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.JUTPQPVMPT GREECE From Exit to Recovery? 00-2577-0 fm.indd 4/30/14 1:48 PM 00-2577-0 fm.indd 4/30/14 1:48 PM GREECE From Exit to Recovery? Theodore Pelagidis Michael Mitsopoulos brookings institution press Washington, D.C 00-2577-0 fm.indd 4/30/14 1:48 PM Copyright © 2014 the brookings institution 1775 Massachusetts Avenue, N.W., Washington, D.C 20036 www.brookings.edu All rights reserved No part of this publication may be reproduced or ­transmitted in any form or by any means without permission in writing from the Brookings Institution Press The Brookings Institution is a private nonprofit organization devoted to research, education, and publication on important issues of domestic and ­foreign policy Its principal purpose is to bring the highest quality independent research and analysis to bear on current and emerging policy problems I­ nterpretations or conclusions in Brookings publications should be understood to be solely those of the authors Library of Congress Cataloging-in-Publication data is available ISBN-978-0-8157-2577-0 987654321 Printed on acid-free paper Typeset in Sabon Composition by Cynthia Stock Silver Spring, Maryland 00-2577-0 fm.indd 4/30/14 1:48 PM For Mark (t.p.) and for Veronica (m.m.) 00-2577-0 fm.indd 4/30/14 1:48 PM 00-2577-0 fm.indd 4/30/14 1:48 PM Contents Foreword Kemal Dervis¸ ix Acknowledgments xv List of Abbreviations xvii Introduction 1 From La Dolce Vita to Collapse: The Sins of the 1990s and 2000s That Led Greece into Free Fall The Depression of the Century: Prejudice and Misguided Policies Unlocking Growth: Innovation as a Driver of Competitiveness and Prosperity 85 41 Appendixes A Cases of Corruption in the Greek Government, 2008–12 127 129 B Data and Statistical Analysis Notes 139 References 147 157 Index vii 00-2577-0 fm.indd 5/8/14 3:18 PM 00-2577-0 fm.indd 4/30/14 1:48 PM Foreword Sipping a lemonade on a perfect summer evening, near the Acropolis in Athens in 2005, I was thinking about how beautiful and lucky a country Greece was Greece’s growth performance over the post–World War II period had been one of the best in the world, and per capita income had reached US$21,700 at market prices in 2005, making it a high-income country More recently, the ratio of Greek to German per capita income had gone from 52 percent in 1995 to 64 percent by 2005 Greece had become a full member of the European Union and of the euro zone The terrible period of right-wing military dictatorship and violence in the late 1960s and early 1970s was long gone, and democracy was functioning, in a somewhat populist and chaotic but perfectly peaceful way There were no internal ethnic or regional conflicts, so prevalent elsewhere in the Mediterranean and Balkan regions Thanks to the work of George Papandreou and Ismail Cem when they had been foreign ministers of Greece and Turkey, respectively, relations between the two neighbors had greatly improved, particularly since a special Greek rescue team was dispatched to Turkey by Greece immediately after a devastating earthquake in Turkey in 1999 It is amazing what such a gesture—and it saved Turkish lives—can to promote peace and goodwill Turkey reciprocated at the time of a smaller earthquake in Greece, some months later Tensions in the neighborhood had decreased Greece was an influential member of the European Union and of NATO and, at the same time, had good relations with Russia, the Arab world, and Israel, as well as countries further afield The adoption of the euro had gone well, growth had accelerated further, sovereign interest ix 00-2577-0 fm.indd 4/30/14 1:48 PM 162      Index Human resource management in public sector, 9, 70–71 Hwang, J., 91, 126 ICT See Information and communication technology IKA, 44, 56 IMF assistance, 40 IMF directors and country reports (1990–2009), 21, 29–34 Imports, 22, 88 Inflation, 11, 12, 17, 21, 21f, 36–37 Information and communication technology (ICT), 42, 88, 89, 90f, 111 Infrastructure, 84, 102–05, 118; quality of, 131–35t Infrastructure investment, 17–18, 31, 42, 52, 102 Innovation, 2, 85–126; and access to finance, 106–09, 123; business spending on non-R&D innovation, 88; competitive forces, role of, 93–95, 121, 124b; drivers of innovation, 93–111, 121; and economic crisis, 89, 123; and economic inefficiency, 27; Europe compared to United States, 101; and firm size and age, 109–11; Greece as belowaverage innovator, 85–91, 87t, 111, 122; locus of technology-based innovation, 95–96; obstacles to, 104–05, 108–09; organizational, 94; policies to encourage linkages between business community and research institutions, 122–23, 124–25b; research-based, 3; role of institutions in, 96–100 See also Research and development (R&D) Innovation Union Scoreboard See European Commission Innovation Scoreboard INSEAD Global Innovation Index, 85, 89 07-2577-0 index.indd 162 Institutional factors: in innovation, 96–100; leading to the crisis (1990–2008), 13–14; modernization, 13, 16, 27; quantitative ­analysis for decision to invest in R&D, 111–22; weaknesses, 24–26, 84 Insurance, 9, 68 Intellectual property rights, 85, 91, 98, 99, 105, 118, 119, 120, 123, 124b, 131–35t; Bayh-Dole Act (1980), 102–03 See also Patents Interest groups, 10, 13, 16, 19, 21, 27–28, 33, 74 Interest rates, 17, 29, 37 Internal devaluation: as controversial strategy, 2; defined, 2; and implementation of conditionality program, 62–63; of private sector, 2, 41, 63, 70; as strategic error, 71; and tax revenues, 67, 77 Interviews: with key politicians, 5; on R&D, 111–12 Investment, 17–18 See also Foreign direct investment (FDI) IPOs of university spin-offs, 112 Ireland as innovation leader, 90f Jaffe, A., 96, 102, 103 Jarmin, R., 109 Job matching, 34 Job opportunities, 22–23, 23f, 34, 51; job creation by start-ups, 109–10; in jobs that repeat practices of the past, 110–11; skilled workforce, need for, 104 Judiciary, performance of, 27, 28 See also Courts Kaufmann, D., 24 Kerr, W., 96 Kirkegaard, J.-F., 81 Kitson, M., 103–04 4/30/14 1:53 PM Index      163 Knowledge, transfer of See Transfer of knowledge Knowledge-intensive services, 85, 88, 91, 126 Kraay, A., 24 Living standards: goal to improve, 1; research-based innovations linked to, 3; at time of accession, 16 Locke, R., 104 Logistics, 111 Labor costs: index evolution per sector, 48, 48t; labor cost indexes, market economy, 57, 60f; market reforms, success after 2012, 41; per employee, by industry, 45, 46t; personnel costs as percent of turnover and cost per employee, 48–51, 49–50t; real unit labor cost, 33, 61, 62f; restoration of competitiveness without suppressing, See also Wages Labor market distortion, 21, 22–23, 23f, 29, 33 Lamoreaux, N., 106 Law, rule of See Rule of law Layoffs, 52, 63, 71 Leather industry, 42, 45, 50t Legislation: 1990–93 period, 7; intellectual property licensing, 105; removing control of legislative initiatives from Greek government, 76; research centers as separate entities from universities, 126; uncertainty created for businesses due to, 99 See also Costs of legal ambiguity; Licensing law Lehmann, E., 104 Lerner, J., 96, 97, 98, 100, 102, 103, 107, 110 Li, N., 94–95 Liberalization of financial sector, 17 Licensing law, 32, 103, 105, 123, 125b Limited liability, 101, 125b Liquidity crisis, 2, 42, 68, 72, 77–84 Lisbon Agenda, 38 Litan, R., 110 Maastricht Treaty: excessive deficit under, 35; no-bailout clause, 72, 76; no exit for admitted country, 72; ratification of, 5–13 Machinery operators, 34 Macroeconomic factors: imbalances, acceptance of, 72; leading to the crisis (1990–2008), 13–14; stabilization of, 13, 14–18 Madison, James, 76 Main Financial Institutions (MFIs), 78–79f, 79 Manos, Stefanos, 13 Manufacturing: decline in economic activity, 42, 43t, 105; earnings, 45; importance to focus on, 123; labor cost per employee, by industry, 45, 46t, 47f; personnel costs as percent of turnover and cost per employee, 48–51, 49–50t; research-driven, 2; shipbuilding and, 3; wages in, 60 See also specific types of products Marinas, McKinsey and Company, 2, 104, 114 Media industry, 49t, 50 Medical insurance, 68 Medical tests, 102 Medical tourism, Metal processing, 42, 50, 88 Metro (Athens), 18 MFIs See Main Financial Institutions Michie, J., 103–04 Microeconomic factors leading to the crisis (1990–2008), 13–14 Minimum wage and minimum national wage agreement, 45, 57 Ministry of Economy, 68 07-2577-0 index.indd 163 4/30/14 1:53 PM 164      Index Ministry of Transport, 18 Miranda, J., 109 Mitsopoulos, M., 17, 23, 26, 27, 28, 33, 67, 69 Mitsotakis, Constantine, 7, 9, 13, 40 Mobile telecommunications, 7, 9, 32 Modernization policy, 13, 16, 27, 37–38 Monetary policy, 35 Monetary union, See also European Monetary Union (EMU) Moral hazards, 74 Mowery, D., 103 Multicollinearity, 115–16, 118, 119, 120, 122 National Institutes of Health, 103 Netherlands and innovation gap, 91 Niche markets, development of, 126 Nicodème, G., 94 Nicoletti, G., 27 No-bailout clause, 72, 76 Nonbank financing, 84 Nontradable sectors, 22, 60 North-south divide, 11 OECD Economics Department, 27 OECD Indicators of Product Market Regulation Database, 24, 112 Oil shocks, 14 Olympic Games (2004), 17, 18 Optical products, 42, 49t Optimum currency areas, theory of, 12, 13, 27 Ordinary least squares (OLS), 117, 118 Organization of Mediation and Arbitration (OMED), 57 Overtime, 45, 57 Parliament: composition of, 6, 39; ratification of Maastricht Treaty by, 5–13, 31 07-2577-0 index.indd 164 Patents, 85, 94, 97–98, 105, 112, 124b Pawlicki, P., 88 Pelagidis, T., 17, 23, 26, 27, 28, 33, 67, 69 Pension reform, 68 Pharmaceuticals, 68, 88, 96 Policies to encourage linkages between business community and research establishment, 122–23 See also Collaboration of business and government in research Political economy of reform, 76 Political factors leading to the crisis (1990–2008), 13–14 Political favoritism See Regulatory favoritism Political opposition: corruption of, 13; on ECB favoring strongest and core states, 12–13; on Maastricht criteria, 10–11; stymied efforts to address economic instability, 13 See also Resistance to reform Political uncertainty See Uncertainty Politicians, 72, 74–75 See also Political opposition Portugal: efficiency levels, 20, 20t; as innovation leader, 90f Poverty, 11 Predation, 28 Price controls, Prices, 26, 32, 37, 121 See also specific commodities and goods Printing industry, 49t, 50, 88 Private insurance, Private property taxation See Taxation Private sector: costs pushed onto, 2, 41, 74; decrease in employment in, 52; increased debt of, 17, 81, 82f; low level of employment in, 70–71; operating outside of euro area, 73, 75 See also Internal devaluation 4/30/14 1:53 PM Index      165 Private sector involvement (PSI), 41, 72, 78 Privatization, 31 Privileges bestowed by regulatory favoritism, 7, 13, 16, 28 Procyclical fiscal stance, 38 Production base, 16, 120 Productivity: decreases, 16, 100; efficiency in moving from less to more productive activities, 110; increases, 13, 27, 94 Product market developments, 33 Professional services, 24, 48, 95 Profits, 26–27 Property rights, 118, 119, 120, 123, 124b, 131–35t See also Intellectual property rights Property taxes, 67–68, 78 PSI (private sector involvement), 41, 72, 78 Public administration, 48, 52; employment in public administration, 70–71, 70–71f See also Administrative burden Public debt See Government debt Public finances, 63–71, 76 See also Government debt; Taxation Publicly owned enterprises, 42, 68 Public sector: decrease in employment in, 52; efficiency weaknesses of, 19; employment growth, 16; employment in public administration over total population, 70–71, 70–71f; labor costs disproportionate in, 63; reform, 2; wages, 10, 16, 37, 56, 70 Quebec, 76–77 R&D See Research and development Ratification of Maastricht Treaty: in economic policy context, 6–13; parliament’s understanding of, 5–6 07-2577-0 index.indd 165 Real estate agent fees, Real estate market, 52, 68 Recession: and austerity measures, 12; and private debt levels, 81 Recommendation 2010/190/EU from the Council to Greece, 39 Refineries, 42, 49t, 50 Reforms: flagship, 9, 17; key, 17; likelihood of success of reformers, 75; political economy of reform, 76; regulatory reforms (1990–93), 9; structural reform (1995–2008), 14–18; structural reform program tied to EC loan (1990), 40; structural reform Recommendation 2010/190/ EU from the Council to Greece, 39 See also Resistance to reform Regional shock, 11, 12 Regulation: compared to other OECD countries, 9; high costs of, 24, 26; regulatory quality, 119, 120, 131– 35t; regulatory reforms (1990–93), See also Administrative burden Regulatory favoritism, 7, 13, 16, 28 Rents, 9, 19, 24, 28, 34, 94 Rent-seeking interest groups, 10, 14, 21, 24, 27–28, 34 Research and development (R&D): data analysis on, 115–22, 129–30t; data collection on, 111–15; and economic inefficiency, 27; highquality research infrastructure, 120; importance to economy, 3; and licensing of technologies, 103; quantitative analysis of institutional factors in decision to invest in, 111–22; researchers as officers in start-ups, 121; size of companies engaging in, 108; spending on as percentage of GDP, 85, 86f; tax authorities’ recognition of expenditures, 102, 123 See also Business expenditure on R&D (BERD) 4/30/14 1:53 PM 166      Index Research centers, 89, 92, 92b, 98–100, 104, 105, 111, 126 Research-driven manufacturing, Research institutions, 89, 90f, 103, 104, 108, 109, 118–21, 122–23, 126, 131–35t Resilience: of financial system, 41, 78; sectoral, 45, 47f, 52 Resistance to reform, 10, 14, 16, 27–28 Retirement, 51, 52, 63 Ring road (Athens), 18 Risk: currency, 76; pricing of, 39 Road haulage, 9, 45, 95 Rodrik, D., 91, 116, 126 Rose-Ackerman, S., 113 Rubber and plastics industry, 88 Rule of law, 118, 119, 120, 131–35t Salaries See Wages Sauner-Leroy, J-.B., 94 Scarpetta, S., 27 Schwellnus, C., 100 Science and business parks, 92, 92b, 109, 126 Scientific publications, 88, 91 Sectoral developments, 42–63; annual gross employee earnings by economic activity, 42–43, 44t; decline in economic activity, 42, 43t; minimum wage, 57 See also specific sectors Sector wage agreements, 33 Self-employment, 26, 41, 52, 62, 67 Sembenelli, A., 100 Serrano-Velarde, N., 95 Sewage treatment, 42, 48, 48t, 50, 52 Shipping, 2–3, 17–18, 34, 95, 104 Silicon Valley, 103 Simpson, H., 94 Single Market Program, 94 Single supervisory area, 81 Sivadasan, J., 94 07-2577-0 index.indd 166 Size of companies: and innovation, 109–11; and R&D, 108 Small innovative businesses, 106–09 See also Start-ups Smith, A., 97 Social security system: contributions, 57, 67; fund losses, 79; post-accession obstacles to, 37, 39; reform, 19, 31, 37; surplus funds, 37 Sokoloff, K., 106 Solar farms, 33 Solvency of Greek sovereign, Soros, G., 80 Spain’s efficiency levels, 20, 20t Special interest groups See Interest groups; Rent-seeking interest groups Spillover effect: cross-industry, 95; of public wages on private wages, 37; of university research on corporations, 104 Stability and Growth Pact, 35 Stabilization policies, 12 Standard of living See Living standards Stangler, D., 110 Start-ups, 88, 99, 103, 105, 106–07, 109, 114, 121 State-controlled companies, 42, 44–45, 52 Stobbe, A., 88 Strikes, Strom, R., 97 Structural factors leading to the crisis (1990–2008), 13–14, 30 Structural reform (1995–2008), 14–18; evaluation in terms of price stability, 37; failure of IMF to recognize, 30; inconsistent state of, 32 Supply chain management, 111 Surveillance reports, 29–40 Sweden: innovation economics in, 102; as innovation leader, 89 4/30/14 1:53 PM Index      167 Taxation: complexity of Greek tax laws, 102, 125b; corporate, 100; cost of taxing success, 100–02; decreases for corporations, 32; direct, 63, 65f, 66; excise tax-induced cost increases, 62; flow-through, 100, 101; income, 66, 67; increases favored over cost cutting, 31, 32, 41; indirect, 63, 65f, 66; property, 67–68, 78; and R&D activities, 102, 123; self-employed, 52, 67; shortfall, 63, 66; value added tax (VAT), 66 Tax authorities, 13, 102 Tax burden, 67, 68, 100 Tax evasion, 26, 66 Telecommunications, 7, 9, 32, 33 Textiles, 42, 49t, 88 Theory of optimum currency areas, 12, 13, 27 Tip surcharge, 44 Tobacco production, 49t, 50, 88 “Too large to fail,” 80 Tourism, 2–3, 17–18, 34, 91, 104, 123 Tradable sector, 60, 75 Trade balance deficit, 18 Transfer of knowledge, 97, 99, 102– 05, 126 Transparency, 28 See also Accountability Transparency International, 24 Transportation sector, 19, 42, 45, 49t, 50, 68, 95 Uncertainty, 41, 42, 72–74, 77–78, 99 Unemployment, 11, 16, 37–38, 51–52, 51f Unions, 44 See also IKA; Wage bargaining United Kingdom: development of medical tests in, 102; electrical sector in, 9; and innovation gap, 91; telecommunications market in, United Nations (UN) databases, 113 07-2577-0 index.indd 167 United States: Bayh-Dole Act (1980), 102–03; budget compared to European Community’s, 11; ICT, logistics, and supply chain management in, 111 Universities, 70, 92, 99, 102–05, 109, 112, 114, 126 See also Collaboration of business and government in research; Education sector Utilities, government-controlled See Publicly owned enterprises Value added products and services, 89, 95, 126 Value added tax (VAT), 66 Value chain, 42, 118, 119, 120, 123, 131–35t Venture capital, 91, 106, 118, 119, 120, 131–35t Vietnam excluded as outlier, 114 Wage bargaining, 33, 34, 44, 45 Wages, 52–61; annual gross employee earnings by economic activity, 42–43, 44t; average gross wage per day, 57, 58f; cross-­country comparison, 45; in distorted labor market, 23; driving down wages to increase competitiveness, 2; and economic inefficiency, 26–27; flexibility of, 117, 119, 120, 121; imbalance between ­private and public sectors, 39; indexation, 33; low level of salaries, 52; private sector gross wages and salaries vs administrative cost as percent of GDP, 63, 64f; public sector, 10, 16, 37, 70; reliability of wage determinations, 131–35t; sector wage agreements, 33; in state-owned enterprises, 44–45 Water utilities, 42, 44, 45, 48, 48t, 49t, 50, 52, 60 4/30/14 1:53 PM 168      Index Weaknesses: after accession, 1, 5, 10; efficiency weaknesses, 19–21, 20t; of innovation system, 85–91, 90f; institutional, 24–26, 29, 39, 84 Wellhausen, R., 104 Workers’ Center of Athens, 18 World Bank: Doing Business rankings, 24, 102, 113, 114; Worldwide Governance Indicators (WGI), 24, 85, 113, 120, 134t 07-2577-0 index.indd 168 World Economic Forum (WEF), 2, 24, 104, 134t; Global Competitiveness Report (GCR), 85, 89, 113, 114, 136–37f Worldwide Governance Indicators (WGI), 24, 85, 113, 120 Wunsch-Vincent, S., 112 Zolotas, Xenophon, 39 Zucker, M., 103 4/30/14 1:53 PM about the authors Theodore Pelagidis is a professor of economics at the University of Piraeus, Greece and a nonresident senior fellow in Global Economy and Development at Brookings He has also been a NATO scholar at the Center for European Studies of Harvard University, a Fulbright scholar at Columbia University and an NBG professorial fellow at the London School of Economics Michael Mitsopoulos is an economist at the Hellenic Federation of Enterprises, Greece, and has taught at the Economic University of Athens and the University of Piraeus He holds a Ph.D in Economics from Boston University Pelagidis and Mitsopoulos are co-authors of Understanding the Crisis in Greece: From Boom to Bust (Palgrave Macmillan, 2011) 07-2577-0 index.indd 169 5/28/14 4:16 PM
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