The 3 competitive weaknesses Greece needs to address

In light of the weekend agreement between Eurozone leaders, Greece’s creditors and Greece, it is worth looking at the deep seated competitiveness challenges Greece needs to address in order to pave the way for any sort of recovery in its fortunes.

The prospect of a Greek exit from the Eurozone – and even the EU – remains a possible, if not desirable, scenario. The weekend saw a marathon series of negotiations between the Greek government and the troika, made up of the European Commission, the International Monetary Fund and the European Central Bank. It has ended with an agreement under which Greece has agreed to implement a series of rapid reforms in exchange for a 82bn-€86bn debt relief and the opportunity to stay in the eurozone.

This is the latest in the ongoing series of short term relief for reform packages. However, what Greece needs is a long-term strategy to tackle the underlying reasons for its current economic malaise.

The future of its economy and its ability to provide high and rising living standards to its citizens depend on growth-enhancing reforms, not simply reining in spending or obtaining debt relief. Beyond all the recent brinkmanship and short-term politicking, it is high time to recognize that Greece’s economic challenges are rooted in its problems of competitiveness, productivity and social inclusion. The power to address these issues really does lie with Greece. The good news is that, with serious conviction, the structural challenges Greece faces can be tackled. The World Economic Forum’s research shows that we can be cautiously optimistic.

The most recent Global Competitiveness Report, released in the autumn of 2014, showed that the country was indeed making measurable improvements in the functioning of its goods and labour markets. Improvements to the business environment and moves towards the liberalization of professions were injecting competition into markets and making them work better. The country was also getting its macroeconomic house in order, addressing such tricky issues as raising the retirement age and reforming the civil service.

This was just starting to bear fruit: Greece rose by 10 places in the report’s ranking, and was finally returning to growth after years of recession. Yet since the beginning of the year, Greece has been rolling back reforms, halting privatizations and reintroducing barriers to efficiency. This backsliding is not just bad for negotiations with creditors – it is bad for Greece’s long-term economic prospects.

Short-term thinking is hurting social inclusion

It is also very bad for the social inclusion that the country is so eager to achieve. The Forum’s forthcoming work on inclusive growth and development shows that Greece’s economy is far from developing in a way that ensures broad-based participation by all citizens. Despite an already very low labour participation rate, Greek unemployment is the highest in Europe, and disproportionately afflicts young workers. Many people are forced into vulnerable employment or are pushed into the informal sector, which constrains the financial resources available to deal with many of the country’s economic ills through effective taxation. In other words, the Greek people are indeed suffering and something must be done. But what?

The first thing would be to move forward with the market reforms that were already mooted. But this is not enough. In September, the Forum will publish the Inclusive Growth and Development Report. The report examines 30 advanced economies and, in the case of Greece, highlights building blocks of inclusive growth that are screaming out for attention:

• The educational system does not deliver the quality education needed for a dynamic economy and is plagued by inequities: data in our upcoming report show very different performance outcomes among students depending on their income levels. As a consequence, Greece ranks 30th out of the 30 countries for the quality of education.
• Corruption is rife in both the public and private sector, and as a result, Greece ranks 28th for business and political ethics.
• New business creation continues to be hindered by excessive red tape. According to data from the World Bank, the country ranks 28th for new business creation, and finishes last when it comes to the burden of starting a new business.

Only by addressing the underlying drivers of growth and inclusiveness will Greece be able to place itself on a sustainable footing for this generation and those to come.

Greece does not exist in a vacuum, and external creditors do have influence over short-term outcomes. But it has much more control over its economic future than one would think from the present discourse of “us versus them”. As a thought experiment, take the external forces out of the equation and we see that growth-enhancing reforms are the right thing to do for Greece’s future. Regardless of the outcome of the debt negotiations, the country must put itself on a more sustainable and inclusive path. Greece’s destiny is indeed in its own hands. It is time to seize it.

Author: Jennifer Blanke is the Chief Economist of the World Economic Forum.

Image: A Greek national flag flutters atop Lycabetus hill in Athen REUTERS/Kostas Tsironis