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Structural reforms for more inclusive growth in Greece – ECOSCOPE


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through Christian Daude, Senior Economist, Office of the Chief Economist, OECD Economics Department (former Head of the Greek Desk)

The Greek economy has been turning around lately, but remains in a deep depression. GDP fell by more than a quarter between 2007 and 2015, unemployment remains extremely high at 25 percent and entrenched poverty – which measures poverty in relation to pre-crisis income levels – nearly tripled between 2007 and 2014, to a third of the population. According to our latest OECD Economic Outlook, growth will be slightly negative in 2016 (-0.2%) and will pick up to 1.9% in 2017. Unemployment will remain high and wage growth moderate.

If the upcoming negotiations with its European creditors reduce Greece’s indebtedness, more confidence and less fiscal headwinds would support investment and a stronger cyclical recovery. However, policy makers in Greece cannot rely on a cyclical recovery alone if they are to overcome the deep costs of the crisis and provide a better life for their citizens. OECD estimates show that the protracted depression has reduced the long-term potential growth of the Greek economy by 2 percentage points. This means that without reforms to increase investment and productivity it would be extremely difficult to achieve pre-crisis living standards within a reasonable timeframe. More importantly, unemployment remains at a very high level as long periods of unemployment have left significant scars on the labor market (OECD, 2016).

In a recent articleshow that Greece has implemented far-reaching labor market reforms, but less progress has been made in reducing oligopoly power, simplifying regulatory burdens and addressing deficiencies in public administration due to limited administrative capacity, weak control over prior vested interests. Our estimates show that changing the mix of structural reforms to increase competition in product markets and improve general framework conditions for business could increase GDP by about 13% over the next decade, if fully implemented.

Figure: Index for product market regulation

Index scale 0 – 6 (least to most restrictive)

Greece struc refm

Note: The MoU scenario represents the estimated level of the PMR index under full implementation of product market reforms contained in the August 2015 Memorandum of Understanding of the ESM Agreement. See Daude (2016) for details.
Source: OECD (2015) Database with product market regulation and OECD calculations.

Further product market reforms are crucial to increase productivity and get investment back on track. While reforms so far have brought Greece close to the OECD average in terms of product market restrictiveness, there is still significant room for improvement, even if the current Memorandum of Understanding (MoU) is fully implemented. Network sector regulations remain restrictive. Particularly in rail and road transport, as well as in electricity and gas, a combination of government ownership, barriers to entry and significant vertical integration creates relatively high costs that undermine the competitiveness of the rest of the economy.

At the same time, reforms are needed that improve the business environment, the functioning of the judiciary, the tax authorities and the overall effectiveness of the public administration. The OECD is currently working with the Greek government on several necessary reforms. The challenges are significant, but a more balanced reform package and better implementation could not only contribute to a more inclusive recovery, but also increase public support for reforms and greater ownership to modernize the Greek economy.

References

Daude, C. (2016), “Structural reforms to boost inclusive growth in Greece, ”OECD Economics Department Working Papers, No. 1303, OECD Publishing, Paris.

OECD (2016), Economic Surveys: Greece 2016, OECD Publishing, Paris.

OECD (2016), OECD Economic Outlook, OECD Publishing, Paris



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