Greece has been in the news constantly over the last eight years due to its sovereign debt crisis and the subsequent recession that has decimated the economy. Most of the talk has been about the Greek economy’s prospects (40% of GPD lost since 2008 and is now at pre Euro levels), the sustainability of its government debt (175% of GDP) and the need for investment and growth that can put to work the 1 million unemployed Greeks (25% unemployment of which over 50% for youth) as well as reduce the brain drain (more than 400,000 have left since the beginning of the crisis, most of which highly educated).
Many that are trying to explain the causes behind the problems of the Greek economy are pointing out to labor and public administration deficiencies and even expand to cultural traits. There is actually a book where many of these articles have been collected (“Greeks: Corrupted, Lazy and Disobedient” by Thomas Tsakalakis, (in Greek) 2016).
You would expect with all this negative talk that nothing is working in Greece. However Greece ranks 86th in World Economic Forum competitiveness ranking (down from 81st). It has comparable rankings to the European and North American average when it comes to health, education, infrastructure and lags in institutions, business sophistication and innovation as well as in sectors affected by the economic crisis ie the macroeconomic environment and financial markets (truth is economy mainly depending on banks that are now facing liquidity problems).
On the other hand negative talk doesn’t offer a solution and often escalates into defamation, bigotry, defamation and stereotyping, no different to what you’d expect in a bar talk (ECOFIN president Dijsselbloem recently went as far as stating that Southern Europeans have spent their wealth on money and women (!!).
Even if one can ignore the demoralizing aspects of this it’s difficult to ignore how it hurts investment. Which reputable investors wants to get involved in such a situation and have to justify to its shareholders? It’s when this talk becomes criminal as it affects peoples’ lives and prospects of economic reversal. At the same time it distracts investors’ attention and costs them opportunities.
The purpose of this post is to examine the main argument behind this negative talk and discover how much is truth and how much pure fallacy. The posts will cover the arguments regarding Labor, Business Environment and overall Investment. Although it relates to Greece, the same analysis could apply in other economies.
The following fallacies will be examined:
- Labor problems
- High Labor Costs
- Low Productivity
- Tax evasion
- Shadow Economy
- Inefficiency, Bureaucracy
- Overall conclusion: Who’d want to invest?
A. Greek Fallacies and Foreign Investment: Labor Issues
- Greek Fallacies: Laziness
- How can you measure laziness? Lazy is somebody that’s not working. Greeks work the most hours among OECD or EU countries; 42 per week on average. The typical workweek in Greece is 40 hours (8 hours daily for 5 day workweek) but probably the 42 number is based on aggregate data (which is one of the highest globally too).
- It is also common for people to work two or more jobs and sometimes this additional work goes unreported so the number might even be higher (skip to the shadow economy fallacy regarding the economic aspect). Greeks also have less vacations days compared to other countries in the EU (four weeks of vacation compared to five in Austria). Now what they do while working is another question. It depends on the work they have to do (for that go to productivity fallacy)
- Greek fallacies: Labor/Union problems
- The Greek labor framework is similar to that of other European countries (which are generally characterized by strong social aspects). This framework has been relaxed lately with the reforms that are taking place under the IMF restructuring program. This is captured by OECD metrics (Employment Protection Legislation Index), as well as the Labor Competitiveness Index of the World Economic Forum (2016). Greece’s ELP Index for full-time workers (2.4) is below both that of developed Western economies (i.e Germany 3) and similar to that for Emerging/Eastern Europe (ie Poland 2.4, Czech Republic 2.7)
- Much of the low grading in the WEF Competitiveness analysis arise not from labor characteristics but by low productivity (this is due to low value added of output as discussed), as well as the quality of management (ie extend of reliance on professional management). The latter can be attributed to the large number of small or family businesses (discussed under shadow economy) and can certainly be rectified with training, the utilization of recent graduates and ultimately by the rationalization and concentration of some of the activity in larger companies (refer to the shadow economy fallacy regarding size of businesses).
- Greek Fallacies: High Labor Costs
Some might say that salaries in Greece are high. That depends on what you compare them too. Based on 2012 data Greece has one of the lowest salaries in the OECD. Since then wages in Greece have further decreased as a result of the crisis, GDP shrinking and spike in unemployment rates but also because of some regulatory action (decreasing the minimum wage, drop collective bargaining and other).
According to IMF, there’s not a room for further decreases in salaries or disposable income (this has been affected as well through higher taxation). The economy and the people well-being is already too stretched. Furthermore continuous decreases will result in a vicious cycle of contraction with continuously decreasing consumption. On the other hand existing salary levels already constitute an attractive cost point for greenfield investments especially when combined by the fact that Greeks work many hours and are increasingly well educated. And of course besides all that Greece provides a base within the EU.
- Greek Fallacies: Low productivity
To examine this fallacy we first have to define productivity. It’s quite unfortunate that productivity in public speech/common talk is related to how much work one gets done. However what the economists refer to in reality is probably a misnomer. In economic terms productivity represents the amount of goods and services produced in one hour of labor. This labor productivity is calculated as real gross domestic product (GDP) divided by total labor hours. That doesn’t say much. If you produce olive oil it doesn’t matter how fast you collect the crops, it’s about the selling price. If you produce gold watches or automobiles on the other hand you can allow yourself some breaks and still appear more productive, right? To be fiar labor productivity should probably be measured in the engineering way: ie how much output is achieved per labor hour but to do that one has to know a lot more information so this is not realistic.
It is true that the (economic) labor productivity is low in Greece but why? That is because Greek GDP value added are low or working hours are too many.
- Could it be that working hours are more because there’s less automation? It is probably not the case as most of the activity is in services that are not that much automated anywhere. It might be that there’s a lot of idle time then. If so, to the extent that this work (the GDP in the nominator) can be completed with less hours of work (coming to what the work is about) then by just reducing working hours the labor productivity would increase, isn’t it? Eureka! Question is whether employers would agree with reduced working hours but the same pay…
- On the other hand, to raise the GDP and GDP per capita high-value output is needed (ie luxury/branded products, high tech etc). That’s a matter of planning and management decisions. High value added is related to branding (requires marketing expenditure) and technology (requires R&D expenditure) among others. And this cannot also be achieved overnight. Branding has worked quite well in tourism but Greece hasn’t done much to promote opportunities elsewhere. On the same time it lags in terms of R&D or manufacturing altogether. Greece can certainly increase R&D as it has a large number of PhDs and graduates (1,600 per year, similar to let’s say Israel), a lot of whom are forced to leave the country to work abroad. More than 400,000 Greeks have left Greece since the beginning of the crisis, most of them highly educated (a brain drain). A lot of them are also unemployed (20%) or underemployed. A tragedy and a waste of resources!
Some further points on that:
- Know-how: Greece has not always been without manufacturing production. Between 1950-1975 manufacturing activity had increased exponentially and GDP at a 7% rate (it is widely accepted that manufacturing creates more value for an economy and better paid jobs than services. During this time Greece was producing electrical appliances, textiles, fast moving consumer goods even assembling automobiles! It’s since 1980 that manufacturing activity has stagnated and since 2005 dropped off the charts with many bankruptcies as well. Won’t expand on possible reasons for this or search for the culprits. In any case Greece still has significant manufacturing abilities in shipbuilding, defense sector, mining, metallurgy, energy generation, construction, pharmaceuticals, agribusiness/food processing).
- R&D potential: Greek scientists are well respected and accomplished globally. According to Stamford’s Professor Ioannides (3% of global top researches is Greek, 85% of which live abroad). The Greek universities have respectable rankings according to the QS world university rankings six of them are among the world’s best. http://www.huffingtonpost.gr/2017/03/09/eidiseis-qs-koinwnia-paideia-panepisthmia_n_15259686.html. All these scientist could develop a global networks of distributed learning and R&D utilizing their local contacts as well.
- Finally, a frequent argument that Greece has small size and can’t develop the necessary economies of scale for competitive advantage in manufacturing can be easily countered by pointing out to same size economies but most importantly to recent technological advances. The production of the future (Manufacturing 4.0) is not be same as that of the past (without long labor and capital intensive production lines). It will be automated and enable small batch production locally vs large production lines of the past. It is estimated that in the near future most of repetitive manual tasks will be taken over by robots with mainly highly educated employees working in factories; in the UK alone it has been estimated that 57% of manufacturing jobs will be eliminated.
B. Greek Fallacies and Foreign Investment: Business Issues
- Greek Fallacies: Tax evasion
There are multiple articles regarding Greeks’ alleged dislike for paying taxes and propensity to avoid them, as if that is a Greek only phenomenon (without expanding here on complex corporate transfer, transfer pricing, tax havens etc etc). Let’s see in any case how much of the tax evasion issue is reality and how much a myth:
- Greece’s total tax income represent 33% of GDP which is similar to the OECD average. Therefore it appears that there’s no abnormality (differences may exist on whether taxes are direct or indirect). However some might say that tax-evasion arises from not declared income (for that you’d have to jump to the shadow economy fallacy)
- Currently Greece has probably among the highest tax rates in the EU and even outside that (Corporate rate 29%, Individual up to 42%, VAT 23%/13%, real estate 15% see table). Especially during the crisis, tax income has increased significantly to cover inflexible budgetary uses. This gets us to the other reason regarding the difficulty in collecting taxes: deposit drain, GDP shrinking and eventually fatigue and resistance ie. what the Laffer Curve illustrates (the more the tax rates increase the higher the propensity to avoid and for the tax revenue to decrease)
- Greek fallacies: Shadow Economy
Shadow economies exist in all countries. In Greece it is estimated at 24% of GDP; it is high but is actually not the highest in the EU or OECD (the respective averages are 19.7% and 17.6% respectively). As a comparison the US has a rather low number of 7% (probably the lowest globally) and on the other end Russia over 40%. The shadow economy results in uncollected taxes (referred to as tax-evasion).
- There are certain factors contributing to the creation of shadow activity such as fragmented business landscape as well as large number of transactions carried out in cash (hotels & restaurants, retails, transport). The latter has been reduced since the introduction of capital controls with more Greeks now using digital money.
- On the other hand Greece has an amazingly high number of self-employed professionals (gig economy, services, lawyers, accountants, consultants and other) as well as a higher proportion of small companies. Almost 35% of Greek labor force is self-employed compared to 7% in the US. On the other hand 58% of companies in Greece are very small (up to 9 employees) while the respective figure in the EU is 29%. It’s generally, difficult to collect taxes from these two sectors. The logistics are just incredible; it may not pay in terms of a cost/benefit analysis considering compliance and supervision expenses. That’s the same everywhere. Small companies are crucial irrespective as they generate a large number of jobs. On the other end in other countries there enough large companies that, to the extent that they don’t use creative tax practices, can provide the funds necessary to run the governments (33% of companies are large in the EU (over 250 employees) compared to only 13% in Greece). Apart from that large companies can also invest in R&D and product and people development and move the needle for the whole economy and society the way that smaller companies can’t as they are usually barely surviving.
- Greek Fallacies: Corruption deters Investment
Corruption in Greece: that’s a big topic that has been overly discussed, and the most often excuse for inactivity when it comes to investments (along with bureaucracy). Let’s see however how much of that is exaggeration and how corruption affects investment.
Corruption is measured by the Corruption Perceptions Index (CPI) that is published by the Transparency International. The index ranges from 0 to 100. According to this:
- Greece has a CPI of 44 in 2017. It has ranged between 36-46 over the last five years
- Greece has better ranking in terms of corruption (CPI) compared to China (40), Mexico, Vietnam (33), Philippines (35), Peru (35), Bangladesh (26) etc. However these countries attract a higher level of Foreign Direct Investment (FDI) (see Table based on 2015 data). So at first sight the argument that corruption matters in investment doesn’t hold.
- Taking it a step further by running a regression analysis between CPI values and FDI in various countries the result come back indicating that there’s no real correlation. In case that you are aware of any other analytical data that support it, please let me know.
Some further thoughts:
- Corruption is illegal, let’s not be misunderstood: USS’s FCPA guidelines have resulted in heavy fines to companies that use briberies to conduct business (for example Siemens and ongoing investigations for Novartis, Petrobras). However outside the moral question of legality, Bill Gates, in his $38 billion Gates Foundation 2014 annual letter, said that “corruption isn’t nearly the barrier to development that most people think it is” but kickbacks and bribes are “an inefficiency that amounts to a tax on aid”.
- Talking is branding: Even if corruption is not a deterrent for investment discussing about it creates a negative image for the Greek economy and eventually a vicious cycle and a self-fulfilling prophecy. Who want to be associated with corrupted practices? Therefore when coming to these issues the press should be very careful.
- Discussing corruption without proof might be irresponsible: the public often overreacts in corruption rumors and this can even lead to unrest, violence and hysteria (for example in cases that affect public health). Even if a system is “rigged” is it responsible to shake people’s trust in it without trying to correct it? Wouldn’t one be opening the Pandora’s Box by promoting mistrust?
- Defaming: how fair is it to draw conclusions over an entire population based on certain incidents? At best this would be considered stereotyping in the US and is unfair to say the least. It is what the Association fallacy in reasoning describes: when guilt or merit can be attributed to somebody based on its relation to a particular group. It may appeal to emotion or prejudice. There are two types of this fallacy:
- Guild by association: John is a con artist. John has black hair. Therefore, all people with black hair are con artists
- Honor by association: country X has higher GDP compared to Country Y. Therefore, John who is a citizen of Country X is superior to Mark, a citizen of Country Y
- The definition of corruption and the public’s attitude towards it could also vary from one country to the other and this can involve cultural aspects too (we could refer to the work of Weber, Hofstede etc). For example individualistic cultures rely on written laws while collectivist on societal norms. When certain actions are not in accordance with written laws then this is corruption or criminal as per the individualistic cultures, however it might not appear as in a collectivist culture if it is in accordance with unwritten norms that for any reason are not reflected in the law. It’s a rather iconoclastic point of view but you may think about it.
- The Corruption issue – a case of double standards?: finally, while there’s a lot of talk about corruption, scandals, inefficiencies in Greece. At the same time there are many large scandals in the news that do not result in a long-lasting negative image; often these negative news fade away quickly or bushed off as extraordinary incidents (isn’t this some type of double-standards?). For example:
- Volkswagen dieselgate ($15bn fine)
- Siemens bribery scandal ($1.6 billion fine)
- Deutsche Bank (MBS contracts ($7.2 billion SEC fine)
- Wall Street banks (as part of their role in the 2008 crisis (total fines estimated at $160 billion)
Does this mean that all the system in Germany or US is corrupted as the association fallacy in Greece’s case would imply?
- Greek Fallacies: Inefficiency, Bureaucracy deters Investment
Outside corruption another issue of grave importance and a frequent excuse for abstaining from investment in Greece are shortcomings in public administration, legislation and the legal system such as inefficiency and bureaucracy. These factors can be captured by the Index of Economic Freedom (EFI) that is published by The Heritage Foundation. Taking it a step further one could also look at the all-encompassing Global Competiveness Index (GCI) that is published by the World Economic Forum. The latter covers all aspects of competitiveness of the economy (12 parameters that involve labor, infrastructure, institutions and innovation aspects)
Running again a regression analysis between Foreign Direct Investment (FDI-World Bank) vs the EFI and GCI one could see whether there’s a connection between the two.
This analysis comes back again indicating no significant/visible correlation! If somebody thinks different or if I am missing something I would be interested to know. Therefore the discussion of whether efficiencies affect investment is open to debate; one can’t decide other by looking on a case by case basis.
However I wouldn’t disqualify these indicators completely. If there’s one that appears to be more helpful in linking/predicting investment levels this should be the GCI. Just by observing the data in the Table with all the rankings and using empirical judgement it seems, at least to me, that high levels of FDI appear in countries that offer:
- Convenience; ie favorable tax or legal regime: for example Ireland, Honk Kong, Switzerland, Luxembourg, Cyprus, Malta
- Development/size: such as G7 and other Western EU, BRIC, Australia
- Emerging Economies and/or Low Labor Cost and/or Resources: such as Mexico, Central/Eastern Europe(Czech Republic, Poland, Hungary), Asia (Vietnam, S. Korea, Indonesia, Turkey, Thailand, Singapore), large S. American (Colombia, Argentina, Chile), resource rich African (Nigeria, S. Africa)
- Capabilities/know-how in a particular area (let’s say startups in California even if not the cheaper location)
Any other observations/opinions are welcome.
FDI vs GCI, EFI and CPI in selected countries (2015 and 1990-2015)
Source: Transparency International (CPI), The Heritage Foundation (EFI), World Economic Forum (GCI), World Bank (FDI)
The questions is whether Greece offers any of these features that attract investment. The answer is that it does or it may do as it will be covered in the next part.
C. Greek Fallacies and Foreign Investment
- Greek Fallacies: Who’d want to invest there
There are various reasons that may be given for not investing in Greece. How much of that is true (not much based on the preceding analysis) and how much simply just an excuse (for not investing). The latter is respected when the investor is not familiar with the country or with the industry or doesn’t have the resources to analyze and manage or the funds. The purpose of this is to reduce the instance that this refusal is a matter of disinformation or apprehension as other people may be abstaining (herd mentality). In case that you are convinced about the fallacies that exists as well as the opportunities then the remaining purpose is to highlight investment areas. Some facts regarding who is investing in Greece:
- FIDI amounted to $1.7 billion in 2014 according to World Bank and 39.5 billion between 1990-2015; Top investors are from European countries (Germany, France, UK and Netherlands) ie western economies. Geopolitics and distance may be a factor for European investment compared to the US that is not a major investor. Lately China is being investing heavily too.
- Investment has fallen of the cliff lately, obviously due to the crisis and its consequences in business climate, economy, consumption etc
- There is luck of financing: the Greek banks are facing liquidity problems and operate under capital controls so they are giving loans sparingly. There are no other financing options (other from probably EU subsidies). The use of Private Equity or Venture Capital domestically is very low, if any, compared to western economies. Some foreign Private Equity funds have been quite active though.
Indicatively notable foreign investments in Greece over the recent period include:
- Blackstone (Lamda) $40million
- Oaktree (Ikos Resorts, $280m)
- KKR-Pillarstone ($1.2 billion of NPL portfolio)
- Cosco (OLP- Piraeus Port) $1.7 billion
- Fraport (regional airports) ($1.1billion)
- Deutsche Telecom (Hellenic Telecom- OTE, $5.5 billion)
- PSP Investments- Canadian Pension Fund (Athens airport, $1.7 billion)
- John Paulson (shareholdings in Alpha Bank, Piraeus bank)
- Wilbur Ross (shareholding in Eurobank)
- Fairfax/Prem Watsa (Shareholdings in Eurolife, Eurobank)
- Olayan group (Costa Navarino, $150m)
- Jermyn, Dogus, Kuwait funds (Astir Palace Hotel Complex, $440 million)
- Dogus, Temes (Hilton Athens, $190 million)
- Italian Railways (Greek Railways/Trainose) $50mllion)
- Thassos Grand Resort (Bulgarian investor $28million)
- Kassiopi Corfu Resort (NCH Capital (NY), $83million)
As indicated, investment is strong where there is a strong/proven case (ie tourism), strategic issues (ie logistics and Cosco) or fundamentals (telecom, airports). Apart from this the country needs, and in my opinion can support, investment in other value added sectors where the young more educated generation can be employed without having to move abroad.
In my personal view investment in Greece can involve:
I. Established FDI target areas:
- Tourism/Real Estate: large number of hotels houses at low prices that can be used for tourism purposes or even investment (such as trophy investment or new developments such as the Hellinikon project). Greece is a top 20 tourist destination. There are also new forms of tourism that can be developed that will expand the tourist season and target audience such as City Break tourism, food tourism (wine and other), experiential/alternative tourism.
- Infrastructure & Logistics: Greece can be a hub for transporting to Europe (China’s COSCO acquired the Piraeus port). The route from the East to Western Europe through the Suez Canal and Greece is faster by four days compared to following the Atlantic route. Furthermore the infrastructure of highways, railway, airports are being modernized (to be completed by 2017-18).
- Financial Services: large international investors (Paulson, Wilbur Ross, Fairfax) have invested in the Greek banking sector. Use of fintech applications are quite limited but expanding especially as the market is trying to find ways to operate around the capital controls imposed on use of cash and fund transfers. The Private Equity industry is also negligible and could be a source of financing while realizing significant returns in a not contested dealmaking space.
II. Established market sectors:
- Energy: there’s activity in conventional energy resources (a gas pipeline (TAP connecting Azerbaijani gas fields through Turkey to Italy) is under construction and others are under discussion (East Med), there’s offshore gas and oil exploration as well). Renewable energy accounts for 18% of energy consumption and has great potential although activity has come to a stall lately. The electricity market is being liberalized too.
- Agribusiness/food sector: the Mediterranean cuisine is increasing in popularity. There’s potential for exports; at the same time domestic consumption can absorb much of production as a large part of food products is imported. Furthermore there’s room for automation and intensification of production.
- Healthcare and Medical Tourism: there’s spare capacity in private sector hospitals as well as great human capital. Capacity can be utilized in medical tourism as well (IVF, dental, physiotherapy/spa among others). This is a service that hasn’t been developed yet. There are 6,000 doctors of Greek origin in the US only and many in Europe that could act as ambassadors. At least 18,000 Greek doctors have found work abroad since the beginning of the economic crisis.
- Pharmaceutical & Personal Care: the Greek pharmaceuticals sector (generics) possess significant capacity and knowhow. There’s potential in the generics sector where use is limited (18% market share compared to 37% in Germany, according to OECD). There’s also potential in natural products taking advantage of the traditional healing methods (the birthplace of Hippocrates after all) as well as of pharmaceutical R&D that could absorb the large numbers of graduates
III. Emerging/Developing Industries and Promising FDI Targets:
- R&D and technology/manufacturing: as discussed there’s a large number of Greek PhDs in Greece and abroad and a large number of them are among the top researches. EBRD and the Greek state are sponsoring research programs to keep these scientists at home. At the same time salaries are low compared to other EU countries. Why not develop manufacturing facilities? As seen the modern production of tomorrow will not require large scale production or large labor force. Greece would not have to go through the adjustment phase but rather jump into the new high value added automated future right away. Note that large investment can now take advantage of fast track application procedures that have been lately put in place by the Greek state. Production could cover a wide array of products from fast moving consumer goods to household goods and high tech products as Greece is importing much of these goods not to mention that could also be used as an export base to the EU or other countries.
- Business Process Outsourcing: there are already companies taking advantage of the highly educated young workforce in Greece as well as of lower salaries by outsourcing IT work or other BPO services to Greece
- Arts, culture and education: there’s a lot to say about cultural activities and education in Greece. Classical tourism hasn’t even been developed to the extend it could. Arts like filmmaking, apart from shooting revenues from can also create revenues indirectly through promoting the country for tourism or business activities (see such effect in New York City from the huge filming industry there).
There may be more areas but I’m personally not very familiar/able to support the case but I’m open to research.
In any case it is imperative to use advisors that are familiar with the investment environment and can navigate. Becoming making presumption based on investors’ own business environment, inconveniences from differences in legal system or culture or inability to tame bureaucracy can’t be a reason for failure. It’s just an excuse for those that are not prepared well. The difference between success and failure, between generating return or losing money depends on having a knowledgeable advisor to navigate through troubles. And in the end there are no shortcuts. If you don’t want to invest in advice and research you’ll have to live with the consequences…..