Low payoff from structural reforms in Greece?

The IMF has released a preliminary debt sustainability analysis for Greece — undertaken before this week’s cash crisis but after its adjustments to the numbers to take account of the deterioration in the relationship between Greece and its creditors since January. The document can be read cynically as the IMF using Syriza as an excuse to dump all the unrealistic assumptions in their earlier calculations, but it’s still helpful in spelling out those assumptions — which were there for everyone to see. Arguably the most incredible scenario was for growth (see Box 2):

What would real GDP growth look like if  total factor productivity (TFP) growth were to remain at the historical average rates since Greece joined the EU? Given the shrinking working-age population (as projected by Eurostat) and maintaining investment at its projected ratio of 19 percent of GDP from 2019 onwards (up from 11 percent currently), real GDP growth would be expected to average –0.6 percent per year in steady state. If labor force participation increased to the highest in the euro area, unemployment fell to German levels, and TFP growth reached the average in the euro area since 1980, real GDP growth would average 0.8 percent of GDP. Only if TFP growth were to reach Irish levels, that is, the best performer in the euro area, would real GDP growth average about 2 percent in steady state. 

That last assumption — 2 percent long-term growth — was the one that was actually in the program until now! These are of course results from an economic model that could be right or wrong. But that’s part of the political challenge of these lending programs: undertake massive effort on “reforms” and you might, if everything else goes well, get a not-especially-exciting growth rate. And the voters on Sunday don’t even know which set of “reforms” they are voting on, let alone their long-term consequences.

UPDATE: Note that the debt sustainability analysis is on the ballot on Sunday!

3 thoughts on “Low payoff from structural reforms in Greece?

  1. Pingback: [BLOG] Some Friday links | A Bit More Detail

  2. I reproduce a comment made about this on the alphaville blog, which also refers to yours :

    Actually, it is actually much worse than that

    The potential for real growth not only for Greece, but actually the whole Eurozone is just ZERO (and that is being kind…) . If one takes the pain to actually look at the raw data that the IMF used for its estimate (available here : http://ec.europa.eu/economy_finance/ameco/user/serie/ResultSerie.cfm ), it is obvious that :
    – the average TFP growth for the last 30 years, as in the IMF paper, is not relevant : there is a significant difference for ALL countries between the 60’s (where the growth was very high) and the 00’s (where it is … naught !).
    – Hoping that TFP growth is going to lift the boats is therefore lunacy. For the last 15 years, TFP growth for Germany was a paltry 0.47% per annum, for France 0.25% per annum. The 4% touted for Ireland only comes from a very low base in the 70’s, and also happened in the earlier period, not in the naughties.

    – For ALL EU countries, TFP took a sharp dive during the 2007-2010 financial crisis. So if the TFP relationship with labor market reforms is tenuous at best as Varoufakis rightly pointed out, its relationship with deleveraging is very strong. So strong actually that one could easily imagine that the paltry figures cited supra would just go down to zero if deleveraging (or simply leverage kept constant) was occurring in the whole eurozone. Actually, if one was removing from Germany GDP the sales made with vendor financing to clients who cannot pay back, I wouldn’t be surprised to see Germany last 15 years TFP growth completely evaporate.

    This is the core reason why a reasonable and fact-based discussion about potential growth is so taboo. Once this happens, not only Greece, Italy, Spain or Portugal appear to be on an insustainable debt path, but also France and Germany.

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