European Economy - the puzzle of the missing Greek Exports(Uwe Bower, Vasiliki Michou, Christoph Ungerer)

European Economy - the puzzle of the missing Greek Exports

Economic Papers 518 | June 2014 

Uwe Bower, Vasiliki Michou, Christoph Ungerer 

European Commission 

• Greece is a closed economy, but has an enormous export potential. Greece controls 16% of international shipping.

• Transport, tourism and agriculture sectors exceed our model predictions while machinery and electrical equipment lag far behind.

• Greece’s exports were hit the hardest by the global economic crisis in 2008/2009. Other countries had strong export growth within three years or less, but Greece exports have recovered marginally. This reflects Greece’s weak export base.

• To avoid double-counting by examining export flows in value added (VA) terms.

• Greece’s export performance is the driver of economic growth and jobs in Greece

• the paper joins an emerging body of literature

        ◦ the gravity model is used to assess the trade impact of national borders

        ◦ production technology (the Ricardian theory of trade formulated in its modern form in Jones (1961))

        ◦ factor endowments (the Heckscher-Ohlin-Samuelson theory of trade as in Samuelson (1948))

        ◦ increasing returns to scale (Krugman (1979), Krugman (1980), Krugman (1981))

        ◦ institutional quality as a source of comparative advantage (models and empirical evidence by Nunn(2007), Levchenko (2007) and Costing (2009))

        ◦ the gravity trade model with institutional quality indicators (Anderson & Marcoullier (2002), de Groot, Linders, Rietveld and Subramanian (2004), Ranjan and Lee (2007), Shepherd and Wilson (2008))

        ◦ Athanasoglou and Bardaka (2008) develop a demand function for Greece’s exports of manufactures and show - among- others - that non-price competitiveness approximated with capital stock plays a vital role in explaining export performance in the long run as well as in the short run.

        ◦ Papazoglou (2007) approaches Greece’s potential exports through a gravity model and finds that potential sizes exceed actual ones and their differential considerably widens over time.

• the basic gravity model with four different institutional quality indicators

        ◦ Global Competitiveness Indicator (GCI) from the World Economic Forum

        ◦ World Bank Doing Business Distance to Frontier Indicator (DB)

        ◦ World Bank Worldwide Governance Indicators (WGI)

        ◦ OECD Sustainable Governance Indicator (SGI)

         ▪      logarithmic functional relation (explain bilateral exports between exporter country and partner country for sector k at time t, by GDP of exporter and partner country as well as a vector of “trade resistance factors”, including geographical distance between the two countries and dummy variables for countries that share a common land border, that were in a colonial relationship, that share a common official language and that have a regional trade agreement in force)

             ▪   adding measures of institutional quality in the exporter and partner country 

▪ the scale of the relevant institutional quality variables

▪ the scope for improvement for Greek institutions

• This paper shows that Greece exports significantly less than what a standard gravity model would predict.

        ◦ the gap in Greek export VA amounts to 33% compared to what regular international trade patterns would predict on basis of Greek GDP, the size of its trading partners and geographical distance.

            ◦ regression results suggest that an improvement in the quality of Greek institutions up to the EU/OECD average would close the Greek competitiveness gap by between 54% and 78%, explaining large parts of the puzzle of the missing Greek exports

• a range of issues for further research

          ◦ questions for the design of a growth strategy

          ◦ identify more in depth which specific institutions are essential for export growth

          ◦ how quickly Greece can tackle its institutional deficits and how quickly reforms will translate to change on the ground

• significant progress has already been made in implementing structural reforms

• the results of this paper suggest that structural reforms can yield significant long-term rewards in terms of opening up worldwide markets for Greek exporters.