Economic Growth in Greece: Past Performance and Future Prospects

This Paper examines the past growth performance of the Greek economy and examines the outlook for future growth in light of the macroeconomic stabilization that was achieved over the last half of the 1990s and following Greece's admission to the Euro currency zone. The Greek economy performed very poorly over the quarter century from 1970 to 1995, during which it was the poorest country in the European Union. We develop a set of growth accounts that attribute part of the deteriorating performance to a falloff in capital formation, but the most dramatic factor is a sharp deterioration in multi-factor productivity, or the efficiency of the economy. Part of the explanation lies with the collapse of macroeconomic policy that took the form of large fiscal deficits and very high rates of inflation; but the Greek economy also fares poorly in other dimensions of its economic institutions, such as competitiveness of its tradable goods sectors, a highly constrained labor market, and a reputation as an unattractive market for foreign capital. Over the last half of the 1990s, Greece undertook a successful program to restore fiscal and monetary stability ? by the end of 2000, it had qualified for admission to the Euro currency system. The restoration of rational macroeconomic policies also led to an improvement in economic growth to the extent that Greece matched the performance of the rest of the EU over the 1995-2000 period. It also appears that these growth rates are sustainable and consistent with current rates of capital accumulation. The next step would be for Greece to attain an accelerated path of growth that would allow it to catch up with the rest of EU in future years, following perhaps the experience of Ireland. We conclude, however, that Greece still lacks a strategy to achieve a further acceleration of growth. It lacks a strong export sector comparable to that of Ireland; and, while it continues to be an unattractive destination for foreign direct investment, domestic rates of saving are insufficient to finance higher rates of capital investment. It needs to institute a faster past of reform of domestic economic institutions if it hopes to promote innovation and entrepreneurship.