Innovation for Growth i4g Policy Brief N 6 Growth impeding (obstructing) innovation: the case of Greece Lena Tsipouri

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1 Innovation for Growth i4g Policy Brief N 6 Growth impeding (obstructing) innovation: the case of Greece Lena Tsipouri Chair I4g 1

2 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 19 th and 20 th 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 21 st 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 A similar pattern of convergence/divergence is observed for unemployment. GDP/capita growth rate GREECE EU27 Eurozone ,6% 1,7% 1,3% ,0% 2,6% 2,3% ,8% 2,8% 2,6% ,0% 2,8% 2,6% ,1% 3,6% 3,4% ,9% 1,9% 1,5% 2

3 2002 3,1% 1,0% 0,4% ,6% 1,0% 0,1% ,0% 2,1% 1,6% ,9% 1,6% 1,1% ,1% 2,9% 2,7% ,1% 2,8% 2,4% ,6% -0,1% -0,2% ,5% -4,6% -4,7% ,2% 1,8% 1,7% ,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 reforms) it remained below all EU-15 but Portugal 1. 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 GDP 2 and diminished systematically since 2005 (first date with data availability) with the exception of a slight increase in 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) ,9 35,4 36,5 35, ,0 35,5 36,7 36, ,1 34,7 36,0 35,

4 ,0 33,8 34,9 34, ,4 34,9 36,4 35, ,2 36,4 37,7 37, ,2 38,6 40,0 39, ,8 39,1 41,1 40, ,1 40,3 41,5 41, ,3 35,9 36,4 36, ,2 39,5 40,6 40, ,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 34 th rank): YEAR Growth Competitiveness Ranking 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 Global Competitiveness Index st pillar: Institutions nd pillar: Infrastructure rd pillar: Macroeconomic environment

5 5th pillar: Higher education and training th pillar: Goods market efficiency th pillar: Technological readiness th pillar: Business sophistication th pillar: Innovation Source: WORLD ECONOMIC FORUM DATABASE: e80b18b 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 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 Number of citations to Greek publications 167, ,132 Share (%) of Greek citations in EU 1.78% 2.06% Share (%) of Greek citations in OECD 0.80% 0.95% CITATION IMPACT Citation Impact (average number of citations per publication) Relative citation impact of publications from Greece compared to EU Relative citation impact of publications from Greece compared to OECD Source: National Documentation Centre 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 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. 5

6 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 ,4 bn Euros were spent for state aid distributed between projectss; this indicates an average of Euros per project; this thinly spread amount was further reduced in the period: despite a rise in funding from 3,4 to 4 bn the number of actions supported increased more rapidly including now nearly which produced a reduction of the average to A total of 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 individual companies between 2000 and But 88,6% of them received less than 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 Euros per company, the ERDF, expected to enhance competitiveness remains into 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). 6

7 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 evidencebased 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. 7

8 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) 8

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