Income distribution, structural competitiveness and financial fragility of the Greek economy

ABSTRACT

The aim of this paper is to examine the growth prospects of the Greek economy, after the implementation of the Economic Adjustment Programs (EAPs). The main focus is on the impact of investment, and the structural competitiveness of the productive sector, on effective demand and the financial fragility of corporations. For this purpose, a Post-Keynesian SVAR model is developed which connects functional income distribution and the regime of accumulation, with the structural competitiveness and the non-performing loans of corporations. The findings indicate that the distribution of income and fiscal consolidation as established after the implementation of the EAPs have destabilized the economy both in macroeconomic and financial terms. The structural competitiveness of the Greek economy is particularly weak, the regime of accumulation is not profit-led, while the non-performing loans are in a negative relation with the capacity utilization ratio. In this respect, policies that aim to increase the capacity utilization ratio will determine the sustainability of the macro-financial system of Greece.

KEYWORDS:

• Functional income distribution
• structural competitiveness
• non-performing loans
• financial fragility
• SVAR model
• Greek economic crisis

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. For a theoretical argument in favor of fiscal consolidation as a policy option for carrying out internal devaluation see Blanchard (2007).

2. For instance, the leakages in specific branches exceed 40% of output (Argitis et al. 2018, ch., 4).

3. For a more detailed view of the competitiveness of the Greek tradable sector see Paitaridis (2018).

4. Equation 1 could be expanded through the inclusion of NPLs which would provide negative incentives to invest. However, the majority of NPLs is attributed to small and medium-sized corporations which do not undertake large investment. Thereby, the structure of the Greek productive sector indicates a priori that the inclusion of the NPLs in the rate of accumulation function would likely lead to spurious regression. In fact, impulse response functions, presented in a later section, denote a positive impact of NPLs on investment, which is counter-intuitive.

5. Vouldis and Louzis (2018) find that in the case of Greece there is a positive relation between NPLs and imports. However, their findings correspond to total NPLs and not strictly of firms.

6. For a review of the SVAR methodology see Amisano and Giannini (1997, ch., 1).

7. For a detailed discussion on the pros and cons of each econometric methodology see Onaran and Obst (2016).

8. The same practice is also followed by Vujčić et al. (2014) and Carvalho and Rezai (2016), when developing similar models for the Croatian and the US economy, respectively.

9. For a discussion regarding the impact of leverage on investment see Lavoie and Godley (2001–02).

10. The impulse response functions are based on the Choleski decomposition, corresponding to a 1% increase of the standard deviation in each variable. The dotted lines represent the ±95% margins.

11. Several exogenous variables were introduced to capture a structural break in the relation between the profit share and the unemployment rate, i.e. the share of temporary and part-time employment in total employment or dummy variables reflecting statutory changes. None were statistically significant or altered the associated responses.

12. This condition presents similarities with Minsky’s Financial Instability Hypothesis (Minsky 1992).