Innovation for Growth i4g

Policy Brief N 6
Growth impeding (obstructing) innovation: the case of Greece

Lena Tsipouri

Chair I4g

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
1996
1,6%
1997
3,0%
1998
2,8%
1999
3,0%
2000
4,1%
2001
3,9%

Eurozone

1,7%
2,6%
2,8%
2,8%
3,6%
1,9%

1,3%
2,3%
2,6%
2,6%
3,4%
1,5%

2002
2003
2004
2005
2006
2007
2008
2009
2010

3,1%
5,6%
4,0%
1,9%
5,1%
3,1%
-0,6%
-3,5%
-5,2%

1,0%
1,0%
2,1%
1,6%
2,9%
2,8%
-0,1%
-4,6%
1,8%

0,4%
0,1%
1,6%
1,1%
2,7%
2,4%
-0,2%
-4,7%
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
2

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

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
Source: Annual Reports : WORLD ECONOMIC FORUM DATABASE

38

35

37

46

47

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

20062007

20072008

20082009

20092010

20102011

20112012

20122013

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

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
Source: WORLD ECONOMIC FORUM DATABASE:

63

63

65

79

88

87

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.
5

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 lions 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).

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.

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)