Greece seeks to kick start econ­omy

The China Post - - COMMENTARY - BY MENELAOS HADJICOSTIS

Af­ter so much pain, Greece must now fig­ure out how to get its econ­omy back on its feet.

The scale of the coun­try’s fi­nan­cial prob­lems is mind bog­gling — a full quar­ter of the econ­omy evap­o­rated in the past six years and busi­ness ac­tiv­ity is now plum­met­ing fur­ther. Gov­ern­ment cuts needed to qual­ify for a new bailout will hurt in­comes for years to come.

The ad­vice to Greece from econ­o­mists is sim­ple: fo­cus on the ba­sics.

Have a steady gov­ern­ment, sim­plify the rules of do­ing busi­ness, and rather than try to rein­vent the econ­omy, zoom in on sec­tors that can ben­e­fit from small in­vest­ments: tourism and agri­cul­ture, for ex­am­ple.

In many cases, that’s eas­ier said than done.

Po­lit­i­cal in­sta­bil­ity, a hall­mark of Greece’s cri­sis, is highly toxic for in­vestors, who need to know that the rules for busi­ness won’t change un­ex­pect­edly.

Greece’s cur­rent gov­ern­ment of­fers a stark ex­am­ple of the risks. The coun­try had just emerged from re­ces­sion when the new gov­ern­ment, led by the rad­i­cal left leader Alexis Tsipras, came to power in Jan­uary with plans to undo a se­ries of re­forms and chal­lenge cred­i­tors.

Tsipras’ in­ten­tions were good: to ease the eco­nomic bur­den on the Greek peo­ple. But the un­cer­tainty proved im­mensely painful.

Fears that the po­lit­i­cal clash with cred­i­tors could push the coun­try out of the euro caused in­vestors and Greeks to pull tens of bil­lions of eu­ros out of the coun­try. The econ­omy plunged back into re­ces­sion. To avoid a bank run, the gov­ern­ment was forced to close banks and the stock mar­ket for about a month and im­pose lim­its on cash with­drawals. The lim­its are cost­ing Greece an es­ti­mated 1.75 bil­lion eu­ros to 2.8 bil­lion eu­ros ( US$1.9 bil­lion to US$3.1 bil­lion) weekly.

Rather than grow this year, the Greek econ­omy is now ex­pected to con­tract by be­tween 2 and 4 per­cent this year.

The out­look for gov­ern­ment sta­bil­ity is not par­tic­u­larly good, ei­ther, as high un­em­ploy­ment of 25 per­cent and pop­u­lar re­sent­ment against eco­nomic re­forms are ex­pected to last. Po­lit­i­cal par­ties, in­clud­ing Tsipras’ Syriza, are in tur­moil and there is spec­u­la­tion Greece will head into another gen­eral elec­tion in Novem­ber.

That comes on top of years of po­lit­i­cal in­fight­ing in the coun­try, both dur­ing the past six years of cri­sis and be­fore, when of­fi­cials hid the scale of the gov­ern­ment’s debts.

“Ir­re­spon­si­bil­ity de­stroyed this coun­try,” said Ni­co­laos Eri­o­tis, a pro­fes­sor who heads the depart­ment of busi­ness and fi­nance at the Na­tional & Kapode­s­trian Univer­sity of Athens.

With so much un­cer­tainty hang­ing over it, Greece is strug­gling to at­tract ma­jor for­eign in­vest­ment. In­vest­ment last year equaled just 12 per­cent of eco­nomic out­put — only three of 124 coun­tries ranked by the World Bank in­vested a lower share.

So, ex­perts say, Greece’s best op­tion in the short-term is to tar­get what lit­tle money it can get into in­dus­tries it al­ready has a pres­ence in.

Agri­cul­ture last year con­trib­uted al­most 6 bil­lion eu­ros to the coun­try’s 179-bil­lion euro econ­omy but could yield more with some ba­sic mod­ern­iza­tion and bet­ter mar­ket­ing.

Take olive oil. Although Greece is the third largest olive oil pro­ducer in the world, it ex­ported 60 per­cent of its out­put to Italy in bulk, giv­ing its neigh­bor the op­por­tu­nity to earn 50 per­cent more on the price of the fi­nal pack­aged prod­uct, ac­cord­ing to a 2012 re­port by con­sult­ing firm McKin­sey & Com­pany.

The fish­ing in­dus­try is another sec­tor that Greece could de­velop quickly and en­joys a strong com­pet­i­tive ad­van­tage in, given its huge shore­lines.

“You have the ground­work al­ready laid out and there’s no need for large in­vest­ment,” said Panay­otis Alex­akis, pro­fes­sor of eco­nom­ics at the Na­tional & Kapode­s­trian Univer­sity of Athens.

Tourism re­mains king of the Greek econ­omy and could be im­proved fur­ther. When count­ing whole­sale and re­tail trade, tourism rev­enue ac­counts for 23 per­cent of the na­tion’s an­nual eco­nomic out­put.

De­spite all the tur­moil, this year’s tourism num­bers are forecast to hover around last year’s. But ex­perts warn the in­dus­try mustn’t re­main static if it wants to com­pete against up-and-com­ing ri­vals like neigh­bor­ing Tur­key.

Greece could, for ex­am­ple, ex­tend the tourism pe­riod into win­ter by de­vel­op­ing more golf cour­ses — a rea­son­able move in a coun­try blessed with so much sun­shine.

Turn­ing Greece’s main ports of Pi­raeus and Thes­sa­loniki into re­gional cruise ship hubs should be another key tar­get for the tourism sec­tor, said Christos Agiak­loglou, pro­fes­sor of eco­nom­ics at Pi­raeus Univer­sity.

The ports also hold prom­ise in be­com­ing Europe’s gate­way to global im­ports by ex­pand­ing and up­grad­ing their con­tainer ter­mi­nals. Through Greece, goods can en­ter the Euro­pean Union as many as 20 days faster than if they were off­loaded in the con­ti­nent’s main con­tainer ter­mi­nal in Rot­ter­dam, in the Nether­lands. China’s Cosco ship­ping com­pany man­ages two con­tainer ter­mi­nals at Pi­raeus port and is re­port­edly look­ing to clinch a ma­jor­ity stake.

Greece’s huge cul­tural en­dow­ment can be spun into a money­maker be­yond tourism. Alex­akis notes that the univer­si­ties of­fer a high level of teach­ing in phi­los­o­phy and ar­chae­ol­ogy, yet lag in at­tract­ing for­eign stu­dents be­cause there aren’t many cour­ses taught in English.

The McKin­sey re­port iden­ti­fied Greece’s phar­ma­ceu­ti­cal in­dus­try as a “ris­ing star” that could boost eco­nomic growth. The in­dus­try ac­counts for 18 per­cent of GDP, sec­ond only to tourism. Another sec­tor with po­ten­tial is the health care in­dus­try, which an­a­lysts say could cater to a large re­gional mar­ket with hos­pi­tals re­ceiv­ing pa­tients from neigh­bor­ing coun­tries such as Bulgaria.

In the longer- term, Greece’s econ­omy needs fun­da­men­tal re­form of the kind that its cred­i­tors are de­mand­ing.

Above all, that means cut­ting red tape for com­pa­nies, stream­lin­ing busi­ness laws and mak­ing the le­gal sys­tem more ef­fi­cient so that it doesn’t take months, even years, to set­tle a busi­ness dis­pute. It also in­cludes open­ing up closed pro­fes­sions, such as phar­ma­cies, to greater com­pe­ti­tion.

The Greek gov­ern­ment, mean­while, needs to bol­ster the fi­nances of the bank­ing sec­tor so that it can grad­u­ally lift the lim­its on cash with­drawals with­out risk­ing a bank run.

And it needs to heal its own fi­nances, a process that in­cludes con­vinc­ing its cred­i­tors to ease the terms of its mas­sive debt bur­den. At around 320 bil­lion eu­ros, or 180 per­cent of GDP, public debt is con­sid­ered un­sus­tain­able. Even the In­ter­na­tional Mon­e­tary Fund, a key cred­i­tor, says so and sug­gests low­er­ing the in­ter­est rates and re­pay­ment rates on Greece’s bailout loans.

Eri­o­tis said Greece needs to elim­i­nate a cul­ture of tax avoid­ance and cor­rup­tion, in which public sec­tor jobs are handed out by politi­cians in ex­change for votes.

He says this has pre­vented the coun­try from mod­ern­iz­ing its busi­nesses, mak­ing its po­lit­i­cal sys­tem trans­par­ent and cre­at­ing an en­vi­ron­ment where hon­est work pays off.

“Other coun­tries over time have built strong in­sti­tu­tions. Greece hasn’t done so.”

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