Greece's comparative advantage

Moving from a complacent tourism model to a new innovation economy

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🇬🇷 Greece's comparative advantage

What’s the first thing that comes to mind when you think about the Greek economy?

This is not a trick question.

Tourism dominates

Most people will instinctively think about tourism.

Let’s look at the composition of Greece’s exports in 2022.

Source: Harvard Growth Lab (2022)

Travel and tourism is by far the largest export category for Greece.

Transport (a fraction of the global revenues by Greek shipping magnates) and refined petroleum oils follow. We then see the agricultural sector (led by olive oil) and metals (led by aluminum production). Finally, a hodgepodge of many smaller industries.

Why are exports important? Because they show us what the rest of the world are willing to buy from us and what we can do to increase our own domestic wealth.

Greek exports suffered a lot during the crisis and then were hit again hard during the first year of COVID. But they have since rebounded and are close to an(other) all-time high, despite strong global pressures.

Source: NBG Greece Macro Flash (Dec 2024)

A large portion of Greece’s exports relies on services, primarily travel and tourism.

This brings a lot of foreign currency into the country every year. It also comes at a great cost: it has created a model of complacency based on a heavily non-innovative, highly un-diversified and low value-add mix of activity to the country’s GDP.

Making money from tourism in Greece is an easy win, which is why both the economy and successive governments have been optimizing in favor of it.

Sadly, this is also double edge sword: we have turned our service-oriented, tourism-based industry into Greece’s main product. Not just a product, but the product.

This is a mistake.

You don’t have to take it from me. Much smarter people have said so, including a trio of the greatest Greek economists alive today:

[O]ur economy’s reliance on tourism is still excessive, with 17% of the workforce being employed in the tourism or closely related sectors. This is three times the EU average and more than double other tourism-intensive countries like Spain, Italy, Croatia and Portugal.

So, what should tourism’s place be in Greece’s production model? Is this excessive dependence on tourism the result of the country’s comparative advantages, which dictate the direction of our market forces? The answer […] is “no” [.] The tourism sector’s employment ratio needs to be gradually reduced in favor of other sectors of the economy, just as the tourism product needs to be upgraded in favor of the environment and the capabilities of the country’s destinations. (Meghir, Pissarides & Vayanos, Aug 2024)

The goal here is not to vilify tourism. Greece needs it. Tourism will inevitably remain a key ingredient of its economic model. But it can no longer remain the only one.

This is why Greece needs to take the idea of comparative advantage seriously.

Comparative advantage means that a country can produce a product or service at a lower opportunity cost than its trading partners.

Looking beyond tourism, where do we find Greece’s comparative advantage today?

Where to look for Greece’s comparative advantage

21 out of 63 product categories in Greece have a comparative advantage globally.

These constitute 69.7% of Greek exports (41.9% excluding petroleum products).

Source: Piraeus Research (2024)

The top 10 categories that Greece has a comparative advantage on are the following:

• Raw skin and furs

• Tobacco and its manufactures

• Textile fibres

• Vegetables and fruit

• Dairy products and eggs

• Fixed veg oils / fats

• Crude fertilizer / mineral

• Petroleum and products

• Non-ferrous metals

• Fish/shellfish/etc.

These are all great industries and showcase a lot of interesting opportunities. However, there are not that many high-output and innovative activities in that list.

Greece has started exporting larger volumes of high-tech goods in recent years, but its comparative advantage remains in products with relatively low tech sophistication.

Exports lack technological sophistication

Economic growth is a function of both more and more complex industries. It is not enough to generate a high volume of goods and services; a country must also increase their quality and sophistication. This latter part is exactly what the Economic Complexity Index (ECI) captures.

ECI measures the different productive capabilities of countries and expresses the knowledge accumulated from them in the underlying economic activities present.

Since 2018, Greece has continuously improved its ECI ranking.

Source: ECI

In 2021/2022, Greece reached a 17 year record, coming 52nd out of 145 countries. (Here, a lower number means a better ranking.)

There is another sister metric to ECI called the Complexity Outlook Index (COI).

COI is a measure of how many complex products are near a country's current set of productive capabilities. COI strongly affects the growth of the ECI over time.

A high COI reflects an abundance of nearby, complex products that rely on capabilities similar to a country's existing production. A low COI suggests limited nearby products, making it challenging to increase economic complexity.

Source: Greece’s Product Space

Unfortunately, Greece has a very low COI, ranking 24^th out of ⁨145⁩ countries. (Here, a lower number means a worse ranking.)

This brings us to an important realization about Greece’s growth prospects: Even if Greece never experienced the deep financial crisis that started in 2009, the country’s growth would still have been low. Why? Because our main exports lack technological sophistication, commanding lower premiums in the global economy, with few adjacent high-tech products close to our current productive base.

Our level of sophistication of exports has only recently started reaching our pre-crisis levels, and it still lags far behind peer countries.

Persistent productivity gap restricts growth

There is another major problem: Greece has a deep productivity problem.

Let’s channel the holy Greek economist triad again:

The issue of productivity is crucial. In 2023, Greece had the second lowest labor productivity among the EU-27, coming only above Bulgaria. Our country’s position in this regard has been declining steadily for the past 20 years: It was in 13th place in 2007, dropping to 19th in 2014, then to 25th in 2019 and second-to-last in 2023. The decline of the Greek economy in relation to the rest of Europe is, in part, due to the economic crisis of the last decade. However, the country’s inability to change the production model, which relies on low-productivity activities like tourism, is also to blame. (Meghir, Pissarides & Vayanos, Aug 2024)

The level of productivity is heavily correlated with the level of total exports. Higher (lower) productivity tends to lead to higher (lower) exports.

Sectors like Basic Metals, Pharmaceuticals, Chemicals and Electronic Equipment that exhibit high productivity in Greece also record a high exports share.

Source: IOBE (2023)

Overall, Greece is trailing most of its EU peers in terms of productivity, even though the average Greek is working more hours than anyone else in Europe. That’s just sad.

Our appalling productivity performance is even more pronounced in high-tech and knowledge-intensive (HTKI) SMEs, one of the most critical domains for export-led growth. Between 2009 and 2023, real productivity dropped by 20% in this segment.

Source: KEPE (2024)

One silver lining is the recent rise of the Greek manufacturing sector, which exhibits both higher labour productivity than the total economy and a growing share of exports as % of GDP. But that alone is not enough and it requires much deeper efforts.

Creating more innovative exports

Economic growth is driven by continued diversification into new product areas that are incrementally more complex and can be gradually produced more efficiently. ⁨

By now, it is clear that Greece needs to build much more technologically sophisticated products and infuse significantly higher productivity in its processes. Marrying these two concepts together, this means creating more innovative exports.

Where do we stand today?

Source: Harvard Growth Lab (2022)

Between 2007 and 2022, Greece added only 7 net new types of products in its export mix, contributing to $101M in total value and $10 in income per capita.

Compare that to our close neighbor Bulgaria, which over the same timeframe has introduced 48 net new export product categories that contributed $3.7B in total value and have added $575 in income per capita.

Ouch.

Below, you can find the new products that each country introduced during 2007-2022.

Source: Harvard Growth Lab (2022)

Clearly, there is a lot of work that Greece has to do to improve.

Fortunately, we have started discussing openly about transitioning from a tourism-based economy into a more tech-driven and innovative one. We have also recognized that, while we work the longest hours in Europe, we are terribly unproductive. And even though our exports are rising, they still exhibit low tech sophistication.

Acknowledging these problems and thinking of solutions is a positive development.

Now let’s finally move from talking to acting.

Time is running out.

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🏭 Economy & Business

New tax cuts in 2025 aim to increase average incomes

Lowest number of emigrants (people leaving Greece) since 2010

New businesses set a(nother) record breaking year in 2024

Unemployment still on a decreasing path end of last year

Primary surplus until Nov at €12B, significantly above expectations

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🤖 Tech & Startups

1 in 2 young Greeks wants to build a startup, according to survey

Pharos, the Greek “AI factory”, in the words of Athena RC President

Amazon online store entering the Greek market in 2025?

Clinical studies as a new big bet for Greece

Alex Alexakis is launching a new show about EU tech

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🙌 Celebrating Greek wins

Greece is fighting back against young people’s internet addiction

Greece begins tenure as elected member of the UN Security Council

Miltos Tentoglou voted top Greek athlete for 2024

Konstantinos Palikaras 1 of 4 globally to receive the IUPS Junior Faculty Award

Messolonghi Salt Museum awarded by the Academy of Athens

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📌 Spotlight: Growth of data center market

Since 2020, Greece has been trying to establish itself as a hub for data centers.

This has attracted a lot of foreign investment (in the range of multiple billions) including from major global players like Data4, Amazon, Google and Microsoft.

Some critics have questioned the number of high-skilled jobs that will end up being created (I disagree), while others have pointed to the significant energy resources that are required in order to run such operations (that’s a much more valid concern).

I see this trend with a positive eye, as it makes Greece much more relevant for top tech companies and can push us to make better use of alternative energy sources, but also build better energy storage capabilities. It is not a coincidence that Amazon is building three utility-scale wind farms in our country.

Source: DC Byte

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