Oecd Economic Surveys : Greece 1986-1987.

79 Pages·5.089 MB·English

by  OECD

OECD
ECONOMIC SURVEYS
1986/1987
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GREECE
JULY 1987
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Pursuanttoarticle 1 oftheConventionsignedinParison 14th December,
1960,andwhichcameintoforceon30thSeptember, 1961,theOrganisation
for Economic Co-operation and Development (OECD) shall promote
policiesdesigned:
- toachievethe highestsustainableeconomicgrowthandemployment
andarisingstandardoflivinginMembercountries,whilemaintaining
financial stability, and thus to contribute to the development ofthe
world economy;
- to contribute to sound economic expansion in Member as well as
non-membercountries in the processofeconomicdevelopment; and
- to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordance with international obliga¬
tions.
The original Member countries of the OECD are Austria, Belgium,
Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain,Sweden,Switzerland,Turkey, the United Kingdomand the United
States. The following countries became Members subsequently through
accessionatthedatesindicatedhereafter:Japan(28thApril, 1964),Finland
(28thJanuary, 1969), Australia (7thJune, 1971) and New Zealand
(29th May, 1973).
The Socialist Federal Republic ofYugoslavia takes part in some ofthe
work ofthe OECD (agreement of28thOctober, 1961).
Publiéégalement en français.
©OECD, 1987
Application forpermission toreproduce or translate
all or part ofthis publicationshould be made to:
Head ofPublications Service, OECD
2, rue André-Pascal, 75775 PARIS CEDEX 16, France.
CONTENTS
Introduction
I. Economicstabilisationandrecentdevelopments 8
Themacro-policyframework 8
Subsidinginflationarypressures 14
Demand andoutput 16
Thelabourmarket 18
Thebalanceofpayments 20
Theoutlookfor1988 23
II. Financialandsectoralimbalances 26
Industrialstagnation 26
Unbalancedpublic/privatesectordevelopments 36
III. Conclusions 51
Notesandreferences 53
StatisticalAnnex 57
TABLES
Text
1. Ordinary andinvestment budgets 10
2. Monetaryprogrammeandoutturn 12
3. Wagesandsalaries 15
4. Prices 16
5. Householdincome 17
6. Demandandoutput 18
7. Balanceofpayments 21
8. External debt 22
9. Short-termoutlook 24
10. Structuralchanges 27
11. Problematicfirms 35
12. Publicsectorexpansion 37
13. Publicsectorborrowingrequirement 38
14. Comparativetax receipts 41
15. CurrentrevenueandexpenditureofSocial InsuranceFunds 45
16. Pensionfunds 46
17. Selected dataonpubliccorporationsandenterprises 47
18. Netpublicsectordebt 50
Statistical annex
A. Nationalproductandexpenditure (currentprices) 59
B. National product andexpenditure (1970prices) 60
C. Grossdomesticfixedcapitalformation (currentprices) 61
D. Grossdomesticfixedcapitalformation (1970prices) 62
E. Income andexpenditureofhouseholdsandbusinesssavings 63
F. Governmentrevenue andexpenditure 64
G. Industrialproduction 65
H. Pricesand wages 66
I. Exportsbycommoditygroup 68
J. Importsbycommoditygroup 69
K. Exportsand importsbyarea 70
L. Balanceofpayments, OECD basis 71
M. Moneyandbanking 72
DIAGRAMS
Text
1. Exchange rates 9
2. Interest rates 13
3. Conjunctural indicators 19
4. Businesssurveys 25
5. Comparativemanufacturingperformance 28
6. Labourcostsandcompetitivenessin manufacturing 31
7. Profitabilityand financialchargesinmanufacturing 32
8. Profitsandlossesin manufacturing 33
9. Governmentexpenditure 39
10. Averageearningsdifferentials 40
II. Governmentreceipts 42
12. Personalincometaxbyoccupationalcategories 43
13. Socialexpenditure 44
14. Interestpaymentsandthe PSBR 49
BASIC STATISTICS OF GREECE
THELAND
Area(1 000sq.km) 132.0 Mainurbanareas, 1981 census(1 000):
Cultivatedarea (I 000sq.km) 1979 38.9 GreaterAthens(incl. Piraeus) 3027
Salonika 872
THEPEOPLE
Population, 1986mid-year(I 000) 9966 Totalemployment, 1985(1 000) 3588
No.ofinhabitantspersq.km 75 Agriculture(%) 28.9
Netnaturalpopulationincrease, 1985(1 000) 24 Industryandconstruction(%) 27.3
Otheractivities(mainlyservices)(%) 43.8
PRODUCTION
GNP, 1986(billiondrachmae) 495.7 OriginorGDPatfactorcost, 1986(billiondrs.) 4928.0
GNPperhead($), 1986 3966 Agriculture(%) 16.9
Grossfixedinvestment(excl.ships): Miningandmanufacturing(%) 20.1
percentofGNP, 1986 18.7 Construction(%) 6.4
perhead($), 1986 743 Services(%) 56.6
THEGOVERNMENT
Generalgovernmentcurrentexpenditure, CompositionofParliament(No.ofseals):
1986(%ofGNP) 36.9 PanhellenicSocialist Movement 157
Generalgovernmentcurrentrevenue, 1986 NewDemocracy 110
(%ofGNP) 30.5 CommunistParty 10
Democratic Renewal 10
Independent 13
Total 300
Lastgeneralelection:2.6.1985
Nextgeneralelection: 1989
FOREIGNTRADE
Exportsofgoodsandinvisiblereceipts, 1986 Importsofgoodsandinvisiblepayments, 1986
(%ofGNP) 22.5 (%ofGNP) 30.9
Tourismearnings,gross, 1986(%ofGNP) 4.7 Mainimports, 1985 (%oftotalcommodityimports):
Emigrantremittances. 1986(%ofGNP) 2.5 Mineralfuels,lubricantsandrelatedmaterials 29.6
Shippingearnings,gross, 1986(%ofGNP) 2.5 Manufacturedgoodsclassifiedchiefly
Mainexports, 1985(%oftotalcommodityexports): bymaterial 15.9
Textilesandclothing 23.0 Machineryotherthantransportequipment 12.0
Fruitandvegetables 15.2 Foodandliveanimals 11.5
Crudeoilandderivatives 11.8 Transportequipment 11.7
Ironandsteel 6.4
Tobacco 3.4
Aluminium 3.1
THECURRENCY
Monetaryunit: Drachma CurrencyunitsperUSJ,averageofdailyfigures:
Year 1986 139.48
April 1987 132.98
Note: Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable.
ThisSurveyisbasedon theSecretariat'sstudypreparedfor
theannualreviewofGreecebytheEconomicandDevelopment
ReviewCommitteeon22ndMay1987.
Afterrevisionsin the lightofdicussionsduringthe review,
final approval ofthe Surveyforpublication was given by the
Committeeon23rdJune1987.
ThepreviousSurveyofGreecewasissuedinJanuary1986.
INTRODUCTION
Developments since the previous examination of Greece by the Economic and
Development Review Committee in November 1985 have been strongly influenced by the
current Stabilisation Programme introduced in October 1985. The principal objectivesofthe
Programme have been to reduce the large macroeconomic imbalances which had built up
since the second halfofthe 1970s, manifest in a high rate ofinflation, large current external
deficits and huge public sector borrowing requirements. Given the size of the adjustment
problem, majorreductionsin domesticdemand, notablypublicandprivateconsumption, and
cuts in real incomes were required. All components of macro-policies have been geared to
these ends: traditional demand management, exchange rate policy and price/wage controls.
In the event, total real domestic demand stagnated in 1986 and is likely to show a
pronounced decline in 1987. Helped by the devaluation of the drachma, the real foreign
balance has strengthened appreciably preventing a fall ofnon-agricultural output. However,
owingto alikely sharpdrop in agricultural production, GDPisprojected tofall in 1987. With
buoyant net invisible receipts and lower oil prices, the current external deficit shrank from
$3.3 billion in 1985 to $1.7 billion in 1986 (some 4'/4 per cent of GDP), holding out the
prospect of a further contraction in 1987. The application of strict income norms, entailing
substantial real pay cuts, succeeded in reducing the rate of consumer price inflation from
25 percent at the end of1985 to 16'4percentbythe first quarterof1987, probably declining
further to around 13 per cent by the end of the year.
Part I of the present Survey reviews policies and actual developments since the
redirection ofpoliciesin late 1985, includingan assessmentoftrendsfortheremainderofthis
year and beyond. Part II deals with structural problems underlying the marked deterioration
of Greece's economic performance since the second oil shock, both in comparison to other
OECD countries and her own historical post-war record. The main focus is on relationships
and imbalances both between and within the public and private sectors. Special attention is
paid to issues of de-industrialisation, support to ailing industries, tax distortions and
disincentives, growing social security deficits, and loss-making public corporations and
enterprises. The main policy issues emerging from the review of current and prospective
trends, and the analysis of structural imbalances, are discussed in the Conclusions.
I. ECONOMIC STABILISATION AND RECENT DEVELOPMENTS
Given the dominant role of the Stabilisation Programme in determining economic
developmentsduringtheperiod underreview, itisuseful torecall itsprincipalfeaturesandto
consider its implementation before presenting and assessing the intermediate results. The
main measures taken or announced by the Government in October 1985 included (for more
details see OECD Economic Survey of Greece, January 1986):
i) A 15 per cent devaluation ofthe drachma and a temporary obligatory six-month
non-interest bearing deposit equivalent to 40 per cent or 80 percent ofthe value
of selected imported goods (mainly manufactures);
ii) Amodification ofthewage-price indexation scheme (ATA), excludingtheimpact
of import prices and adjusting wages on the basis of projected, instead of past,
inflation. This system was made compulsory for both public and private sector
employees and implied significant reductions in real pay;
Hi) A reduction of the public sector borrowing requirement (PSBR) by about 4 per
cent of GNP in both 1986 and 1987 to be achieved by curtailing expenditure,
raising taxes and increasing administered prices;
iv) A tightening of monetary policy through a reduction of the growth of domestic
credit expansion, the increase of subsidised interest rates to "privileged"
borrowers and the gradual establishment of positive real interest rates for all
borrowers.
ThisStabilisation Programmeand itsstrict implementation overthelasteighteen months
represents a landmark. For the first time in the post-war period the Greek population, a
largely consumption-oriented society accustomed to continuous steep rises in standards of
living, had to make immediate and large sacrifices notwithstanding strong labour union
opposition. Although the Programme had not been designed to tackle microeconomic
structural issues, it nevertheless aimed at eliminating important impediments to the
resumption of faster growth and at improving the business climate by providing a stable
macroeconomic framework for at least two years.
The macro-policy framework
Exchange rate management
With a view to arresting speculative capital outflows and maintaining competitiveness,
the authorities announced that after the October 1985 devaluation the real exchange rate
would be kept stable, with relative unit labour costs used as the key indicator of
competitiveness. Given the marked slowdown in pay increases, effective exchange rate
changes have been moderate (cid:9) 10 per cent annual rate between December 1985 and
May 1987. The largelypredetermined course oftheexchange rate,given theforward-looking
Diagram1. Exchangerates
Drachmaintermsofforeigncurrencies
1981 82 83 84
Sources: OECDMainEconomicIndicatorsandOECDestimates.
mode of wage adjustment, together with the move towards positive real interest rates and
greaterconfidence have curbed capital flight appreciably. The new policy represents a major
shift from previous exchange rate adjustments, which served to validate past domestic
inflation. Even allowing for the unpredictably large cross-exchange rate fluctuations, setting
and adhering to broad exchange rate targets has had a damping impact on inflationary
pressures.
Fiscal policy
Fiscal restraint has been an important ingredient of the Stabilisation Programme. The
objective is to reduce the PSBR from 17.7 per cent of GDP in 1985 to 13.7 per cent in 1986
and 10 per cent in 1987. Such an ambitious target has called for wide-ranging action on both
income and expenditure sides at all levels of the public sector. The 1986 and 1987 Budgets
relied heavilyon traditional sourcesofincome and on measures tocurb tax evasion, while on
the expenditure side measures were taken to reduce in real terms non-interest current and
capital expenditure. The 4 percentage pointcut in the PSBR targeted for 1986was achieved.
However, about halfofthis reduction was accounted forby the appropriation ofa large part
ofthe windfall gainsfrom the dropin the oil price. Excludingthisfactor, the reduction ofthe
general government deficit wasfairlysmall. Bycontrast, the ratioofthe aggregate borrowing
requirement of Public Corporations and Enterprises (PCEs) to GDP declined by about
one-fourth reflecting an increase in tariffs and fees, cutbacks in real fixed investment and a
reduction in the wage and salary bill in real terms. The latter, however, was smaller than