What's the Greek Economy Really Like?
Scott Sumner was talking about Greece months before its fiscal woes put it on the front page. This passage was so vivid it stuck with me:
Before delving into the numbers, I’d like to first try to dissuade
you from thinking about this problem in terms of mental images. To do
so, I am going to first talk about two other countries; German and
Greece. Which of those two countries has the largest GDP? Obviously
Germany. And why is Germany’s GDP much larger than Greece’s GDP? Most
of us have mental images of each country:
Germany: A manufacturing powerhouse full of sleek Bauhaus-style factories churning out turbines and BMWs
Greece: A beautiful sleepy backwater, full of fishing ports and mountain villages with donkeys walking down the street.
But it turns out that these images are very misleading-and in fact
have little or no role in explaining the wide gap between Germany and
Greece’s GDP. The three institutions cited in Wikipedia’s PPP GDP tables all
estimate Germany’s per capita GDP at about $35,500. Unfortunately, the
three sources differ on Greece, ranging from $29,000 to $32,000. Let’s
say it’s $30,500, which would make Germany about 15% richer.
The means that the reason Germany’s GDP is roughly 10 times bigger
than Greece’s is almost entirely due to it much bigger population (80
million vs. 10 million.) If you had a country of 100 million at
Greece’s level of development, then it’s GDP would be larger than that
I was skeptical at the time. “Mental image”? I didn’t spent a lot of time in Greece, but the non-tourist part I saw with my own eyes looked like the Third World. Today Tyler links to a partial resolution of the puzzle. Remember that GDP stats value government “output” at cost:
The shakeup of longstanding aspects of Greek life, from endemic tax
evasion to overstaffed offices of idle employees, has prompted fears
that widespread social unrest could unhinge a Greek recovery.
The government’s proposals for deep spending cuts already have stoked
strong resentments in a country where one in three people is employed
in a civil service that, until now, has guaranteed jobs for life.
In Germany, in contrast, it looks like only about 10% of the labor force works for the government. Knowing the Germans, it’s easy to believe that its government employees accomplish as much as the Greeks’ despite their smaller population share. This implies that 25% of the Greek labor force is, contrary to official stats, producing nothing.
So using Sumner’s other numbers – and assuming output is roughly proportional to labor force – per-capita GDP is more than 50% higher in Germany than Greece. First-hand observation tells me that’s still an understatement, but it still closes a big chunk of the gap between official stats and reality. How’s that for a mental image?