Economy into Greece - Case Study Example

GREECE ECONOMY Introduction Greece is a European country which is also referred to be the Hellenic Republics. It is located in the Southeastern Europe on the Balkan Peninsula bordering Alabina, Macedonia, Blagares and Turkey. The Aegean Sea is found on the east of the Greece and Ionia Sell lies in the West. Greece lies in the boarder of Europe, Asia and Africa. The capital of Greece is in Athens and other major cities in the country include Thessaloniki, Patras, Heraklion, Volos, Loannina and Larisa. The country has a long spinning history and it is considered to be the birth place of the democracy, the western philosophy, Olympic Games, the western literature, political sciences, major mathematic and science principles, and arts like drama, tragedy and comedy. It is home to some of the world known scholars who have made great contribution to the modern world of education. Greek is a member of the European Unions after joining in 1981. It also a member of the Economic and monitory union of the Europe union which it joined in 200. It is also a member for NATO which it joined in 1952 and OECD since 1961. Greek is credited to be the home of civilization in Europe. This happened in the Aegean Sea which has been shown as the home to the first civilization in Europe. The Minoa civilization in the Crete and Mycenae civilization happened later in the mainland of Greece which emerges with Greek cities of Peninsula and spread to other parts of Europe. At the same time Greece has been able to develop a world class economy. Ti has one of the growing economies in Europe which it has been able to sustain since 1950s. There has been a major shift in the economic constant of Greek for all that time. It has shifted from agrarian economy to a technology driven economy recently. The country has developed a capitalist economy with a GDP of more the $305.595 billion as per the 2006 data. The country has diversified economic activities including tourism, shipping industry, banking, manufacturing and construction, and telecommunications. The country has also been resettled as regional hub for many developing multination companies as they try to venture in the three continents where Greek sits at a juncture. The country has been able to develop a standard economy and there has been an emerging middle class in the country. It has been raked 24th in the 2006 HDI on the quality of life index. According to the IMF, the country has a per capital income of $35,166 which has been places at the same level with other European countries like Germany, France, Italy and others. A historical review of Greece economy Since 1950, Greece stared economic reforms which were aimed at ensuring that the country developed a sustainable economic development plan. From 1950, the country began transforming its economy from an agrarian economy to service and manufacturing industry. Even if there was a slow progress in the economic performance at that time, the government was able to sustain a standard 7% economic growth rate from 1950 to 1970 which has been described as a the economic miracle of the time. At the same time, the government came up with economic policies which were aimed at attracting foreign investors in the country in order stir that economy. Government economic policy there was at the time targeting foreign investors, state intervened in the economic planning and the growth too of tourism. The tourism sector became a major player in the economic growth of the nation. After three decades of economic miracle the economy again stagnated in 1979 and since then it has been struggling to resume it earlier growth without necessarily causing increased inflation rate. (CIA World Fact book, 2006) Until the mid 1970s, the govern policies in Greece had been aimed at ensuring that there was principle look at the growing agriculture and industry sectors, controlling the prices of goods an services and the rate of inflation, improving the financial status of the operating firms, development of natural resources and the creation of basic industries and encourage diversification of the existing industries. In 1975 the government which was in power took a series of measures that were aimed at curbing the rising rate of inflation and address the problem of balance of payment deficits. The government also put in place anew energy program which was aimed at diversifying the source of energy in order to increase the energy security of the country. In the new program the government targeted coming up with plans to exploit the oil and lignite reserves which were abundant in the country. It was also aimed at utilizing the uranium reserves in the northern part of Greece. Under economic plan there were also increase efforts which were aimed at substituting substitution in all the key economy sectors. In the same year, the governed also came up with a new policy that was aimed at strengthening the confidence of the national currency. Therefore the value of drachma was no longer quoted in terms of a fixed link to the US dollar and from then it was based on daily average which were taken from the trading partners of Greece. The coming of a socialist regime in 1981 had a promise of ensuring that there would be a fair distribution of income and wealth by promoting democratic planning and taking enough measure to deal with the rising rate of inflation. The new regime also assumed office with a promise that it would encourage increased productivity in the economy by diversifying the production sectors. (Richard, 1993) The new regime imposed price controls and also controlled the credit rates. It also begun to restructure the public corporations but it was very cautious when it came to the socialist practice of controlling key economic sectors. The government required a detailed study to be made first in order to come up with a framework of the key sectors that it would have to impose control. The new regime also develops police which emphasized a balance regional growth which was coupled with technological modernization with a special outlook on the agricultural sector. In 1990, a conservation government came to power and adopted an adjustment program which was aimed at reducing prices and wage increment. It also aimed at reducing the public sector deficit from 13% to about 3%. The regime also privatized more that 28 industrial companies. In the race tires, the main goal of the regime has been the admission of the country into the European Monetary Union. Therefore there have been developments of program that have been aimed at tackling high inflation rates, unemployment, and bloated public sector service. By late 1990s, it was evident that the policies that were being implemented by the regime were bearing fruits. Greece had gained admission to EMU in 2001 and had adopted euro as it new currency by 2002. The Greek economy had been growing at above average rates in 2003. There are still high rate of unemployment and inflation compared to other euro counties. By 2002, the government debt in the country has been standing at 99% of the total GDP but it has been benefit from EU aid of bout 3.3% of the GDP. There has also been effort to reverse the gains of the socialist regime and there has been increased privatization of the state-owned enterprises although it has been moving at a very slow pace. There have been efforts to privatize most of the state owned companies especially in the telecommunication sector, aerospace, energy sector and others. The EU membership There were many advantages that Greek gained as a result of becoming a member of the EU since 1981 when it was admitted. The country last held the rotating EU presidency in the first half of 2003. Even though the businesses have been facing a fierce competition from the other EU businesses, Greek companies have been slowly adapting to the level of competition from the EU. One of the most important that the government undertook when it was admitted to the EU was the liberalization of the market and the economy general. As a result there was removal of price control and other practices. The country has been benefiting a lot from the EU budget. For example in 2004, transfer form EU accounted for 3.6% of the total GDP and in 2005 it was estimated to have contributed 3.2%. Between 1994 and 1999, the Greek economy is said to have benefited from $20 billion from EU structural funds which were used in modernizing the Greek transport system in preparation for the 2004 Olympic Games. The funds were also used in the construction of the new international airport near Athens which was opened in 2001 after the new Athens subway system was opened. In 2000-2006, the EU structural funds have accounted for more than $24 billions. However the rate of the structural development in the country has been hampered buy some factors which have been associated to the bureaucratic nature of the government which have slowed the rate of issuing of tenders. Therefore it has been estimated that most of the funds have not been absorbed in the projects and they are likely to be returned to the EU. The EU has also allocated the same amount of $24 billion funds to Greece for the year 2007-2013. These funds have been making a positive impact in the economy of the country as they have been contributing to the current account balance and also they have further reduced budget deficit. The EU funds will continue to finance major public conditions and other economic development projects which will help to upgrade the competitive of Greece as an investment destination. The funds have also helped the country to improve the living condition of its people, address the disparities between the poor and the rich and bring equitable development of regions. The euro economy There has been dramatic development of the Greek economic since the country adopted euro as the main currency in 2002. The adoption of euro helped Greece to move from a higher inflation risk drachma to a more stable euro. The country also had an access to competitive loan rates and it was also accessing the low rate of the Eurobond market. There was a dramatic increase in consumer spending which was a big boost to the economic growth of the nation. This also resulted to a more reliable fiscal policy which started in 2002. This came with a combined expenditure and was also associated with the preparations for the Athens 2004 Olympic Games. This resulted to excessive deficit and debt in between 2003 and 2004. By 2004, the government defect was estimated to have reached 6.6% of the GDP. There was a lower post Olympic spending and therefore the government defect is projected to have reaches a low of 4.3% of the GDP. This had a combined debt ratio of 107.9%. However the government came up with policies that were aimed at reducing the government debt further to 2.6% in 2006 and to tighten the final polices in the financial sector which would come under a very tight EC excessive defect surveillance program. In 2005, the Greek economies were recorded to have grown at 3.6%. This was remarkable performance of the economy since the 1970s when it had preformed at an average of 7%. This rate of growth had many effect on different sectors for the economy and also on the social life of the people. There was a remarkable drop in the rate of unemployment which dropped to 9.8% from the earlier 10.4% in 2004. However there is still a high rate of unemployment in the country especially for those below the age of 27 years. There has also been marked Foreign Direct Investment (FDI) in the country and the efforts to attract more investors in the country have not worked as earlier planned by the economic regimes. However there has been increased investment of Greek in the Southeast Europe which shows a marked trend of increased outflow of FDIs from Greece. In the recent times the service industry has been one of the fastest growing industries in the country. It has been emerging as one for the fastest growing sector of the Greek economy. This has been due to various growing sectors in the economy. For example it has been recorded that in 2005, there were more the 14 million tourists who visited the country. This came with increased revenue of more than 10 billion euros. There has also been recorded growth in the transport industry mainly the tourist industry which has been one of the key industries in the Greek economy. The transport sector has also been growing at a rapid rate which has been enabled by the growing number of tourist visiting the country who needs to access various sites. The shipping industry has also been recording growth due to the growth of cruise tourisms which has become one of the most recent developments in the tourism industry. (Barry and Tryphon, 2006) Industrial growth has not been segment to one sector only. There has been increased growth of other industries like the food industry and high-tech telecommunication industry. However there has been a slowing growth in some sector like the textile sector which has recorded decreasing growth. The agricultural sector is still one of the major employers of the Greek economy though it is characterized by small farms and low capital investment. Though the sector has received a major structural funding from the EU, it has not been able to recover full to it former stature. The sector employs about 12% of the workforce in the country. (Greeka.com, 2008) The ship industry has been one of the most important sectors in the country. Traditionally Greece has been descried as a seafaring nation. In March 2005, Greek owned merchants had a total of 3,3800 ships which represent 8.7% of the world merchant fleet. This fleet had been responsible for handling more the 16.5% of the world tonnage. The maritime industry has been one of the most important industries in the history of Green since the ancient times. Even today it remains to be one of the most important sectors of the economy accounting for more the 4.5% for the total GDP and employing about 4% of the total workforce. The maritime industry also represents about a third for the country trade deficit. The maritime industry has been growing since the 1990s. The investment that was made by Onassis and Niarchos helped to double the size of Greek fleet at that time. Up to date Greek has the largest maritime fleet in the world. The industry also ranks the first in the world in terms of tanks and bulk carriers. It has been ranked fourth in the number of containers and fourth in other ships. (Engber, 2007) The performance of the Greek GDP in recent times The Greek GDP has been showing signs of revitalized growth in the recent years. It has been performing well despite the hurdles that have been slowing the economy. Although the rate of growth of GDP has been undermined by the rate of the unemployment in the country, there has been marked improvement in the performance of the GDP since Greece was admitted to the EU and since it adopted euro as its main currently. There have been reduced rate of inflation which means that the economy has been stabilizing. With the economy growing at 4% per year, the GDP has rhymed with this rate of growth. There has been controlled deficit and reduced rate of domestic borrowing has also helped to reduce the interstates and likewise increased consumer power. The stability of the GDP has also been rooted on the growing number of foreign countries which have been investing in the country. The position of the country in retaliation to Europe, Asia and Africa has made it an ideal investment place for many investors who have been wiling to operate in the three continents. Therefore Greece is chosen as the center for the three continents. Let us look at the performance of the GDP. If you look at the following data you will find that it is extremely volatile. The GDP has not achieved a stable status compared to other nations in the region. Adopted from: Hugh, E. (2007). Greek GDP. Greece Economic Watch, December 2007 This shows that the GDP has been prone to various economic factors that have been prevailing in the region. As a result it has been recording negative and positive growth from time to time owing to the prevailing circumstance. This has been due to the government polices that have been aimed at addressing the issue of stable fiscal polices. For example, the ministry of finance has been changing various policies since 2000 in order to come up wit a policy that best fits the economic condition in the country. When some of volatility is ironed out, the grasp below will show the performance of the GDP on quarter year growth rates. Adopted from: Hugh, E. (2007). Greek GDP. Greece Economic Watch, December 2007 The trend in the performance of the economy can be traced to the earlier economic polices that have been adapted by the previous regimes. The transaction of Greece to a socialist regime and subsequent joining of the EU and the end of the socialist regime led to changes in different economic polices that could have affected the performance of the GDP. Let us look at the performance of the GDP since the 1960s as illustrated by the graph below. We find a peculiar trend which shows the same volatile and has been witness in the below graphs. In the 1960s, Greece had a storm GDP that it has not been able to realize in the recent times. But we observe a general trend of fluctuations in the GDP as in the above graphs. The GDP is affected by various factors some which may not be controlled by the environment but the government fiscal polices have a lot of effect on the performance of the GDP. Adapted from: Hugh, E. (2007). Greek GDP. Greece Economic Watch, December 2007 This observation gives us a particular image that we can deduce from the graph. The rate of GDP had been highly growing up to 1970s when it suddenly took a noose diver. Despite the recent high economic growth rate that has been witnessed in the recent years, the general performance of the economy had slowed since the 60s and 70s no wonder those years were referred to as the economic miracle days. This kind of evolution is however based on some common factors that can all be attributed to the growing economies in the world. First all developing economies usually experience a quite rapid growth rates of catch up growth. For example you can look at what is happening in China and other emerging economies. These economies try to performance their best in order to catch up with the developed economies. All the catch growth have been shown to be technological and efficiency driven. But this is affected by demographic dividend period which could be seen in Greece in 1960s and 1970s. After this period then there is the peak performance state which is characterized by high participation, low dependency ration, and majority of the workforce are in their production 30s and 50s. This was what had been attributed to the performance of Greece economy in the 1960s. But the demographic situation has changed and majority of the workforce are now in their ages years. This could be one of the problems why the GDP of Greece could have plummeted earlier and now it is beginning to emerge as another cycles of prime age workers come to the workforce. Conclusions and recommendations There are several problems that have been facing the Greece economy on the way it has been performing in the recent years. Although there have been government policies that have been put in place in order to stir economic growth in the county, there have been imminent challenges that are being posed by various problems in the country. One of the major problems that have been challenging the economic development of the Greece economy has been the problem of unemployment. Though there have been many efforts that have been aimed at reducing the rate of unemployment, the efforts are working very slowly. The rate of unemployment has been affecting the productive sector of the country that is at their 20s. The rate of unemployment is still standing at more than 7 percent which has been one of the greatest challenges that the country has been facing. The current strategies that are being implemented by the government are to look into the way in which it can help to create jobs for the youths and majority of those who are not employed. The other problem that the country has been facing in its efforts to address the economic change is deteriorating social security. Although this problem has been addressed over the years, there has not been any mechanism that has proved that it can work to deal well with the problem. There have been efforts of creating a social state during the socialist years which was replaced with government policies of creating a welfare state but all these efforts have not worked well for the government. Greece has also been fairing bad when it comes to the tradable goods sector. Still the country does not have a well developed export sector as compared to other EU countries. The country FDI policies have continued to be unattractive to the foreign investors which make it the least attractive investment destination in the region. There is need fro the country to fast rack its economic policies and domestic investment policies in order to make it attractive investment destinations. The country still need to take a close look at its privatization polices in order to make the process fast and attract foreign investors in these public corporations. There is need to privities most of the public companies which have been underperforming for along time not in order to decrease their deficiencies. References Barry, B. & Tryphon, K. (2006). Economic growth in Greece: Past performance and future prospects. Available at http://www.cepr.org/pubs/dps/DP2852.asp CIA World Fact book, (2006). Greece: Economy. Retrieved from http://globaledge.msu.edu/countryInsights/economy.aspcountryID=54®ionID=2 on 13th May 2008 Engber, D. (2007). So many Greek shipping Magnates. Maritime Journal, Vol. 2(2):78-90 Greeka.com, (2008). Greece Economy: information about economy of Greece and Greek Islands. Retrieved from http://www.greeka.com/greece-economy.htm on 13th May 2008 Hugh, E. (2007). Greek GDP. Greece Economic Watch, December 2007 Richard, C. (1993). Greece in the 1980s. 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