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Innovation for Growth – i4g

Policy Brief N° 6

Growth impeding (obstructing) innovation: the case of Greece

Lena Tsipouri

Chair I4g

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1. Introduction

Greece has a peculiar development history. It has grown in episodes (Thomadakis 1997) rather than in a

more stable exponential pattern. During the growth periods it has outperformed its peers but has been

underperforming and falling behind until the next growth episode. The same pattern was repeated twice in

the 19th and 20th century. Development economists and economic historians explain it by the inability of

the productive system to transform into an economically sustainable organism, able to adapt to new

challenges and restructure in response to internal and global challenges (Vaitsos-Giannitsis 1994, Hatziiosif

1986). Sociologists and political scientists can go deeper into this analysis and explain the recurring

regression through a vicious circle of lack of trust between the state and its citizens, an unstable

environment that discourages long-term investments ending up in short termism and political clientelism.

The 21st century has not been an exception. Greek growth rates have been well above the EU average until

2008 but plummeted after that. The argument in this policy brief is that:

The present distress of the country is not an echo or an overreaction to the financial crisis; it is a

pattern that has been repeatedly observed in Greece in the past and unless structural reforms take

place and there is a fundamental behavioural change there will be no transformation of the Greek

economy and the country will at best avoid an economic catastrophe but be faced with serious

problems again in the next world recession.

The massive support from the EU Structural Funds could have been used to pave the way not only

to sufficient physical infrastructure but also to a stable environment triggering a new pattern of

long term investments, entrepreneurship, innovation and sustainable growth. It did not. Instead, it

created a climate of misplaced and unjustified optimism, obstructing real structural change.

The Greek financial crisis is only the tip of the iceberg and could have easily been foreseen and

addressed before growing out of control, had early warning signals on the trends of the structural

characteristics of the economy been taken into consideration. Labour cost reductions, which are

undoubtedly necessary, are by far not a sufficient condition to regain competitiveness as increases

in capital cost outweigh wage reductions and business expectations are at an all-times low.

2. Macro-economic and structural indicators until the crisis (and their revision): justifying the Greek

disease

2.1 Overall growth

Average Greek GDP per head has converged slightly to the Eurozone (less so to the EU-27) until 2000, then

demonstrated a remarkable growth episode to lose again all ground gained after 2009. A similar pattern of

convergence/divergence is observed for unemployment.

GDP/capita growth rate GREECE EU27 Eurozone 1996 1,6% 1,7% 1,3% 1997 3,0% 2,6% 2,3% 1998 2,8% 2,8% 2,6% 1999 3,0% 2,8% 2,6% 2000 4,1% 3,6% 3,4% 2001 3,9% 1,9% 1,5%

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2002 3,1% 1,0% 0,4% 2003 5,6% 1,0% 0,1% 2004 4,0% 2,1% 1,6% 2005 1,9% 1,6% 1,1% 2006 5,1% 2,9% 2,7% 2007 3,1% 2,8% 2,4% 2008 -0,6% -0,1% -0,2% 2009 -3,5% -4,6% -4,7% 2010 -5,2% 1,8% 1,7% 2011 -7,1% 1,4% 1,1% 2012 estimate -6,0% -0,4%

2013 estimate -6,0% 0,2%

*GDP in constant prices/constant exchange rates Source: OECD, estimates IMF

With hindsight one may argue that both the Greek government and the European Commission were too

content with the nominal convergence, which led them to refrain from any corrective action. Had they

observed structural indicators (or lacking evidence on structural indicators) more carefully they might have

worried about growth despite limited labour productivity growth, specialisation in construction, low-cost

tourism and retail, with increasing employment in the public sector, deteriorating performance in

international competitiveness rankings and persistent balance of payments deficits.

2.2 Indicators of productivity and competitiveness

Based on OECD data labour productivity grew faster than in the Eurozpne until 2007 but in 2011 (after the

significant reduction of labour cost imposed to the private sector after the 2010-2011 reforms) it remained

below all EU-15 but Portugal1. There are no total factor productivity statistics.

Throughout the growth period manufacturing and exports were and remained persistently significantly

below the EU average. Manufacturing is less than 10% of GDP2 and diminished systematically since 2005

(first date with data availability) with the exception of a slight increase in 2008.

Foreign direct investments have been the lowest in the EU-15 and have declined during the convergence

period. At the same time outward investment has increased, as small companies in the textile sector

relocated to Bulgaria. This led some authors to speak about de-industrialisation before industrialisation.

A country of the size of Greece can hardly grow based on the domestic market only. However, Greek

exports/GDP have always been well below the EU average.

GEO /TIME

Greece European Union (15 countries)

Euro area (12 countries)

European Union (27 countries)

2000 24,9 35,4 36,5 35,9

2001 24,0 35,5 36,7 36,0

2002 21,1 34,7 36,0 35,3

1 http://www.oecd.org/std/productivitystatistics/productivitystatistics.htm#Labour_Productivity 2 http://stats.oecd.org/Index.aspx?DatasetCode=DECOMP#

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2003 20,0 33,8 34,9 34,5

2004 22,4 34,9 36,4 35,8

2005 23,2 36,4 37,7 37,2

2006 23,2 38,6 40,0 39,6

2007 23,8 39,1 41,1 40,1

2008 24,1 40,3 41,5 41,3

2009 19,3 35,9 36,4 36,9

2010 22,2 39,5 40,6 40,8

2011 25,1 42,2 43,5 43,7

2012f 27,8 43,3 45,0 44,9

2013f 30,2 44,5 46,3 46,0

2014f 31,9 46,0 47,8 47,6

Exports diminished initially and grew only slowly before the crisis. A significant surge is observed in 2011,

when the declining domestic demand forced the business sector to focus at export opportunities and

forecasts indicate further increase for this year. There is no evidence whether the low share of exports was

due to low competitiveness or to complacence, as the domestic market and grants offered sufficient

opportunities for profit with lower risks. The emphasis on exports after the outbreak of the crisis (despite

the reduced export credits) may indicate that the second explanation is not unfounded.

Overall competitiveness rankings deteriorated systematically after 2000 (when Greece reached it top

position ever with the 34th rank):

YEAR 1998 1999 2000 2001 2002 2003 2004 2005 2006

Growth Competitiveness Ranking 44 41 34 36 38 35 37 46 47

Source: Annual Reports : WORLD ECONOMIC FORUM DATABASE

If looking into the data after 2006 not only the global index continues to deteriorate very rapidly, but one

can observe that the direct wealth creation components, namely market efficiency, innovation and

business sophistication are among the worse rankings for the country. Infrastructure (directly and

massively supported by the Structural Funds), education (with private funding added) and technological

readiness (publicly-financed GERD) are the best indicators.

Series 2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

Global Competitiveness Index 61 65 67 71 83 90 96

1st pillar: Institutions 41 49 58 70 84 96 111

2nd pillar: Infrastructure 34 35 45 47 42 45 43

3rd pillar: Macroeconomic environment 94 106 106 103 123 140 144

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5th pillar: Higher education and training 37 39 38 43 42 46 43

6th pillar: Goods market efficiency 53 60 64 75 94 107 108

9th pillar: Technological readiness 51 58 59 53 46 47 43

11th pillar: Business sophistication 52 62 66 66 74 77 85

12th pillar: Innovation 46 63 63 65 79 88 87

Source: WORLD ECONOMIC FORUM DATABASE:

http://spotfire.weforum.org/embed/ViewAnalysis.aspx?file=/users/tgeiger/Public/GCI_data_platform&waid=e58066c

e80b18b3756667-b6d0&options=2-0%2c10-0%2c9-0

The scientific publications, citations and impact factor have improved systematically during the period of

economic convergence:

PUBLICATIONS 2008 2010

Number of Greek publications 10,625 10,219

Share (%) of Greek publications in EU countries 2.48% 2.40%

Share (%) of Greek publications in OECD countries 1.17% 1.14%

CITATIONS 2004-2008 2006-2010

Number of citations to Greek publications 167,274 222,132

Share (%) of Greek citations in EU 1.78% 2.06%

Share (%) of Greek citations in OECD 0.80% 0.95%

CITATION IMPACT 2004-2008 2006-2010

Citation Impact (average number of citations per publication) 3.83 4.49

Relative citation impact of publications from Greece compared to EU 0.76 0.84

Relative citation impact of publications from Greece compared to OECD 0.74 0.83

Source: National Documentation Centre http://metrics.ekt.gr/en/report02/chapter2

But the improved scientific performance was not accompanied by improving innovation. Patenting

compared to the EU in both the EPO and US PTO was and remained marginal during the period studied;

GERD grew until 2000 to reach 0,6% and fluctuated between 0,55 and 0,6% ever since (partly as a function

of Structural Funds cycle) and BERD grew slightly to decrease slightly from 2005-2007 from 0.19 to 0.17%

In terms of all benchmarks (European Innovation Scoreboard, Innovative Industrial Policy) Greece ranks

below the EU average with positive rankings only in “tertiary graduates in science and technology” and

“broadband above 10 MBps” . The Summary Innovation Index produced for the European Innovation

Scoreboard (the predecessor of the Innovation Union Scoreboard) showed no progress during the growth

period and the only partial indicators where Greece scored above the EU average were the “Youth

education attainment level”, “Enterprises receiving public funding” and innovation indicators based on the

CIS. The latter were, however, not confirmed at later stages as there is no recent CIS in the country.

Conversely, life-long learning, venture capital and patenting are indicators where the country ranked last

and did not improve.

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The rough presentation above indicated that during the period of GDP growth in Greece:

1. Structural indicators did not explain the good macro-economic performance

2. The strengths of the Greek performance, namely education and research could not be directed

towards the productive sector. A significant brain-drain after the outbreak of the crisis is depriving

the country of its major strength.

3. The role of structural funds

Total regional development funding has been significant. Infrastructure has been the highest priority

followed by business support.

Although there is no systematic evidence reporting there are indications that the funds could not be used

in a way to transform the economy. While physical infrastructure has improved support to the business

sector, as indicated by State aid analysis, could not be used as leverage for the transformation of the

economy:

The lion’s share (1/3) of funding was absorbed by the “Development Law” funding mainly

investments, while about 1/5 was distributed through the de minimis regulation.

45% is not attributed to NACE codes, 32,8 goes to construction (tourism), 6% to gross and retail

trade, 0,39 to R&D (for the business sector, as this is State aid only)

In the period 2000-2006 3,4 bn Euros were spent for state aid distributed between 47158 projectss;

this indicates an average of 72.004 Euros per project; this thinly spread amount was further

reduced in the 2007-2012 period: despite a rise in funding from 3,4 to 4 bn the number of actions

supported increased more rapidly including now nearly 72000 which produced a reduction of the

average to 56360. A total of 119055 projects have been funded.

The low funding per project would not be a significant worry, had they been concentrated in

companies able to aggregate them into competitive growth. Checking for individual VAT numbers it

was evidence that the funds were distributed to a total of 94719 individual companies between

2000 and 2012. But 88,6% of them received less than 100000 Euros. It is unlikely that this amount

that can lead to significant competitiveness boost. Conversely, only 830 companies have received

more than 1 million.

The small average amounts are influenced by the ESF support (which aims at employment

creation/maintenance and training), hence thin distribution of funds is reasonable. However, while

the ESF funding is lower on the average with 19.410 Euros per company, the ERDF, expected to

enhance competitiveness remains into 82.345 per company.

A further matching reveals that only 8036 companies have received funds in both period; half of

them are limited liability companies and half of them personal (likely to be very small ones, possibly

small retail shops) .

Preliminary findings of empirical research produce the following evidence:

More than 1/3 of the companies supported cannot be found among those publishing balance

sheets (more efforts are undertaken to see to what extent this is due to bankruptcies,

size/structure of companies not being legally obliged to publish results or other reasons).

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Among those identified state aid does not appear causing a statistically significant shift in their

profitability or sales using 2-3 years time lags (this may however be related to the crisis and further

work is done to control for that).

Compared with control groups the companies supported do not seem to have been performing

better on the average than their peers.

Further work is undertaken to control for regional and structural characteristics.

These finding lead to important hypotheses that need more data to be confirmed (in particular on

employment and profitability of micro-firms):

Structural policies are guided by other than competitiveness priorities: absorption of EU funds,

short-term maintenance of employment and the broadest possible political satisfaction with

spreading support thinly. Entrepreneurship and innovation are not in focus.

Given the bureaucracy, the role of intermediaries and allegedly corruption the best Greek

companies are not among the best performers of support schemes. There may be a liquidity trap

(companies interested in cash rather than growth are taking the trouble of submitting proposals,

and many of them disappear after that).

Evaluations and impact assessment studies are practically absent in the country. Although the

evaluation obligations to the Structural Funds are met (with delays and quality worries, but they

are) there are no real assessments of longer term impacts. Hence, it is unlikely to pursue evidence-

based policies since the evidence itself is lacking.

4. Conclusions and what next

The nominal convergence to the EU that took place before the crisis was not due to or accompanied by

increasing competitiveness but by a combination of grants, borrowing, shaky demand boosting (not to

speak of data manipulation). National policies did not take advantage of the growth period to transform

the structure of the economy and, as in the past, the national economy could not cope with an

international crisis. Growth in this case obstructed innovation. One may argue that the transfer of resources

created a mutation of the Dutch disease. While it most often refers to natural resource discovery, it can

also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in

natural resource prices, foreign assistance, and foreign direct investment”.

The transfer of EU funding could not be mobilised to reverse deeply rooted structural problems. While

research outputs improved and human capital was and remained above the EU average, innovation

performance could not improve. On the contrary it deteriorated at the time the economy was growing.

The reaction to the crisis led to significant contraction of demand. While some efforts to make it up with

exports were undertaken successfully, they were insufficient. In particular the credit crunch, affecting

equally insolvent and solvent companies, is draining the more competitive part of the economy. With the

combination of accumulated structural problems, no access to the capital markets and contracting GDP,

Greek economic policy is called to cut the Gordian knot: stabilise the economy and at the same time

finance innovation-led growth and envisage behavioural change. All this, while there is limited emphasis on

producing the necessary evidence to document better intervention.

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References:

Hatziiosif (1986), The Greek sustainability and the role of industry

Thomadakis, S. B.: (1997), The Greek economy: performance, expectations and paradoxes, in Graham, A. T. and Nikolaides, K. (eds), The Greek Paradox: Promise versus Performance, Cambridge, MA: MIT Press

Vaitsos C., T. Giannitsis (1994) Technological transformation and economic development, Gutenberg, Athens (in Greek)