Greece has not been leaving the headlines of leading global newspapers for several years already, as the country`s economy has been in turmoil, while the efforts to aid it with a bail-out have encompassed the entire European Union. Real Gross Domestic Product of Greece, Gross Domestic Product per capita, as well as the annual growth rates, respective to those figures, have been calculated for the period from 1984 to 2014. Real GDP per capita growth rates can be seen on the following chart.
Figure 1. Annual growth rates, real GDP per capita of Greece (1985-2014)
It can be observed that the Greek economy growth rates were either negative (i.e. real GDP per capita falling by 18.31% in 1993 was the most extreme) or rarely verging on zero in the last 15 years of the XXth century. The country was the poorest in the European Union, where Greece was accepted in 1981. Some scholars argue that the country entered EU because of improved macroeconomic policies and structural reforms in financial and product market sectors, while the economic downturn was largely due to the divergence from fiscal consolidation and inflation reduction (Vamvakidis, 2003).
Indeed, it can be seen on the chart that real GDP per capita growth rates were rarely positive in the last 15 years of the previous century and exceeded 5% threshold only once, in 1995. Having entered the EU, Greece, which experienced impressive economic growth after WWII, faced stagflation, which is the combination of high unemployment and high inflation (Alogoskoufis, 1995).
In the late 1990s, Greek politicians prioritized getting access to the European monetary union. The government began reducing inflation as well as budget deficits in order to meet the requirements of Maastricht Treaty, which was used as a road map for a union built on a single currency. It has to be noted that during the 2000s Greek economy has exceeded 4% only twice, while from 1980 to 1998 inflation has regularly been above 10% (Avent, 2011).
The chart with real GDP per capita growth rates clearly proves that an average Greek citizen felt himself more well-off until the global recession, since real per capita GDP was going up and the growth rate even topped 25% (27.69%) in 2003. Greece gave up monetary independence, but it may have been for the better (Avent, 2011).
In 2008 the economic situation in Greece began to deteriorate. This was partly caused by the Great Recession, as well as the structural weakness of Greek economy. Considering that Greece has publicly admitted forging data to join EU, there is little surprise that it was Greece who was hit by the crisis most severely (Carasssava, 2004).
Greece was at the forefront of the European debt crisis. Several countries announced that they expect larger than normal budget deficits in 2009, but the new Greek government, which won the election in October 2009, announced a revisited budget deficit expectation of 12,7% GDP. This triggered doubts regarding Greece`s solvency. Sovereign bond yield spreads began to widen across EU. This triggered a significant capital outflow from the country (Lane, 2012).
The chart clearly indicates that the impact of this developments on the GDP per capita was rather negative. Real GDP per capita was falling since 2009, with the highest fall happening in 2012 (-13.68%).
It is evident that GDP cannot be used as a universal means for measuring economic growth and development.
Firstly, even the meaning of it, which is the total value of goods and services produced within country`s borders (Viet, 2009), discloses its limitations, namely the fact that final beneficiaries of the production and sale of those goods and services may be located abroad, hence the profits get accumulated elsewhere. Considering the globalization of business, this means that production and wealth accumulation flows may be going in different directions, impeding the application of GDP as a measure of economic development. The economist Simon Kuznets has noted in 1962 that the difference between costs and returns should always be taken into account (Kuznets, 1962).
What is more, it has to be noted that GDP is void of the connection to the well-being of particular individuals. In particular, if the government ventured, for example, into any sort of infrastructural project, like the construction of a sea port, which will not be used in any trade roots at all, GDP will show growth. But in reality only the individuals who were engaged into that construction could experience the immediate improvement in their well-being due to receiving wages. In general, since that port (or any sort of useless activity) will not be used in future for economic purposes, other individuals` wealth will not be influenced (Shostak, 2001).
In addition to that, GDP does not take into account the sizes of the black or shadow economy, the sole reason for existence of them is the avoidance of government supervision (for legal or tax purposes). The less developed the country, the larger its shadow or black economy normally is. The estimates of the sizes of shadow economies in European countries show that the proportion of such economic activities can amount to as low as 19-20% on average. According to some estimates, the size of Greek shadow economy was 25,4% of GDP in 2010 (Schneider, 2011).
Secondly, GDP does not take into account the inequality of the wealth distribution, which is extremely important for valuing country`s overall well-being, since the existence of a large middle-class cluster of population is essential for long-term growth (Easterly, 2001). This drawback of GDP could be covered up with the application of Lorenz Curve in combination with Gini coefficient, which measure the extent of the inequality of income distribution between different population groups. Furthermore, Gini coefficient and Lorenz curve can be used for a variety of purposes, where inequality is concerned. For example, those two instruments were used to measure the distribution of water in rural areas of South Aftrica and disclosed that 99.5% of population were entitled to 5% of water (0.96 coefficient) (Cullis, van Koppen, 2007). The methodology underlying GDP calculation would have shown that the water consumption is high and would not indicate extreme inequality. The application of Gini coefficient together with GDP calculations would show a lot more about the well-being of one single individual, since GDP is essentially an aggregate indicator. Inequality of income has been noticed by the already mentioned economist Simon Kuznets, who observed that once per capita income goes up income inequality tends to rise, but falls afterwards (Kuznets, 1955).
Thirdly, the issue of GDP being incapable of distinguishing between growth and development can be solved with the application of Human Development Index, which is based on three measures of human development: health, education and living standards (UNDP, 2014). The particular value of HDI results from the very drawbacks of GDP: as already indicated, GDP is incapable of pointing to the final beneficiary of economic activities, while the very reason for HDI application is just that figuring out whether the population has chances to develop physically and mentally, plus measuring the comfort of life. Of course, the calculation of HDI requires more information than GDP, so this entails certain limitations. But the proper application of HDI might be far more useful for global economic development than the pursuit for higher GDP growth rates.
However, HDI lacks any ecological component and hence could be improved, since the condition of the environment is evidently vital for the successful development of humanity (Sagar, Najam, 1998).
All in all, it is evident that GDP is just a simplified instrument for measuring an extremely complex phenomenon of economic development. It should be complemented with other tools for gauging the success of development efforts and their impact of the life of particular individuals, not whole nations in general.
The general approach to macroeconomic policies for encouraging economic growth has never been too complicated. It has always revolved around providing economic stimuli by increasing government expenditure, reducing taxes or loosening the monetary base by lowering the interest rates (or engaging into quantitative easing). It was all about increasing the amount or velocity of money in the economy, which, just like blood, would presumably wash away all the negative impacts of slowing economy.
However, none of this was applied in Greece when the sovereign debt crisis hit this country hard. Basically, the crisis has exposed huge amounts of the piled up debt, accumulated over many years and hidden, partially, with the help of Goldman Sachs (Story et al, 2010). On the contrary, Greece was plunged into a wide array of austerity measures, which were justified by economists, who were dubbed as austerians later on, to be beneficial for investor-confidence. Investors, they argued, would see that national debt is under control and will channel their money towards the national economy. It turned out the austerians were wrong, since no country, that has adopted austerity measures, strengthened its economy, but rather only weakened it further. The amount of the two bail-outs, that Greece received from EU in 2010 and 2012, has totalled 240bn. Austerity measures were not working. This is why European Central Bank has engaged into extensive quantitative easing interventions later on, willing to shore up consumer confidence. Old macroeconomic principles were put to use again (Krugman, 2015).
First of all, the key issue with solving the Greek macroeconomic problems is obtaining the resources for providing economic stimuli. Since the major part of the first two bail-outs have not landed into government budget but were used to pay off the debts, owed by the Greece to the international banks, the country, together with the whole EU, should either restructure those debts so that economic help goes towards stimulating the economy, or the ECB should just provide more financial resources to the Greeks. Considering that 78% of the government debt is owed to the so-called troika of lenders (IMF, ECB and European commission), it is evident that the debt was effectively moved from being private to being public (Inman, 2015). A moratorium on publicly owned liabilities could help the Greek government substantially.
Once the government coffers return under the control of Greece, the country could begin implementing certain macroeconomic policies.
So secondly, Greece should restore confidence in its banking sector among the population. In summer 2015 ECB was doing exactly the opposite, freezing the flow of money to Greece, when people were forming lines behind ATMs (The Economist, 2015). The country should aim to do the opposite of what ECB did provide liquidity and slash reserve requirements in harsh times. Of course, the large problem here is that EU is basically combining local governments with international obligations, and such actions of the Greek government could provoke another capital flight, but those measures could be successfully carried out under oversight, not intrusion, of European Stability Mechanism (ESM).
Thirdly, other European countries should not lend money to Greece in exchange for loosening borrowing conditions by troika lenders. Basically, Greek government should be left on its own financially. Of course, the Greek government would be forced to renew its credit rating a lot faster in such conditions to restore the trust of the markets. The country should adopt the legislature that would deprive the official authorities of a possibility to blow up public debt using foreign banks, as it happened with Goldman Sachs (Inman, 2015). This would be extremely...
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