the Gulf crisis, fundamental economic reasons also contributed importantly to the worsening balance of payments trends in the last two years. First, reflecting the non-accommodating exchange rate policy, relative unit labour costs measured on a common currency continued to increase rapidly, bringing the cumulative deterioration in international cost competitiveness to some 20 per cent in four years. Second, both quality and product mix have suffered from the prolonged sluggishness in investment and other structural rigidities, thus accentuating the deterioration in overall competitiveness. Third, following sizeable current account deficits the servicing of the external debt represents a heavy balance of payments burden.
The deterioration in competitiveness largely explains the stagnation of merchandise exports since 1988 (Table 13). The growth of non-oil exports in value (US dollars) stepped up to 6 per cent in 1990, implying a small decline in real terms, to a large extent due to the reduced supply of agricultural products after the drought . Exporters may have also delayed somewhat the repatriation of their export earnings in anticipation of a devaluation. Even allowing for these factors, developments in the last two years underline the inability of Greek industry to switch to exports in a period of growing slack at home. The cumulative loss in foreign market shares for manufactured goods may have amounted to as much as 15 per cent in the two years to 1990, despite a small fall in export prices in foreign currencies. By contrast, the growth of non-oil imports in value (US dollars) accelerated from 11 per cent in 1989 to 23 per cent in 1990. Allowing for stronger "leads and lags" effects and the sharper rise in the price of internationally traded goods in 1990, the growth of non-oil import volumes seems to have slowed to about 6 per cent. This is still a sizeable growth in a period of slackening domestic demand and is explained by the buoyancy in business investment, with its high import content, and by speculative imports, especially in the first half of 1990. The increase in the price of oil added about $1/2 billion, giving a trade deficit of $ 12.3 billion in 1990, nearly one-fifth of GDP. [Tabular Data Omitted]
The widening of the trade deficit was largely offset by a marked increase in the invisible surplus in 1990. This increase followed the stability of 1989, which masked illegal capital flight, mainly in the second half year. In the second half of 1990 improved confidence and high interest rates stopped capital flight, explaining most of the steep growth in invisible receipts in 1990 as a whole from the artificially low 1989 level. The swing from a decline in 1989 to an increase in 1990 was particularly noticeable in the case of emigrant remittances and tourism receipts. Excluding these distortions and allowing for the devaluation of the US dollar against the EMS currencies, in which most emigrant remittances and tourism revenues are made, the increase in invisible receipts in 1990 was very small, indicating broad stability in volume. Mediterranean tourism was affected by good weather in North-Western Europe as well as by the Gulf crisis in the last few months of the year.
The current account deficit widened to $ 3.6 billion in 1990, and almost two-thirds of which were covered by non-debt-creating capital inflows (Table 14). Non-debt private net capital inflows sprung up, mainly for real estate investment and portfolio investment enticed by the stock exchange boom up to last August. However, the figures in Table 14 exaggerate the increase in these inflows as company borrowing, which augmented considerably in 1990, is also included in entrepreneurial capital. Allowing for this and the decline of the US dollar vis-a-vis the EC currencies, private direct investment, though higher in real terms than in 1989, remained at a relatively low level and mainly reflected increasing foreign participation (including outright purchases) in Greek firms. Capacity-expanding investment was, likewise, very small (especially compared with Spain and Portugal) and most of it seems to have been directed to services, in particular to financial sectors, tourism and trade. As for the steeper rise in deposits in foreign currencies with domestic banks this is largely attributable to an increase in convertible drachmae deposits by companies for business operations, which more than offset the lower net inflow of deposits by individuals . [Tabular Data Omitted]
The shift to foreign borrowing by the business sector is also highlighted by the marked increase in suppliers' credit, making it the principal factor behind the surge in debt-creating capital inflows in 1990. Public sector net borrowing from abroad remained at the high 1989 level. However, reflecting growing amortisation, gross borrowing increased considerably. This, coupled with the unsound balance of payments situation and the world-wide tightening of credit, led to a deterioration in borrowing terms in 1990, after a steady improvement between 1986 and 1989. Official foreign exchange reserves have remained at around $ 4 1/4 billion for nearly three years to 1990, but in terms of total imports they have been on a downward trend since the last quarter of 1988. Partly due to the appreciation of other currencies vis-a-vis the US dollar the external debt of the public sector measured in US dollars further increased to $ 21.9 billion in 1990, but continued to decline as a per cent of GDP (Table 15). Likewise, the debt servicing ratio also fell in 1990, reflecting on the one hand the large share of debt in US dollars combined with the decline both in the value of the dollar and in interest rates in the USA and on the other the relatively high level of invisible receipts due to the reflow of funds from abroad. [Tabular Data Omitted]
PHOTO : Diagram 10. INVESTMENT PATTERNS
PHOTO : Diagram 11. COMPARATIVE INFLATION DEVELOPMENTS (1) (1). Measured by the consumer price index.
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|Publication:||OECD Economic Surveys - Greece|
|Date:||Jun 1, 1991|
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