(International Review of Applied Economics, vol. 6, no. 1, 1992)
Economic restructuring and the debt problem: the Greek case
TAKIS FOTOPOULOS
Abstract: The Greek post-war economic development process clearly illustrates the links between the debt explosion,that many countries inthe periphery and semi-periphery face at the moment,and the strategy of free-market economic restructuring.It is argued that both the balance of payments and the budget deficits, which fuelled the Greek debt expansion in the eighties, have been heavily conditioned by structural problems that are directly related to the development strategy adopted by the Greek ruling elite. In the absence of radical structural changes, a new stop-go cyclical pattern tends to become a permanent feature of the development process: debt-led growth followed by Stabilisation Programs to secure the external debt servicing.
I. Introduction
This article attempts to show that the rapid debt deterioration in the eighties is not just a short-term phenomenon exclusively related to the socialist government's (PASOK) economic policy in this period, as the Greek neo-liberals, who took over after the April 1990 general election, assert. Instead, the hypothesis may be put forward that this deterioration, as well as government policy during the PASOK era, have been heavily conditioned by long-term structural problems. As therefore the policy debate over the debt crisis increasingly shifts lately from the short-term adjustment problem to the long-term restructuring issue, (Pollin and Alarcon, 1988) the case of Greece presents a special interest, as it makes particularly explicit the connection between economic restructuring and debt.
The twin deficits in the balance of payments and the budget are the main manifestations of the current economic crisis as well as the principal causes of the present foreign debt explosion. Both could be meaningfully explained in terms of the chronic resource imbalance and the structural constraints on public revenue and expenditure, rather than in terms of cyclical or other short-term fluctuations, as it is usually the case put forward by orthodox economic analysis.
The first part of this article examines the relationship between the chronic balance of payments (BP) deficit and the resource imbalance that resulted from the post-war free market economic restructuring strategy. It is argued that the production structure has proved increasingly incapable to cater for domestic needs, let alone foreign needs, within a pattern of export-led growth. This is directly related to the fact that the production structure was the outcome of the hegemony held by elite interests that never allowed the state any effective planning role in the development process but forced it to rely instead on an indirect role of inducing foreign investment and financing domestic investment through an elite-controlled banking system.
However, contrary to the liberal view which has presently been adopted by the new Greek "technocratic left", it is not the inefficiency of the state or the banking sector, indisputable though it may be, "that led to processes that dampened competition and ultimately distorted the country's development" (Papandreou, 1991:1). It is instead what is taken for granted by the liberal approach i.e. the rapidly increased liberalisation and openness of the Greek to the world economy in the post war period, which has not been preceded or accompanied by the creation of a competitive productive base, that constitutes the ultimate cause of the failure of Greek development. This is because the existence of enough competitive assets has always proved necessary to offset the productivity or wage differentials that foreign products incorporate. In other words, as it has been repeatedly shown (see for evidence Pollin and Alacron, 1988: 140),it is not competition that has historically led to significant advances in the production efficiency and international competitiveness of late-developers, but protectionist/ interventionist policies.
Such policies, contrary to the advice provided by the liberal approach, have usually involved not only nationalisation of the banking system but also deliberate distortion of the relative prices formed by the free market, in order to stimulate investment and trade (Amsden, 1989: ch 6). One may therefore argue that if the Greek state is to blame for the failure of development, this should be done not on the basis that it did not allow market forces enough freedom to eliminate inefficient businesses and reward efficient ones but, on the contrary, on the basis that it did allow too much freedom to big business and have never had the willingness or the ability to discipline them, as it was for example the case with other late-industrialisers (Japan, Korea, Taiwan). As J Petras incisively observes about the inability of the Greek state to discipline business
"most of the 'industrialists' continued to accumulate wealth by borrowing huge amounts of capital from the state banks, investing a fraction and diverting the rest to overseas bank acoounts. The debt/capital-investment ratio remained one of the highest in the world because industry was directed not by the usual kind of entrepreneur but by a highly distinctive stratum of kleptocrats" (Petras, 1987:12).
Amsden (1990:16-21) points out that competition acted as a disciplinary mechanism for development only in the First Industrial Revolution and was replaced by tecnological change in the Second. However, it is state power to discipline business (and labour) that has historically proved the necessary condition for late development. This power is in turn, according to Lipietz, (1987:72-3) a function of the degree of autonomy of the state from traditional forms of foreign domination, from ruling classes that are connected with earlier regimes of accumulation, as well as from populist parties or social organisations. Late development therefore takes place only within a particular balance of power between social classes/ groups. It is this balance that empowers the state with the ability to discipline business and esults in appropriate developmental structures for the state machine, the financial sector etc and not the other way round, as the liberal-technocratic approach, which is deprived of any real social content, assumes. In this sense, development can be fruitfully explained by reference to the concrete historical process that has led to specific structures and processes rather than with reference to the incompetence of the personnel that manned he state machine (or its "political dependence"), patronage, favouritism etc, i.e. factors that would leave unexplained the fact that similar phenomena were successfully controlled by other late developers (Amsden, 1990: 21-5). In other words, the structure and efficiency of the state (or the financial sector) in promoting development is not an "independent variable", as liberals assert.
As far as the demand structure is concerned, the rapid expansion in the post-war period of income and capital flows from abroad, on account of conjuncture (emigration), temporary factors (foreign aid and EEC subsidies) and factors of diminishing significance (tourism), has led to a volume and pattern of demand that is in flagrant contradiction with the production structure. The paradox of the emergence of a "consumer society without a production base" epitomizes the causes of the resource imbalance.
In the second part of the article I will discuss the structural aspects of the Greek fiscal crisis. It is shown that the historical failure of the industrialisation process, combined with the exhaustion of the emigration opportunities, left the socialist government in the eighties with the clear choice of either expanding the development role of the state, by adopting a radical restructuring program, or expanding its consumption function with the double objective to avoid a massive rise in unemployment and to reproduce the consumer society. At the same time, the service character of the Greek economy and the significant size of the black economy have led to a restricted and distorted tax base that has extensively contributed to the explosion of the public debt.
In the third part, an attempt will be made to assess the debt implications and the prospects for the future. In the conclusion the article touches upon the proposal for an alternative development strategy whose primary objective is the satisfaction of domestic needs within the framework of income redistribution and regional integration policies in an EEC sub-community of regions at similar level of development.
II. Debt and the resource Imbalance
1. The Greek debt problem.
Greece occupied at the end of the last decade the 15th place in the world debt league with one of the highest per capita debts in the world. Also, Greece's debt service as a percentage of GNP and exports of goods and services is slightly higher than the average of the top borrowers (World Bank). Although the seeds of the present debt problem were sown earlier in the post-war period and the foreign debt had reached 15% of GNP as early as 1967, still, it was during the eighties, as Table 1 shows, that the debt condition became explosive. Thus, the total debt (excluding military loans) has more than quadrupled within the last ten years whereas the debt/GNP ratio has trebled. As a result, service payments have increased rapidly between the seventies and the eighties and at present they absorb over a fifth of Greece's current receipts from exports and income transfers, as against a debt service ratio of about 10% in the seventies. Furthermore, the situation has been sharply deteriorating in the early nineties as Greece continues borrowing heavily, partly in order to meet the mounting service payments on past loans which for the period 1990-91 alone amount to about $10 bns. Thus, the external debt (private & public) is estimated to have been about $25 bns. in 1990 and it is forecasted to be at least $28 bns. in 1991.
Table 1. Greek external debt ($ bns)
Year
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
TOTAL DEBT
5.1
6.9
7.9
9.5
10.6
12.3
15.5
18.0
20.7
19.7
21.3
% of GNP
13.0
18.7
22.1
26.0
33.9
41.5
50.0
43.3
42.3
40.6
38.0
Public (1)
3.1
4.4
5.4
7.0
8.2
9.9
13.3
16.0
18.6
17.8
18.7
% of GNP
7.9
11.9
15.2
19.0
26.4
33.4
42.4
40.4
37.3
35.0
33.3
Private (2)
2.0
2.5
2.5
2.5
2.4
2.4
2.2
2.0
2.1
1.9
2.6
Interest
0.3
0.4
0.8
0.8
0.8
1.1
1.2
1.3
1.5
1.6
1.7
Amortization
0.5
0.5
0.6
0.7
0.7
0.8
0.9
1.6
2.1
2.2
1.9
TOTAL SERVICE
0.8
0.9
1.4
1.5
1.5
1.9
2.1
2.9
3.6
3.8
3.6
Debt service/GNP
2.0
2.5
4.0
4.0
4.9
6.2
6.7
7.3
7.3
7.5
6.5
Debt serv.ratio (3)
8.0
9.1
12.8
14.4
16.0
19.2
21.8
21.7
25.5
23.7
22.2
1) It includes medium, long-term and short-term public and publicly- guaranteed loans by general government and banks as well as suppliers'credit.
2) It includes medium, long-term and short-term private loans as well as suppliers'credit.
3) Debt service as percent of current receipts from the export of goods and services as well as from income transfers.
Source: OECD (1987), OECD (1990) and Bank of Greece.
2. The chronic trade deficit and the resource imbalance.
Throughout the post-war period there had been a huge gap between spending and production which, measured at constant prices, had increased from about 15% of GDP in the fifties to 20% in the period 1960-1989. This chronic resource imbalance implies not just a familiar excess demand problem but serious structural problems both on the production and on the demand side. In fact, the deterioration of the resource imbalance that started in the sixties coincided with the acceleration of the process of opening the Greek economy to the world economy which was marked by Greece's association agreement with EEC at the beginning of that decade. The massive expansion of emigration and tourism with the corresponding growth of transfers from abroad has since then been used to finance the growing resource imbalance. This process is clearly reflected in the chronic and constantly deteriorating balance of trade (BT) deficit and the ways used to finance it, which, in the last resort, relied on foreign borrowing.
The BT deficit/GDP ratio, as Table 2 shows, has doubled in the post war period, from 9% in the fifties to 18% in the eighties. During the same period the corresponding average ratio for the 9 EEC countries, before the southern enlargement, ranged from - 1% to +1% of the GDP. A significant part of this deterioration can be attributed to the "oil factor". However, apart from the fact that Greece, unlike ACCs[1], was unable to adjust successfully to the new conditions, the non-oil BT deficit/GDP ratio has also grown by about 20% since the sixties. At the same time, Greek dependence on foreign trade, (measured by the proportion of the semi-total of Greek foreign trade out of GDP), has almost doubled since the fifties and it is about double that in ACCs.
TABLE 2. Balance of Payments trends
PERIOD
1950-9
1960-900
1970-9
1980-9
Exports/imports of goods
43.8
37.4
38.9
42.1
Imports of goods/GDP(1)
16.3
18.3
26.5
31.3
BT deficit/GDP(2)
9.2
11.5
16.2
18.1
Current account/GDP
4.6
3.5
5.1
5.6
Semi-total of exports & imports/GDP
14.3
14.2
20.0
26.8
% BT deficit covered by net invisibles
50.3
66.7
68.5
52.8(3)
% BT deficit covered by tourist revenue
11.5
17.5
24.7
26.6
% BT deficit covered by emigrant remittances
22.7
32.1
24.5
16.7
% BT deficit covered by shipping remittances
18.5
27.6
33.0
20.8
% BT deficit covered by EECtransfers
―
―
―
16.3
Capital outflows/inflows
―
23.3
49.5
68.9
% Net invis.spent on interest/profit payments(net)
―
2.1
4.8
22.2
1) The figures of import coefficients in the table were derived from Bank of Greece data in dollars. The corresponding coefficients from National Accounts data in drachmas are as follows: 16.1, 17.2, 27.6 and 33.8.
2) The corresponding figures from National Accounts data are as follows: 9.7, 9.8, 16.2, and 18.7.
3) Excluding EEC net transfers that started in 1981. The inclusive figure is 69.1%.
Source: T Fotopoulos (1986), National Statistical Service of Greece and Bank of Greece.
The above developments in the BT can be adequately explained by the fact that the increased openness of the economy since the sixties implied an effective take over of the Greek market by foreign industrial products which was not, however, matched by a corresponding increase in exports. The inevitable outcome was an increasing reliance, after the phasing out of US aid in the fifties, on income and capital flows from abroad to cover the chronic and widening BT deficit. Thus, the average propensity to import in Greece is almost double that in the ACCs (0.294 and 0.155 respectively in 1988, World Bank) and it has almost doubled since the fifties. Despite the fact that the volume of Greek exports has increased faster than the volume of imports especially in the seventies, still the proportion of imports that is covered by exports is one of the lowest in the world (less than half that of ACCs) and in the eighties it was still lower than in the fifties and much lower than in the pre-war period (53% in 1929 and 66% in1938, versus 37% in 1989-90).The almost constant deterioration in the Greek terms of trade throughout the post-war period has been a significant contributing factor for this development.[2]
As regards income flows from abroad, net invisible receipts and transfers, as Table 2 shows, have covered more than two-thirds of the BT deficit since the sixties, when the massive post-war emigration together with the significant expansion of tourism started having their effect. However, the gap between the balance of trade deficit and the balance of invisibles surplus seems to be growing over time implying a declining long-run trend with respect to the contribution of invisibles to finance the BT deficit. This is confirmed by Table 2 which reveals that this contribution reached a peak in the seventies and has declined sharply since then. It is only because of the significant EEC transfers, that started with Greece's entry and covered an average 16% of the BT deficit in the eighties, that the Current Account ―which has steadily deteriorated since the sixties― does not presently show a worse deficit.
Furthermore, there are grounds to suppose that the future prospects of invisibles are bleak, since all three main sources of invisible receipts seem increasingly problematic. Thus, emigrants' remittances, after reaching their peak in the sixties, have been declining since then. The halving, within two decades, of emigrants' contribution to financing the BT deficit could be attributed not just to economic factors (recession and some repatriation following the second oil shock) but also to demographic and socio-economic changes affecting Greek emigrants i.e. retirement of first generation, integration of second generation etc. Also, the contribution of Tourism to the BT deficit, that showed a significant growth from the fifties to the seventies, stagnated in the eighties, despite the fact that the number of tourists visiting the country almost doubled during the last decade. Increasing competition by Greece's competitors in the Mediterranean, especially Turkey, and a shift in tourist patterns, particularly as far as wealthier tourists is concerned, away from the increasingly polluted Mediterranean and towards long-haul holidays, play a significant part in this development. Finally, shipping remittances had been badly affected by the world shipping crisis that halved the huge Greek- flag fleet.
However, net invisible receipts were also adversely affected in the last decade by a drastic increase of interest payments to service the growing external debt. The net ouflow of interest and repatririated profits (the latter did not increase in the eighties) which in the seventies absorbed only some 5% of net invisible receipts has grown to absorb about 22% of these receipts in the eighties and the trend is expected to deteriorate sharply in the early nineties.
Finally, as regards capital flows, Table 2 shows that the ratio of capital outflows/inflows has trebled since the sixties, to reach 80% in 1989, mainly because of the growing needs of debt servicing in terms of amortization payments. At the same time, although non-debt inflows increased significantly in the sixties and seventies, there was a decline in the eighties, from an average of 3.5% of GDP in 1975-79 to 2.9% in 1980-89 (OECD, 1990:68/Bank of Greece). So, whereas non-debt capital inflows covered about 81% of the current account deficit in 1976-79, the coverage ratio fell to 60% in the 1980s. The inevitable increased reliance on foreign borrowing is also indicated by the fact that net compensatory official borrowing to cover the chronic BP deficit in goods services and incomes has grown to over 40% since the sixties, from 28% in the fifties.
3. The causes of the resource imbalance.
The fundamental cause of the resource imbalance is the contradiction created in the post-war period between a relatively high and sophisticated consumption standard that relied, in the last resort, on the significant income and capital inflows from abroad and a very weak and non-sophisticated manufacturing sector
3.1 The absence of a strong manufacturing sector.
Greece's development process, unlike the one historically followed by today's ACCs, does not include any significant industrialisation phase. From an agrarian economy in the pre-war period, with over half the active population employed in agricultuture, it moved directly to the stage of a services economy in the post-war period, with more than half the total income produced in the tertiary sector since the early fifties and with half the active population engaged in this sector today. It was only in the seventies that manufacturing output had overtaken agricultural output. The service character of the economy was the inevitable result of the growing significance of the tertiary sector to the expansion of the economy. This sector's contribution to GDP growth had steadily increased (from 47% in the fifties to 81% in the eighties) and had also been much faster than the corresponding expansion of the tertiary sector in ACCs during the same period (the respectives growth rates for the period 1965-80 were 6.2% for Greece and 3.7% for ACCs, World Bank).
The outcome of these diverse growth paths was the significant structural divergences between Greece and ACCs, and therefore her main competitors within EEC. Greece's manufacturing share has been, throughout the post-war period, about half the size of the corresponding share in ACCs and the convergence that has taken place since the late seventies is due to the de-industrialisation process in the latter rather than to any significant industrialisation in the former. In fact, Greece has one of the lowest manufacturing shares in the OECD area (in 1988 this share was 18% for Greece versus an average of 28% in OECD- Europe) and indeed "the lowest, if allowance is made for Greece's comparatively low per capita income and the predominance of small firms not really engaged in manufacturing activities proper" (OECD, 1987:29), a fact that brings Greece closer to the peripheral countries than to ACCs.
It is therefore clear that the heavy import dependence of Greece may be explained by the very limited size of its manufacturing base. Almost a quarter of total consumption consists of imported industrial products and it is significant that the situation is worsening over time. Industrial imports covered 46.5% of the total supply of industrial products in 1964, 50.2% in 1975, 52.2% in 1978 (Papandreou, 1981:259) and about 60% in 1987. Furthermore, not only import substitution has produced insignificant results (the same study estimated it to be just 5.3% of total supply in 1974) but, also, a process of "domestic products substitution" is developing with foreign products rapidly substituting for domestic ones[3].
However, it is not only the limited size of the Greek manufacturing sector that may explain the heavy import dependence. A comparison of manufacturing structures in Greece and the EEC reveals not only a very different pattern in the former but also an unchanging one. As Table 3 shows, whereas the bulk of Greek manufacturing takes place in the processing of agricultural products and textiles/clothing, the bulk of EEC's manufacturing takes place in the production of machinery, transport and chemicals. It should also, be noted that most of Greek manufacturing consists of either processing raw materials/assembling imported components or just repair work and that manufacturing activity takes place mostly in very small units. In 1980, 85% of industrial establishments were employing less than 4 persons and only 30% of the manufacturing labour force was employed in establishments with more than 100 persons (NSSG, 1986). Not surprisingly, there has always been a significant productivity gap between Greece and the EEC which in 1972 implied that the EEC average labour productivity index was 80% higher than in Greece. The gap has since then widened further. In the seventies, labour productivity increased at about the same rate in Greece as in the EEC, but in the eighties, Greek productivity was rising at an annual rate of 0.2% compared to an average rise of 2.3% in the EEC (OECD, 1989).Not, of course, an unexpected fact if one takes into account the interrelationship between investment and labour productivity changes and the fact that gross domestic investment was falling in Greece in the eighties, whereas it was rising in the OECD high income countries
TABLE 3a. Structural characteristics: % shares of output and employment: Greece and ACCs(1)
Agriculture
Industry
(Manufacturing
Services
Greece
ACCs
Greece
ACCs
Greece
ACCs
Greece
ACCs
GDP
L*
GDP
L
GDP
L
GDP
L
GDP
L
GDP
L
GDP