Economic Stabilization and Progress in Greece, 1953-61 Contribution of Foreign Exchange and Trade Reforms

GREECE CARRIED OUT a sweeping reform of its foreign exchange and international trade system on April 9, 1953. The drachma was devalued, its official parity being reduced by 50 per cent. Multiple exchange practices were eliminated. A little later, a series of bold measures were taken to liberalize imports.


GREECE CARRIED OUT a sweeping reform of its foreign exchange and international trade system on April 9, 1953. The drachma was devalued, its official parity being reduced by 50 per cent. Multiple exchange practices were eliminated. A little later, a series of bold measures were taken to liberalize imports.

GREECE CARRIED OUT a sweeping reform of its foreign exchange and international trade system on April 9, 1953. The drachma was devalued, its official parity being reduced by 50 per cent. Multiple exchange practices were eliminated. A little later, a series of bold measures were taken to liberalize imports.

In the present study, the situation that made the reforms necessary is outlined briefly. Next, the reforms themselves are described in detail, and their influence on the country’s monetary stability, balance of payments, and growth is appraised. A final section is devoted to the conclusions which may be drawn from the study.

Background of the Reforms1

By mid-1950, thanks largely to foreign aid, production in Greece had recovered from the devastation it had suffered during World War II and the ensuing years of civil strife. Gross national product (both total and per capita), in real terms, had risen above that of prewar years. The country, however, was still plagued by inflation and the inflation-conscious attitude of the public.

Monetary and credit conditions were most unsatisfactory. Owing to the public’s lack of confidence in the drachma, the gold sovereign performed most of the functions of money, especially its store-of-value function. The price of the gold pound was regarded as a financial barometer. When it rose, other prices were expected to follow suit. Consequently, the monetary authorities found it necessary to peg the free market rate of the sovereign by importing and selling sovereigns. Valuable foreign exchange holdings were thus wasted.

Because of the inflation and the opportunities for speculative investments opened up by it, the demand for loanable funds was strong. On the other hand, the inflationary conditions discouraged money savings and hence the supply of loanable funds. This situation, as well as the increased risks and costs of lending under such conditions, kept interest rates extremely high—illegally, up to 30-36 per cent per annum on private loans. Banks lent money on much better terms, prescribed by the Government. Yet, as they were not permitted to offer their depositors attractive interest rates, deposits remained very low; therefore, the banks’ ability to extend credit was severely limited.

In order to channel bank funds into the most “productive” avenues (at least in the first instance), an intricate network of credit regulations was developed, which resulted in an abnormal pattern of interest rates and which was partially ineffective, since the regulations were often evaded. To supplement the inadequate volume of private bank credit, the Bank of Greece made direct advances to selected categories of borrowers. In so doing, however, the Bank increased the money supply and contributed to the inflationary situation.

Given the regressive structure of the tax system, the inflation—and substantial tax evasion—complicated the task of balancing the state budget and removed any possibility of government borrowing from the public. In turn, budget deficits—necessarily financed by the central bank—aggravated the inflationary pressures.

Furthermore, the inflation hampered efforts to improve the country’s external accounts. Despite repeated devaluations, which had reduced the official parity from Dr 150 to Dr 15,000 to the dollar between 1944 and 1949, the currency was overvalued. To cut foreign deficits, reliance was placed on export subsidies, quantitative restrictions on imports, and bilateral trade agreements. Not only did these measures fall short of achieving their objectives; they also resulted in considerable corruption in the administration, very high prices for the public, and excessive importers’ profits, most of which the Government was unable to tax.

Inevitably, the inflationary conditions undermined economic development. The attention of businessmen was diverted from productive to financial investments, such as gold hoarding or the purchase of foreign exchange. The ability of the Government to undertake public investment projects was curtailed. As an anti-inflationary device, it became necessary to “freeze” part of the U.S. aid funds in counterpart accounts instead of spending them for development purposes.

During the second half of 1950, the economic situation tended to worsen as the country was confronted with two pressing problems: (1) a resurgence of inflationary pressures as a result, primarily, of the Korean war and (2) the need for adjusting to a considerable reduction in U.S. aid. To deal with these new conditions, the Government progressively instituted a stabilization program involving a tightening of credit, a steep reduction in the Government’s current deficit, a drastic curtailment of development expenditures, and reforms of the foreign exchange system designed to reduce the balance of payments deficit. At the expense of increased unemployment and a small decline in industrial production and gross national product, this program, aided by the abatement of international inflationary pressures, succeeded by 1952 in improving the balance of payments substantially and effectively halting the upward movement of prices. It thus paved the way for the more comprehensive reforms in 1953.

The Reforms

As stated above, the reforms in 1953 included a devaluation of the official parity of the drachma. The old parity had been Dr 15 = US$1.2 However, subsidies had been granted to exporters either in the form of direct payments or in the form of import rights. It has been estimated that, with these subsidies, the “average effective rate” for exports was Dr 20.9 = $1 shortly before the devaluation. Again, “contributions” were levied on imports, ranging up to 200 per cent of the foreign exchange value involved. These “contributions” raised the “average effective rate” of the import dollar (not including tariffs and other customs duties) to an estimated Dr 17.6.3 A calculation made for purposes of this study shows that immediately before the reforms “the purchasing power parity equilibrium rate of exchange” was Dr 20.4 = $1.4 As a result of the Government’s anti-inflationary program—and certain special factors—the free market rate for the gold sovereign had fallen below the official ceiling before the reforms. The black market U.S. dollar rate had also declined and was Dr 15.59, or only slightly above the official parity, at the end of March 1953.

The Greek Government decided to set the new official parity at Dr 30 = $1. It argued that prevailing free market rates and effective import and export rates, as well as purchasing power calculations of the type given above, underestimated the “equilibrium rate of exchange” which, of course, may never be determined with precision. The new 30-to-l rate was chosen because it was judged high enough, not only to eliminate the existing overvaluation of the drachma, but also to absorb any primary and secondary price effects of the devaluation itself. It seemed high enough, therefore, to ensure that the devaluation would be a once-for-all adjustment, and that another change in the external value of the drachma would not be needed for a long time to come.

A second feature of the reforms was the elimination of multiple currency practices. However, it was decided that a few export taxes and import subsidies were needed on a temporary basis. The export taxes were applied to a few commodities, such as cotton, rice, and olive oil, which were essential for domestic consumption and had received relatively low subsidies prior to the devaluation. The import subsidies were restricted to a limited number of essential foodstuffs and raw materials. These temporary exchange measures were intended to delay the inevitable increases in the cost of living and thus help the economy to adjust gradually to the new exchange rate. Moreover, the export taxes were designed to absorb the windfall profits of producers and exporters and to prevent a steep decline in export prices in terms of foreign currencies.

Third, the reforms included a series of steps liberalizing imports. Import quotas were abolished, except those on a few luxury goods (for which import licenses were liberally granted, however) and on six agricultural commodities with respect to which farmers presumably needed protection. The elimination of quotas was not restricted geographically, but freed imports from practically all countries, including the dollar area. Furthermore, various administrative procedures in connection with imports were liberalized, and all import monopoly privileges were withdrawn, except for a few held by the Government or the Agricultural Bank on behalf of the Government. Finally, importers were again allowed to make extensive use of foreign suppliers’ credits for specified purposes and maturities.

The fact that the foreign exchange system was unified at Dr 30 = $1 meant that for many imports (“luxuries” and items competing with domestic production) “effective exchange rates” remained unchanged or were actually reduced.5 The Government felt it necessary to take certain measures to mitigate the potentially adverse effects of this result on home industry and the balance of payments. Thus, domestic bank financing for importers was severely restricted, and luxury taxes were increased. Specific tariffs were raised by 33% per cent in accordance with provisions of the General Agreement on Tariffs and Trade (GATT), which permit adjustments proportionate to changes in the local price of the sovereign. (Subsequent to the reforms, the exchange rate of the sovereign in the free market rose to about Dr 300. Nevertheless, the Bank of Greece announced, and has since—with a few exceptions—adhered to, a policy of abstaining from interventions designed to prevent a rise in the rate of the gold pound.) A permanent tariff committee was established to consider and submit recommendations on appeals for higher protection and to study the tariff system with the object of modernizing it and perhaps making it more restrictive. However, the measures just enumerated— although adequate to offset the reductions in “effective” import rates —did not prevent a substantial decline in the prices that the Greek consumer had to pay for many foreign goods. This was due to the fact that the liberalization policy increased the availability of these imports on the market and thereby eliminated the scarcity prices— considerably above importers’ costs—which had formerly prevailed under the regime of quantitative restrictions.

Contribution to Domestic Economic Stabilization

For some time, the ultimate success of the reforms remained uncertain, because it was still to be demonstrated that domestic price stability could be achieved and defended for more than a temporary period. The primary and secondary effects of the devaluation led to a steady climb of prices which was not halted until about the middle of 1956, when the wholesale price index had risen to a level 50 per cent above that of 1952 (see Table 5, p. 142). Thereafter, the Greek economy moved forward under conditions of price stability that were remarkable by any standards, inasmuch as wholesale prices rose by only 3.7 per cent from 1956 to 1961.

An examination of the causes of this stability indicates that it owed much to the earlier reforms. A growing conviction among the public that both a realistic parity for the drachma and, in general, a stable foreign exchange system had been established inspired stronger confidence in the currency. The public’s tendency to flee from the drachma—which was one of the most virulent inflationary elements in prior periods—gradually subsided. Moreover, the liberalization of imports proved to be a powerful anti-inflationary factor. It eliminated “scarcity” prices for formerly restricted imports, thus exercising an indirect downward pressure on the price indices.6 By allowing importers to accept foreign suppliers’ credits, it also helped to ease the capital shortage and to reduce interest rates. Another of its stabilizing influences was that incipient inflationary forces, whether of the demand-pull or the cost-push variety, were channeled into imports. While in these and other ways the reforms can be said to have created a solid framework for monetary stability, the credit for preserving that stability is due, of course, to the Government’s economic policy following the reform measures and to its determination to improve the current budget, not to push the development effort to a point beyond the nation’s means, and, in general, to avoid excessive monetary expansion.

Success in the struggle against inflation brought, in addition to price stability, a number of other interesting developments. In the first place, the gold sovereign declined in importance in the Greek monetary setting. The Bank of Greece, consequently, was able to discontinue—beginning in 1953—the policy of pegging the gold pound at a fixed rate. Nevertheless, the sovereign rate on the open market fell appreciably, while the sovereign/dollar cross rate in Athens decreased to levels prevailing in other European markets and in the Middle East. An even sharper drop would have occurred, perhaps even enough to create profitable arbitrage opportunities for exports of gold pounds, except that the monetary authorities made extensive (net) purchases of such pounds to build up the country’s gold reserves.

The waning of the public’s interest in gold was paralleled by a build-up of its deposits in the commercial banking system, especially after 1956 when the effects of monetary stability were reinforced by the Government’s decision to raise interest rates on bank deposits. Between 1952 and 1961, demand deposits rose from Dr 0.7 billion to Dr 3.8 billion; savings deposits from Dr 0.08 billion to Dr 12.9 billion; and time deposits from Dr 0.01 billion to Dr 1.5 billion.

The growth of deposits enabled the banking system to expand its credit substantially. Total bank credit outstanding rose from 17.1 per cent of gross national product (GNP) at current prices at the end of 1952 to 29.7 per cent at the end of 1961. It therefore became possible eventually to lower the ceilings for interest rates on bank loans,7 while in the nonbank loan market interest rates fell to a range of 12-16 per cent per annum by 1961, compared with 30-36 per cent in 1952. Furthermore, the monetary authorities were able to eliminate many quantitative and other restrictions on bank lending and to curtail the Bank of Greece’s direct advances to the economy.

Through the post-reform period, very large increases in the money supply were absorbed by a continuing decline in the income velocity of money—and to a lesser extent by an expansion of the monetary sector of the economy—and had, consequently, no inflationary repercussions. Specifically, from 1952 to 1961 the GNP at current prices rose by 187 per cent whereas the money supply increased by 400 per cent. This corresponded to a decrease from 11.8 to 6.8 in annual velocity.

Finally, there was a marked improvement in public finances. This reflected determined efforts to progress in that direction and played an important part in safeguarding monetary stability. However, monetary stability, once achieved, helped the Government by eliminating a basic budgetary difficulty which it had encountered under inflationary circumstances, namely, that of having to make expenditures at prices higher than those which pertained to part of its corresponding tax revenues. Furthermore, in an environment of stable prices it became possible for the authorities to remove gradually some of the subsidies which they had granted formerly, most notably the subsidy on bread. Between the fiscal year 1952/53 and 1961,8 current expenditures rose by less than 144 per cent, while current revenues increased by approximately 167 per cent (Table 1). In fact, beginning with 1957 there have been moderate surpluses in the current budget, which totaled Dr 3.9 billion ($130 million) by the end of 1961 and covered one fourth of the corresponding deficit in the investment budget. Financing the deficit in the investment budget was also facilitated by two other factors directly associated with the new monetary climate. In the post-reform years, but particularly after 1957, Treasury borrowing from sources other than the Bank of Greece became feasible once more.9 By the end of 1961, the Government, and the government-controlled Public Power Corporation, had sold almost Dr 4.2 billion ($140 million) of long-term bonds, some of their issues being oversubscribed by an eager public. An additional Dr 3.6 billion ($120 million) of Treasury notes had been placed with the banking system, which had, on occasion, displayed a desire to buy such notes considerably in excess of legal requirements.10 The second factor was that the authorities could utilize all available counterpart funds (resulting from foreign aid, loans, or reparations) to cover the deficit of the investment budget. (It will be recalled that such funds had had to be partly “frozen” in the pre-reform period.) As a result of these developments, the Government was able to increase its investment expenditures (not including similar outlays by government controlled enterprises) from Dr 1.2 billion in 1952/53 to Dr 5.1 billion in 1961 (a 325 per cent increase), with no inflationary consequences for the economy.

Table 1.

Greece: Budget Data, Fiscal Years 1952-611

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Sources: Figures for 1952-55 have been provided by the Economic Research Department of the Bank of Greece. Those for 1956-60 have been based on data from the Bank of Greece, Economic Research Department, The Greek Economy in 1960 (in Greek, Athens, 1961), pp. 52-53; and those for 1961 have been based on data from the Bank of Greece, Economic Research Department, Monthly Statistical Bulletin, October 1962, p. 53.

For 1952-55, the fiscal year covers the 12 months ended June 30 of the year given; for 1956-61, the fiscal year corresponds to the calendar year.

Less than 50 million drachmas.

Effects on the Balance of Payments

One of the main purposes of the reforms was to strengthen the country’s balance of payments position. The results are shown in Table 2. Despite the reduction in foreign governments’ grants and reparations between 1952 and 1961, Greece’s foreign exchange reserves rose over the same period from $71.9 million, or less than three months’ imports, to $250.5 million, more than five months’ imports. Thus, Greece acquired a comfortable cushion against potential adversities in its external accounts. The following brief observations are intended to clarify the role of the reforms as they affected exports, receipts from invisibles, the capital inflow, imports, and payments for invisibles.

Table 2.

Greece: Balance of Payments, 1952-61

(In millions of u.s. dollars)

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Sources: International Monetary Fund, Balance of Payments Yearbook and International Financial Statistics.

These figures are based on data from International Monetary Fund, International Financial Statistics. They exclude the 1946 stabilization loan from the United Kingdom to Greece; this loan was not drawn on, and it was repaid in installments during the period covered by the table.


An increase in exports made a substantial contribution to the improvement in the balance of payments in the period 1953-58. Export receipts (on a payments basis) rose uninterruptedly to a record total of $243 million in 1958, which was more than twice their value in 1952. This increase may be ascribed to a number of factors, including economic expansion in Greece’s major trading partners, the Western European countries, the reduced need of these countries for U.S. assistance, and their increasing willingness to procure agricultural commodities from their prewar Eastern European suppliers rather than through U.S. aid-financed surplus disposal programs. However, the devaluation, too, proved to be a powerful stimulus to exports, its effectiveness being due to favorable conditions on the side of both demand and supply. Thus, the elasticity of substitution between Greek and competing foreign commodities turned out to be high. A particularly extensive substitution appears to have occurred at the expense of Turkey, the keenest rival of Greece in world markets. This is clearly demonstrated in Tables 3 and 4, showing for these two countries total export proceeds, the volume of exports of tobacco, cotton, raisins, and currants (Greece’s four major export products), and ratios of these data relative to averages for earlier years. On the other hand, the domestic supply of export products was aided initially by the drawing down of large stocks accumulated during the preceding period of inflation and export difficulties. But the available supplies continued to expand, as increases in current output were made possible by the removal of acreage restrictions in force before 1953, by the utilization of industrial capacity that had been idled by the deflationary program of 1951-52, and by the employment of new capacity that reached the operational stage as more investment projects were completed.

Table 3.

Greece and Turkey: Annual Average of Exports, 1951-52, 1953-58, 1957-58, and 1959-61

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Sources: United Nations, Yearbook of International Trade Statistics, 1960, p. 13; International Monetary Fund, International Financial Statistics, September 1962, p. 38; and Food and Agriculture Organization of the United Nations, Trade Yearbook, 1954, 1957, 1959, 1961, and 1962.
Table 4.

Greece and Turkey: Ratios of Greek to Turkish Exports1

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Sources: See Table 3.

Ratios for total exports are based on dollar values; those for individual commodities, on volume.

Table 5.

Greece: Selected Economic Statistics, 1952-61

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Sources: Bank of Greece, Monthly Statistical Bulletin, December 1958, p. 71, October 1962, p. 90, December 1962, pp. 22 and 31; Ministry of Coordination, Department of National Accounts, National Accounts of Greece, 1949-1959, pp. 61 and 74; and National Accounts of Greece, 1958-1961 (in Greek and not yet published). Data for fixed capital formation not including ships transferred to the Greek Registry, the money supply, the gold sovereign rate in Athens, and the gold sovereign/dollar cross rate in Athens, Zürich, and Beirut were furnished by members of the Economic Research Department of the Bank of Greece. The price index implied in Cols. (2) through (7) is not that in Col. (1).

Annual averages.

Does not include value of ships transferred to Greek Registry.

At end of year.

By the banking system, including the central bank, the Agricultural Bank, the Mortgage Bank, and special institutions, i.e., the Economic Development Financing Organization, the Post Office Savings Departments, and the Consignations and Loans Fund.

After 1958, however, Greece’s export earnings declined. This was not the result of domestic inflation, which, as indicated above, had been brought under effective control by mid-1956, but was due to the currency devaluation in Turkey (and, to a lesser extent, that in Spain) and to the farm price support policies of the Greek authorities. In an attempt to bolster exports, the Government took measures aimed at redirecting some foreign trade toward countries with which Greece had concluded bilateral agreements—chiefly the communist state trading nations of Eastern Europe.11 Many of these measures were abandoned after it was discovered that they probably did more harm than good. The state trading nations often paid higher prices than Western purchasers for Greek goods, but recouped by charging correspondingly higher prices for their own exports. They were less exacting in their standards of quality, packing, classification, and sorting of the farm commodities that they bought, and they frequently re-exported against convertible currencies many of their imports from Greece. Thus, they disrupted Greece’s internal price structure, brought about a decline in its sales to Western markets, and eased the pressure for much needed improvements in its export methods.

Receipts from invisibles

The reforms doubled the exchange rate for invisibles and, by eliminating the overvaluation of the currency (the principal cause of the flight of capital), they caused a decline in the premium on foreign exchange in the black market. Both these effects in turn increased the public’s willingness to surrender its foreign exchange receipts to the authorities. As a result, immediately after the reforms, invisibles (recorded)—especially tourist receipts and emigrant remittances12— rose sharply, most of the increase no doubt reflecting exchange earnings which had previously eluded the Bank of Greece. Thereafter, receipts from invisibles continued to increase at a slower, but still most satisfactory, rate, more than tripling between 1953 and 1961. By 1957 they had, for the first time, surpassed exports and become the main source of the country’s earnings of foreign currencies.13Undoubtedly, these gratifying developments must be attributed to numerous factors in addition to the reforms. Thus, the spectacular increase in shipping earnings should be ascribed mainly to the transfer to the Greek Registry14 of a huge tonnage of ships owned by Greeks, while the rise in emigrant remittances was helped by increased emigration. However, the reforms themselves played a significant part. As noted above, they reduced the leakage into the black market of receipts from invisibles. Also, along with other important influences (such as the economic boom in the Western world, the spread of the main currents of international tourism across Europe toward the Middle East, and the Greek Government’s efforts to increase tourism in Greece), they contributed to the increase in tourist receipts, from $10 million in 1952 to $68 million in 1961, by making Greece one of the least expensive countries for the foreign tourist. The opinion that the devaluation stimulated tourism appears to be corroborated by the fact that, when compared with countries in the Organization for European Economic Cooperation (OEEC) and Spain, Greece was first in the rate of increase from 1952 to 1955 in foreign tourist arrivals, and second only to the Federal Republic of Germany in the rate of increase in foreign exchange proceeds from tourism.15

Inflow of capital

The capital account also contributed to the improvement in the balance of payments. According to the statistics in Table 2, the net inflow of private foreign capital (not including import credits) rose from $15 million in 1952 to $57 million in 1961 ;16 however, these are the amounts actually recorded, and they certainly understate the increase that did in fact take place.17 To be sure, this influx of capital can be attributed in part to a number of causes other than the reforms; for example, the political and economic pressures which forced many Greeks living abroad (particularly in Turkey and the United Arab Republic) to move themselves and their property out of their countries of residence. Nevertheless, the influence of the reforms was important. By establishing a realistic parity for, and in fact initially undervaluing, the drachma in relation to other currencies, they induced a return flow of the funds which had left Greece illegally before the devaluation and, moreover, attracted funds owned by Greek emigrants, who are always eager to invest part of their wealth in the mother country, provided this can be done without loss that is due to an overvaluation of the drachma.

From the standpoint of its direct impact on the development effort, the capital inflow in the earlier years of the period here discussed was somewhat disappointing. Most of this capital consisted of funds belonging to individual Greeks and Greek emigrants and was used to purchase real estate. International capital of the kind needed to develop unexploited resources and to introduce modern technical and organizational methods did not show much interest in Greece. But this is not surprising. An exchange rate adjustment, of and by itself, could not be expected to attract foreign investors, especially in view of Greece’s past record of financial shakiness and default. Later, however, the prolonged political and monetary stability of Greece, its rapid rate of growth and, in general, its over-all excellent economic prospects—all of which are to some extent related to the reforms— started to have their effect. Direct investment by European and U.S. concerns is rising at a most satisfactory rate. The most striking example of this increased interest was an agreement in 1962 between the Greek Government and a group of foreign firms (T. Pappas, ESSO, and Kellogg) providing for a total investment of no less than $100 million over the next few years in an oil refinery, a steel plant, an ammonia plant, and a petrochemicals factory.18


In the initial post-reform stage, the balance of payments also benefited from a decline in imports, caused by the restrictive price effects of the devaluation and the anti-inflationary policies of the Government, which were continued throughout the first half of 1953. However, toward the end of that year, import payments started to climb rapidly. Their vigorous upward movement was uninterrupted for the next five years, with the result that they more than doubled between 1953 and 1958. The main reasons for these developments were rising incomes, rising domestic prices (until mid-1956), a relatively expansionary government monetary and credit program, and the policy of liberalizing imports.

It is perhaps desirable to explain in some detail the three principal ways in which import liberalization tended to boost imports. First, as mentioned earlier, it resulted in lower prices to the Greek consumer for many imported goods that had previously been subject to quantitative restrictions. Second, it enabled Greek importers to utilize foreign suppliers’ credits and, in turn, to extend credit to their own customers. As a result, there was a spectacular expansion of installment sales—previously quite uncommon in Greece—of imported products. Third, there was a widespread feeling in the country that the liberalization was not in line with economic realities and would have to be abandoned sooner or later. This led to large precautionary purchases of foreign goods by the importers.

This surge in imports was followed by a leveling off in 1959 and 1960, when the rate of growth of real incomes declined and a considerable degree of price stability was achieved. By that time, too, various restrictive tax and credit measures (including the restoration of a number of advance deposit requirements on imports) had become more effective, major investment projects (notably the oil refinery) had been completed and were producing import substitutes, and Greek industry had increased its productivity and become more able to cope with foreign competition. The liberalization itself had come to be accepted as a sustainable policy. Moreover, the Greek consumer slowed down his purchases of liberalized goods, as he found that he had perhaps gone too deeply into installment debt and that his pent-up demand for such goods had been satisfied, to some extent.

Finally, in 1961 there was another substantial increase in imports, reflecting the sharp rise in real incomes (more than 11 per cent) and large-scale investment during that year.

It is instructive to recall, in the light of subsequent developments, the arguments which were initially leveled against the liberalization policy, but which, interestingly enough, are no longer heard in Greece. They were that (a) unless the authorities pursued severe deflationary policies, imports would tend to increase constantly, thereby upsetting balance of payments equilibrium, and (b) valuable foreign exchange resources would be wasted on nonessentials, to the detriment of the development effort.

With respect to the first objection, it may be remarked that, though expenditures on imports actually did rise substantially between 1952 and 1961 (from $289 million to $585 million), they remained well within foreign exchange availabilities. No restrictive economic program became necessary and, in fact, it can very well be claimed that the Government’s policy has been quite expansionary since mid-1953.

As to the other objection, there are no satisfactory data clearly identifying the changes in imports of liberalized goods after the reform. However, the Economic Research Department of the Bank of Greece publishes a classification of imports by various categories, including “nonbasic foodstuffs” and “nonbasic industrial consumer goods,” which more or less group together the items affected by the liberalization. Changes in the figures for these categories can, therefore, be taken as roughly indicating the order of magnitude of changes in imports of liberalized goods; and it can be inferred that, from 1952 to 1961, the latter rose by $40-50 million—a considerable increase inasmuch as it amounted to somewhere between 16 per cent and 20 per cent of the rise in total imports between those years.19 However, before the liberalization policy is judged on the basis of this evidence, the following should be borne in mind:

(1) The above estimate clearly overstates the effects of the liberalization per se. Imports of the goods in question would probably have risen even if the liberalization had not been carried out. No doubt, pressures on the authorities for increases in the relevant quotas would have been strong. Furthermore, experience indicates that evasion of the quota limitations would have occurred. For instance, as long as scarcity prices prevailed for some products, emigrants would have tended to send such goods, rather than remittances in money, to their relatives in Greece. Or, Greeks might have exported funds illegally, bought goods abroad, and imported them on the basis of regulations which permitted imports in excess of quota restrictions, provided that the importer could show that he had paid for his transaction with his own foreign exchange holdings, and that he had not acquired this foreign exchange in a way violating exchange control laws.

(2) The removal of quotas and other liberalization measures did not, of course, leave the Government powerless to restrict specific imports. Reliance could be placed, and was placed, on tariff increases —to the extent that they were permitted by the GATT—on taxes, and on credit instruments, such as advance deposits.20

(3) It is by no means certain, or even probable, that any foreign exchange made available as a result of fewer imports of liberalized goods would have been utilized to enlarge the nation’s productive capacity. As pointed out in the next section, the liberalization policy itself was one of the chief inducements to private investment during the period under survey, and it therefore appears highly unlikely that, in the absence of this inducement, the private investment effort would have been any greater than it actually was. Moreover, as explained below (p. 143), there is every reason to doubt that the Government could have profitably expanded its own development program.

(4) Any “wastage” of foreign currency resources, which might be attributed to the liberalization, has to be weighed against its favorable effects on the monetary situation (see p. 130) and industry as well as the benefit it bestowed on the country by eliminating the evils of the quota system (see p. 126).

On the whole, there seems to be reason for believing that the alleged injurious consequences of the liberalization were rather negligible and that its effects were of real benefit to the economy.

Payments for invisibles

Expenditures on invisibles rose from $27 million in 1952 to $71 million in 1961. This can be largely ascribed to the vigorous economic expansion, which led to a steady increase in expenditures by Greeks abroad for tourism and other purposes. It also reflected a rise in such other items as dividend and interest payments to foreigners (a consequence of the large capital inflow and increasing output) and government expenditures in foreign countries.

Contributions to Economic Growth

The rate of growth of the Greek economy since the reforms has been among the highest in the world. The GNP in constant prices rose by 86.8 per cent during the nine years ended 1961, that is at an annual rate of 7.2 per cent (compounded). Since the natural rate of increase of the population of Greece was relatively low and large-scale emigration took place, per capita incomes also rose substantially, i.e., by 6.2 per cent a year.

One of the most powerful stimulants to growth was the improved balance of payments. Increased exports and invisibles affected incomes directly and through the multiplier process. There were also accelerator effects; for example, the boom in foreign tourism—and government efforts—led to considerable investments in transportation, hotels, and other facilities for the foreign traveler. The capital account of the payments balance also contributed to the growth of income, inasmuch as the large inflow of foreign funds provided the financial basis for greater investment activity and—of late, particularly—brought much needed technical know-how into the country (see p. 138).

Private investment expenditures were a second important contributor to the growth. Between 1952 and 1961 these expenditures rose from Dr 3.7 billion to Dr 11.2 billion,21 or from 7.5 per cent to 12.1 per cent of the GNP (Table 5). Among the factors that facilitated or prompted their increase were the considerable decline in interest rates during the period covered; the greater availability of credit from the banking system or other sources; the balance of payments developments mentioned above; and the import liberalization policy, which forced Greek industrialists to accelerate their investment effort in order to cope with foreign competition. Yet, despite their upward trend, the investment expenditures of the private sector not only lagged behind the aspirations of the Greek people for rapid economic progress; they also fell short of the not overly ambitious projections of the Government’s development plan. Furthermore, they were in large part devoted to the construction of luxury housing.

Since private investment did not attain the levels which were considered desirable, public investment was expanded considerably. Between 1952 and 1961, government expenditure on development projects rose from Dr 2.6 billion (constant drachmas) to Dr 7.0 billion (from 5.3 per cent to 7.6 per cent of the GNP). This was a substantial increase, particularly as it came at a time when foreign aid was cut drastically. Thus, public investment expenditures were, during the period under review, a third major dynamic growth factor. In retrospect, given the degree of price stability and the comfortable balance of payments situation that actually prevailed, it might appear that the Government could have done even more without unduly straining the economy. However, some mis judgments, coupled with the losses incurred in connection with various government projects, suggest that an attempt further to expand public investment expenditures would have overtaxed the limited organizational and planning talents of the administration and would have involved serious waste.

Three other aspects of national income developments may be singled out, inasmuch as they illustrate some of the positive and negative influences of the reforms. First, Greek industry, notwithstanding some pessimistic predictions, demonstrated the ability to survive and prosper after quantitative restrictions had been removed and the increased protection afforded by the devaluation in some fields had worn off. The volume of industrial output rose by almost 110 per cent between 1952 and 1961. Although some assistance was provided by the Government, chiefly in the form of advance deposits on imports and moderate tariff increases, the main factor was that productivity (according to the best available estimates made by the Research Department of the Bank of Greece) roughly doubled in those same years. Without the spur of import liberalization, it is doubtful that industry could have made such strides. The expansion of industry was especially rapid in 1960 and 1961. In those years, there were encouraging signs of small but increasing exports of manufactured goods, even to hard currency areas.

Second, after 1952 there was a shift toward a more equitable distribution of income. Importers’ scarcity profits and windfall gains on speculative ventures, two prominent features of the earlier period of economic disorganization, disappeared, while increased foreign competition tended to eliminate excessive profit margins in industry. The reduction in interest rates also helped. In the low-income agricultural sector, the substantial expansion of output was accompanied by a 10 per cent improvement in the ratio of prices received by farmers to prices paid.22 An improved budget situation resulted in an increase in the buying power of government workers’ salaries and pensions. Wage increases in private industry also outdistanced the increase in the cost of living. Employment made good gains during these years, but the unemployment rate still remained disturbingly high. Needless to say, the improvement in the distribution of incomes, coupled with the increase in national income, had salutary effects, not only of an economic but also of a political nature. It may partly explain the country’s phenomenal government stability after 1952, a stability which could not have been predicted from Greece’s earlier history of short-lived shaky regimes, but which itself was one of the major “real” factors that contributed to the country’s economic progress during the period discussed.

Third, agricultural output increased by more than 67 per cent in the nine years ended 1961.23 This over-all picture of progress in the agricultural sector is partly marred by the results of various government interventions in the markets for farm commodities—interventions which were, of course, departures from the spirit and the letter of the reforms. The detrimental effects of such interferences on export commodities have been mentioned above (p. 135). Government policies of the same kind were also applied to agricultural products consumed primarily or exclusively at home. Their consequences were equally, if not more, injurious.

One example of these policies concerns wheat. Memories of past difficulties led postwar Greek Governments to encourage wheat production by restricting imports and introducing support programs, which kept domestic prices much higher than corresponding world prices. Responding to this stimulation, output expanded and, eventually, completely covered domestic consumption requirements. In 1959, it even left a considerable surplus over and above these needs. Until recently, the budget was seriously affected by the Government’s policy of subsidizing the price of bread. In addition, a heavy deficit was incurred when the surplus part of the 1959 crop had to be sold abroad at competitive prices. Now the Government is incurring additional losses because of its uphill struggle to discourage wheat cultivation by granting subsidies to farmers who switch to the production of other more promising farm commodities. Moreover, the consumer has been penalized because he has had to pay too much for his bread; and, since bread is one of the principal items in the Greek diet, its high price has affected living costs materially, thereby undermining the competitive ability of the entire economy. It is ironical that Greece, but for the policy in question, could have obtained large amounts of wheat from the United States under the advantageous terms of Public Law 480.24


Despite some black spots, the economic history of Greece since the days of the reforms has been undisputably a success. In fact, it need not fear a comparison with the so-called economic miracles of the last decade. To be sure, Greece’s progress can be, in large part, imputed to favorable “real” factors, such as peace in the country’s international relations, domestic political stability, a low rate of population increase, proximity to and close ties with the fast growing Western European area, an expanding trade with Eastern Europe, an improvement in the terms of trade,25 the existence of large and relatively wealthy Greek minorities abroad, the rising trend of world capital movements, and the various pressures which international shipping developments applied on Greek shipowners to transfer their vessels to the Greek flag.

Nevertheless, this survey of events after 1952 provides evidence that the reforms helped Greece to strengthen its balance of payments, make the drachma a respected currency,26 and accelerate the rate of its economic growth. Much, of course, remains to be done by way of eliminating economic backwardness and raising living standards to tolerable levels. The solid accomplishments of the nine years 1953-61, however, have in many ways created conditions favorable to further progress, not the least of which is the confidence prevailing abroad in Greece’s future prospects. This confidence is not unrelated to the fact that Greece was the first country to be admitted as an associate member of the European Economic Community, an association from which the Greeks expect a major boost to their economic growth. Most probably this same confidence will be reflected in an increasing flow of foreign capital into the country.

The experience of Greece suggests a number of conclusions of general interest—particularly to underdeveloped countries which still hesitate to undertake such reforms. First, this experience shows once more that the price elasticity of demand for a country’s merchandise exports is normally high, simply because buyers in international trade do tend to switch to the cheapest source of supply. Second, such reforms affect not only the trade balance but also invisibles (of which tourism seems to be quite price-elastic) and the capital account of the balance of payments. These latter effects, often not duly emphasized or even neglected in theoretical discussions, were very significant in Greece. Their importance will probably increase for all countries in the future because, to cite just one reason, capital is becoming more mobile and alert to profitable investment opportunities across national frontiers. Third, although such reforms cannot by themselves ensure monetary stability, they can help to lay the foundations on which a sound system of money and credit can be built. By devaluing and abolishing multiple rate practices, a country can eliminate basic causes of distrust in its currency, namely overvaluation and a disorderly exchange rate structure. By liberalizing imports, it acquires a powerful weapon for combating domestic inflationary pressures, including the price effects of the former two reform measures. Fourth, the policies of liberalizing imports and unifying the foreign exchange system may perform the invaluable service of exerting effective disciplinary action on domestic industry, forcing it to become more efficient. Fifth, Greece’s impressive economic growth in the period covered by this study would seem to belie the pessimistic contention that some measure of inflation is a necessary price for rapid economic development. It would seem to lend support to the contrary argument that monetary stability, with its favorable effects on exports and imports of goods and services, the inflow of capital, savings, and public finances, tends to stimulate sustained growth at a high rate. Finally, the reforms discussed, in conjunction with the monetary stability to which they contribute, tend to bring about a less unequal distribution of incomes, thus reducing social conflict and government instability—two major obstacles to an effective development effort.

Contribution des réformes de change et de commerce à la stabilisation économique en Grèce, 1953-61


En 1953, la Grèce a dévalué la drachme, unifié son système de change et libéré ses importations. Ces réformes ont été suivies d’une politique appropriée destinée à assurer leur succès. La présente étude souligne qu’elles ont beaucoup contribué à la création d’un climat monétaire favorable, caractérisé par une stabilité remarquable du niveau des prix, une diminution considérable de la vélocité-revenu de la monnaie, une augmentation spectaculaire des dépôts bancaires et de la capacité de prêt des banques, une diminution du rôle du souverain or dans le système monétaire grec, un assainissement du budget courant de l’Etat et un empressement renouvelé du public à souscrire aux emprunts de l’Etat. Ces réformes ont également contribué à consolider la balance des paiements du pays en stimulant les exportations et les recettes provenant des invisibles (du tourisme en particulier) et en rendant possible un afflux important et croissant de capitaux étrangers; en conséquence, la Grèce a pu, depuis 1953, augmenter considérablement ses réserves de change. La remarquable taux d’accroissement enregistré entre 1952 et 1961 par le Produit National Brut de la Grèce, taux composé qui a atteint 7,2 pour-cent par an en valeur réelle, peut être attribué dans une large mesure à ces réformes. Au cours de la période étudiée, les trois principaux éléments de croissance ont été l’amélioration de la balance des paiements, un programme dynamique de développement (que le gouvernement a pu mettre en oeuvre, grâce à la position solide des comptes extérieurs du pays et à la diminution de la vélocité de la monnaie) et une augmentation des investissements privés (en partie liée à l’afflux de capitaux et en partie imposée aux milieux d’affaires grecs par la concurrence étrangère plus âpre amenée par les mesures de libération des importations). Finalement, les réformes ont aidé à réaliser une distribution plus équitable du revenu, réduisant ainsi les conflits sociaux et contribuant à la stabilité politique dont a bénéficié la Grèce au cours des neuf années (1953-1961) couvertes par la présente étude.

El aporte de las reformas cambiarías y comerciales a la estabilización económica de Grecia, 1953-61


En el año 1953 Grecia devaluó el dracma, unificó su sistema cambiario y liberalizó sus importaciones. Este artículo expresa que dichas reformas (las cuales fueron seguidas por una política adecuada que tenía por objeto garantizar el éxito de las mismas) contribuyeron mucho a crear un ambiente monetario favorable caracterizado por un grado extraordinario de estabilidad en los precios, una disminución considerable en la velocidad-ingreso del dinero, un incremento espectacular en los depósitos bancarios así como en la capacidad del sistema bancario para efectuar préstamos, una mengua del lugar que el soberano de oro ocupaba en el sistema monetario griego, un mejoramiento en el presupuesto ordinario del Gobierno, y una renovada disposición de parte del público a conceder préstamos al Gobierno Central. Las reformas también contribuyeron a fortalecer la balanza de pagos del país al estimular las exportaciones y los ingresos provenientes de invisibles (particularmente del turismo) y al hacer factible una afluencia mayor y creciente de capital extranjero, con el resultado de que, a partir de 1953, Grecia ha logrado aumentar considerablemente sus reservas de divisas. La elevada tasa de crecimiento del producto nacional bruto de Grecia entre 1952 y 1961, la cual equivale al 7,2 por ciento anual (compuesto) en términos reales, puede atribuirse en gran medida a las reformas. Los tres principales factores del crecimiento económico de Grecia durante el periodo al cual se contrae el artículo fueron: la situación mejorada de la balanza de pagos, un dinámico programa de desarrollo (programa que el Gobierno pudo llevar adelante merced a la fuerte posición externa del país y la disminuyente velocidad del dinero), y el aumento observado en la inversión privada (en parte vinculado con la afluencia de capital y en parte impuesto a los negociantes griegos por la aguda competencia extranjera creada por las medidas de liberalización de las importaciones). Por último, otro efecto saludable de las reformas fue el hecho de que contribuyeron a alcanzar una distribución más equitativa de los ingresos, aminorando así los conflictos de carácter social y contribuyendo al notable grado de estabilidad política disfrutado por Grecia durante los nueve años abarcados por este artículo (1953-1961).


Mr. Gerakis, economist in the Finance Division, was head of the Productive Services Division of the Research Department of the Bank of Greece, has taught economics at universities in the United States, and is the author of articles in economic journals.

Mr. Wald, Chief of the Office of Economics, Federal Power Commission, was formerly Chief of the Balance of Payments Division, Federal Reserve Bank of New York, and has been on the staff of the President’s Council of Economic Advisers and with other federal agencies. During 1958-59, he served as UN Technical Assistance expert with the Bank of Greece in Athens. He is the author of Taxation of Agricultural Land in Underdeveloped Economies and of numerous articles in economic journals.

The writers wish to acknowledge their indebtedness to many members of the staff of the Economic Research Department of the Bank of Greece, who provided much of the statistical material on which this study is based. The authors are solely responsible for the views expressed here.


This section is based largely on Evangelos Ap. Eliades, “Stabilization of the Greek Economy and the 1953 Devaluation of the Drachma,” Staff Papers, Vol. IV (1954-55), especially pp. 22-49.


Actually, it was Dr 15,000 = US$1. On May 1, 1954, a new drachma was introduced for the sole purpose of simplifying the currency system. Each new drachma was exchanged for 1,000 old ones. All figures quoted here will be in terms of these new drachmas.


See Marina Goudi, The Readjustment of the Price of Foreign Exchange (in Greek, Athens, 1953), p. 17.


The calculation referred to was 112.624910538.77100=20.4, where 112.62 is the Bank of Greece’s average selling rate for the U.S. dollar in 1938 (a “normal” year of equilibrium in the Greek balance of payments); 49 and 105 are the U.S. wholesale price index (1948 = 100) in 1938 and March 1953, respectively; and 100 and 38.77 are the Greek wholesale price index in 1938 and March 1953, respectively.


For example, before the reforms, a 200 per cent “contribution” was levied on a large number of imported goods; this implied an effective exchange rate of Dr 45 to the import dollar. As a result of the reforms, this rate became Dr 30 to the dollar.


Indirect because the goods affected by the liberalization are of relatively minor importance in the construction of the country’s price indices.


Maximum interest rates payable by the banking system on deposits were also lowered at the same time.


See Table 1, footnote 1.


Dr 300 million ($10 million) of long-term Treasury securities were sold in 1954, largely, however, by high-pressure methods which were entirely unnecessary for later issues.


In general, 18 per cent of bank deposits.


This was accomplished by increasing government imports from the countries in question and by imposing quota restrictions on certain private imports from Western nations.


“private capital transfers” in the balance of payments classification of the International Monetary Fund.


It is of interest that in 1961, for the first time, net invisibles surpassed exports.


This transfer was a result of the tax and other incentives granted to Greek shipowners by the Government and of various forms of international pressure on the so-called flags of convenience.


As shown by the statistics in Organization for European Economic Cooperation, Tourism in Europe, 1961 (Paris, September 1961), and International Monetary Fund, Balance of Payments Yearbooks.

Incidentally, Spain seems to have had a similar experience since its currency reform in 1959.


It showed a further considerable increase in 1962.


The official statistics do not, of course, show the capital flight which occurred before April 9, 1953. On the other hand, part of the inflow after the reforms is believed to be concealed in the data for receipts from invisibles, which are therefore overstated. Taking these facts into consideration, one can conservatively estimate that the improvement in the capital account between 1952 and 1961 contributed no less than $80 million to the improvement in the over-all balance of payments in that same period.


See statement (in Greek) by the Minister of Finance, S. Theotokis, in Kathimerini, December 13, 1962, p. 1.


These figures are based on import arrivals, not payments, and hence are not directly comparable with the data in Table 2. They have been furnished to the authors by members of the Economic Research Department of the Bank of Greece.


Nevertheless, the use of advance deposits was evidently a departure from the initial content and spirit of the liberalization policy.


These figures do not include the value of ships transferred to the Greek Registry.


But this increase in the ratio of prices received to prices paid by farmers was also due to factors other than the reforms; for instance, the Government’s price support policies and the improvement in the terms of trade.


Ministry of Coordination, Department of National Accounts, The National Accounts of Greece, 1948-1959, p. 72, and The National Accounts of Greece, 1958-1961 (not yet published).


The Agricultural Trade and Development Assistance Act.


The terms of trade (ratio of prices received for exports to prices paid for imports) rose from 98.7 in 1952 to 107.5 in 1961 (Kingdom of Greece, National Statistical Service of Greece, Monthly Bulletin of Statistics, January and December 1961).


The reputation of the Greek currency, resting primarily on the factors analyzed above, was enhanced in 1959, when the drachma was granted limited nonresident convertibility for current account payments. It is interesting to note that the drachma is accepted everywhere and is hoarded as a hard currency in the neighboring countries, Turkey, Albania, Bulgaria, and Yugoslavia.