Industrialization: A Special Feature of Greece

Professor John Spraos, a distinguished Greek economist, Professor Emeritus at University College London and former economic adviser to Prime Minister Constantinos Simitis, kindly agreed to contribute to our blog. He writes:

I was discussing industrialisation with Michalis Haliassos and he suggested I contribute to the blog on the subject of its anaemic development in Greece.  Instead of writing something new, I submitted an article which I wrote for Ta Nea in 1984 (published on August 9, 1984).  While parts are dated, three key elements have continuing relevance: (1) cost competitiveness; (2) invisible earnings – tourism, shipping, emigrants’ remittances – as the source of the crowding out of industry (along the lines of what has become known as the Dutch Disease); (3) the late starter disadvantage.  At the time, the novelty element (for Greece) was the middle one.  In the current situation, industrialisation is on the agenda as part of the thinking associated with shifting the emphasis from austerity to growth. Greece has more than recouped the loss of competitiveness since pre-euro. Only Germany has done significantly better in the Eurozone.  Cost competitiveness is not a sufficient condition for industrialisation.  But it is a necessary condition.  Are we close to satisfying it?

The article in Ta Nea was originally drafted in English, as published here. A scanned copy of the newspaper page where the article appeared in Greek can be downloaded here.


A policy of industrialisation for the economic development of Greece has been a key tenet of the traditional left for more than half a century.  After World War II, the right has also come round to assigning great importance to industrialisation, though differing from the left in wanting to promote it via incentives to private initiative.

The five year plan of the present government, while not attaching exclusive priority to any one sector, nevertheless gives emphasis to the expansion of industry.  (One measure of this is the intended expansion by 500% in the share of manufacturing in national income as compared with the period 1966-80.)

The paradox of the Greek economy is that, despite the consensus about the basic importance of industrialisation, it has grown rapidly in the post-war decades – real income per head has roughly trebled since 1960 – without substantial expansion in manufacturing.  According to World Bank data, the proportion of manufacturing output to national product was 16% in 1960 and had risen only to 19% in !979.  The equivalent proportion for the industrial market economies as a whole was 27%, also for 1979.  (The year 1979 is chosen to avoid the cyclical distortions of the current recession.)   But this comparison flatters Greece because  about 40% of those employed in so-called manufacturing are in units which employ less than ten people and more than a quarter in less than five people – not manufacturing then, but handicrafts.  Another facet of low industrialisation is that only a quarter of current account imports are covered by manufactured exports, a proportion smaller than many underdeveloped countries.  (And, while growth of manufactured exports as a proportion of total exports was rapid from 1960 to the early 1970s, it has slowed since.)

This coincidence of a relatively high level of economic development, as measured by income per head, and of a low level of industrialisation is explained by the peculiarity of the Greek economy which consists of having three large sources of foreign exchange – tourism, shipping and emigrants’ remittances – which cover, between them, 40 of all imports (including invisible imports) and, in so doing, maintain a high foreign exchange value of the drachma which, in turn, also makes uncompetitive Greek manufactures vis-à-vis foreign products.

If we did not have tourism, shipping and emigrants’ remittances, it is almost certain that we would have had a much bigger manufacturing sector and more industrial exports.  Whether our economic prosperity at the present time would have been higher or lower no one can say, but even if it would have been higher, there is no point in shedding any tears since history cannot be rewritten.

The interesting question is whether Greece, due to its peculiarities, has now superseded the stage of extensive industrialisation and whether, therefore, a policy emphasis on industrial expansion may be counter-productive.

Wages in big urban centres in Greece are now half to two thirds of those in advanced industrial countries.  This would have given us a strong competitive advantage in world markets for manufactures if we already had the necessary manufacturing capital, manufacturing infrastructure and an entrenched market position.  But is it enough as a launching platform when we start almost from nothing. 

Hong Cong and Singapore will continue to compete strongly in world markets even when their average wages reach two thirds of those in advanced industrial countries.  But it is virtually certain that they could not have started on the path of industrialisation if initially their wages were as high as half or two thirds of the developed countries.

Equally, for Greece, some thirty years ago, when wages were less than a quarter of the advanced manufacturing countries (which were then dominated by the US), export-oriented industrialisation (necessarily export-oriented because of the small home market) was a feasible option.  By offsetting the then enormous productivity gap, the low wages would have provided a potential for price competitiveness which could have overcome the disadvantage of a late start in the industrialisation race.  But since then, while the productivity gap has narrowed, the wage gap has narrowed by more – thanks to the contribution of tourism, shipping and emigration – so that price competitiveness has not improved and the potential for improvement has greatly diminished.

The view that competitiveness compatible with large scale industrialisation may not be feasible any longer is reinforced by two important considerations.  First most underdeveloped countries in the world also seek to industrialise and countries such as Brazil, Mexico and India, which have a better industrial infrastructure than Greece and a far bigger domestic market, are characterised by wages which range from ½ to 1/10 of Greek wages; what is more, for such countries industrialisation is essential for thei development because they are too big to be able to find substitutes to industrialisation of the sort which Greece has been able to find.  Second, the advanced industrial countries are facing excess capacity in their manufacturing sector, not just as a cyclical phenomenon associated with the current recession, but a long un phenomenon due to the switch of demand towards tertiary products as standards of living increase, with the result that industrial firms in these countries fight more fiercely than ever for their share of the market and against its erosion by new competitors.

This is not to say that some industrial enterprises will not manage to flourish: in the processing of agricultural products, in the supply of some agricultural machinery and of equipment associated with ships and shipyards and, perhaps, in a small way, even in areas of new technology, opportunities for some industrial expansion which is economically and socially desirable can be found or can be created.  All these areas are rightly emphasised in the current Five Year Plan.  But the preceding thoughts suggest that, in total, the contribution of further industrialisation to Greek economic development will be modest.

For more than a modest industrial expansion there will be a price to pay in the form of a reduction in real wages and this price is unlikely to be acceptable to Greek workers, if they have a choice.

Of course, one can conceive a scenario in which they have no choice: a deterioration of Greek-Turkish relations can raise tensions permanently to a level that repels tourists and third world countries may claim a high share of their trade for their own ships, thus restricting the earnings of Greek shipping.  In such a case one of two things will happen: either a big new wave of emigration or a big reduction in real wages which will make a big industrial expansion both feasible and desirable.

Yiannis Spraos

About M_Haliassos

Goethe University Frankfurt

This entry was posted in Economic development, Macroeconomics, Product market. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *