The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Abstract

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Athanasios Vamvakidis

Greece became the twelfth member of the euro area in January 2001. Substantial progress in macroeconomic stabilization and structural reforms, as well as temporary factors, have led growth to accelerate from an annual average of 1.3 percent in 1990–95 to 3.6 percent in 1996–2003. However, Greece faces considerable challenges ahead: sustaining fast growth, progressing with fiscal consolidation, reforming the pension system, reducing inflation, improving competitiveness, safeguarding the financial sector amid fast credit growth, and increasing employment. Recent IMF research has focused on these challenges.

Vamvakidis (2003) attributes the acceleration of economic growth in Greece since the mid-1990s to considerable progress on both macroeconomic stabilization—fiscal consolidation and reducing inflation—and structural reforms—liberalizing product markets and privatization. However, temporary factors, such as the substantial decline in interest rates to euro-area levels, with a large, but temporary impact on consumption (Halikias, 1999), spending for the 2004 Olympics, and sizable EU transfers, have also played an important role.

Using a production function approach and an econometric growth model, Vamvakidis and Zanforlin (2002) suggest that further progress in macroeconomic and structural reforms may be needed to sustain the convergence speed of recent years. (Greece’s per capita GDP is now 59 percent of the euro-area average.) Growth prospects could also be improved by enhancing research and development activities and broadening the use of information technology, areas on which spending in Greece, although increasing substantially during the 1990s, remains well below levels in other industrial countries (Vamvakidis, 2001b).

Fast growth in Greece since the mid-1990s has not led to major employment gains. Greece’s unemployment rate increased to almost 12 percent by 1999, before declining to about 9 percent by mid-2003. Moreover, Greece’s employment rate has remained broadly unchanged for the last 20 years and is still well below the EU average. Lutz (2001) attributes the poor labor market performance to Greece’s rigid labor market structure, with high minimum wages, strict employment protection legislation, and shortcomings in the educational system. These factors have hindered adjustment to shocks such as declining agricultural sector employment, rising female participation rates, immigration, and a halt to the rapid growth in public employment. Thus, long-term unemployment increased, especially among the women and the young. Recent reforms have facilitated using flexible labor contracts—part-time employment and fixed-term contracts. Nevertheless, bolder steps could help ameliorate the key structural weaknesses in the labor market.

The general government deficit-to-GDP ratio was cut from double digits in the early 1990s to 1.2 percent by 2002, but nondeficit-related transactions remain substantial and Greece’s public sector debt-to-GDP ratio, at 105 percent, is one of the highest in the EU. Moreover, in the absence of reforms, the projected increase in age-related spending in Greece will be higher than in any other EU country in the next five decades. Against this background, IMF research has focused on the elements of a strategy for long-run fiscal sustainability. Lutz (2002) provides an overview of the pension system in Greece, comparing its structure to that of other EU countries, examining recent reforms, discussing spending pressures and their sensitivity to demographic and macroeconomic assumptions, and considering some policy reform options. Allan (1999) examines how developing the accounting framework, identifying fiscal risks, and assessing the sustain-ability of fiscal policy could improve the fiscal information system and aid fiscal policy. Lutz (2003) analyzes Greece’s exceedingly complex tax system, reviews the 2002 reforms aimed at simplifying it, and discusses options for further reforms.

Inflation has fallen considerably since the mid-1990s, but remains above the euro-area average by about 1.5 percentage points. IMF research on inflation has focused on explaining this differential and providing a framework for projections. Swagel (1999a and 1999b) estimates a VAR model of inflation in Greece, and suggests that Balassa-Samuelson effects explain about 1 percentage point of the inflation differential between Greece and the rest of the euro area. Kieler (2001a) estimates a number of models, ranging from single-equation to VAR models, shedding light on inflation prospects and risks following a substantial easing of monetary conditions associated with euro-area entry.

The external current account deficit has increased substantially since the mid-1990s, to more than 6 percent of GDP since 2000. Kieler (2001b) reviews the effects of euro-area entry on Greece’s current account deficit based on MULTIMOD simulations. The results suggest that lower interest rates would be expected to lead deficits to rise some-what above their historical norm. However, the observed increases have been larger than expected, raising potential issues regarding competitiveness. Using simulations from a number of models, Billmeier (2003) finds that the widening of the current account deficit in Greece since the mid-1990s has been driven by both monetary-union-related developments and temporary factors such as Greece’s relatively advanced cyclical position. The author suggests that large current account deficits may persist because of a deterioration in competitiveness and losses in market shares, risks from a further euro appreciation, the decrease of EU transfers over the medium term, and increased competition from new EU entrants.

A far-reaching liberalization of the heavily regulated Greek banking sector started during the 1990s, increasing competition, reducing interest rate spreads, and improving bank profitability. The liberalization of the sector and the fall of interest rates to euro-area levels contributed to considerable expansion of credit, though from very low levels. Vamvakidis (2001a) analyzes these developments, reviews progress in bank supervision and internal risk management procedures, and examines key issues facing the Greek banking system in the process of far-reaching restructuring.

New IMF Book Russia Rebounds

Edited by David Owen and David O. Robinson

Russia’s 1998 financial crisis came as a considerable surprise to both Russians and foreign investors, who a year before had come to think that the worst of the country’s transition from a centrally planned to a market economy was over.

Russia’s macroeconomic performance since the crisis has been impressive. Russia Rebounds assesses the contribution of various factors underlying this recovery—strengthened macro-economic policymaking, accelerated structural reforms, high oil prices, and postcrisis gain in competitiveness associated with the devaluation of the ruble. The book also highlights key policy challenges facing the country—in the areas of macroeconomic policy and structural reforms—to ensure that the postcrisis recovery is sustained.

In addition, Russia Rebounds provides a detailed account of developments in a number of areas that have been at the core of the IMF’s work in Russia: tax reform, public expenditure reform, the banking crisis, and the debt crisis.

References

  • Allan, William, 1999, “Improving Information on Risk and Sustainability of Fiscal Policy,” in Greece: Selected Issues, IMF Country Report No. 99/138.

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  • Billmeier, Andreas, 2003, “The Sustainability of the Greek External Current Account Deficit,” in Greece: Selected Issues, IMF Country Report No. 03/157.

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  • Halikias, Ioannis, 1999, “Interest Rate Convergence and Household Consumption: How Important Is the Income Effect?” in Greece: Selected Issues, IMF Country Report No. 99/138.

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  • Lutz, Mark, 2001, “Greece Labor Market—Grappling with High Unemployment,” in Greece: Selected Issues, IMF Country Report No. 01/57.

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  • Lutz, Mark, 2002, Greece: Selected Issues—An Overview of Pension Reform, IMF Country Report No. 02/58.

  • Lutz, Mark, 2003, “Tax Reform in Greece—Cleaning the Augean Stables,” in Greece: Selected Issues, IMF Country Report No. 03/157.

  • Kieler, Mads, 2001a, “Inflation Risks in the Wake of Euro-Area Entry,” in Greece: Selected Issues and Statistical Appendix, IMF Country Report No. 01/57.

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  • Kieler, Mads, 2001b, “Monetary Union Membership and Greece’s External Current Account,” in Greece: Selected Issues and Statistical Appendix, IMF Country Report No. 01/57.

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  • Swagel, Phillip, 1999a, “Inflationary Implications of EMU-Related Monetary Easing: An Econometric Estimate,” in Greece: Selected Issues, IMF Country Report No. 99/138.

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  • Swagel, Phillip, 1999b, “The Contribution of the Balassa-Samuelson Effects on Inflation: Cross-Country Evidence,” in Greece: Selected Issues, IMF Country Report No. 99/138.

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  • Vamvakidis, Athanasios, 2001a, “The Greek Banking Sector at the Time of EMU Entry: Recent Developments and Challenges Ahead,” in Greece: Selected Issues and Statistical Appendix, IMF Country Report No. 01/57.

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  • Vamvakidis, Athanasios, 2001b, “The New Economy in Greece,” in Greece: Selected Issues and Statistical Appendix, IMF Country Report No. 01/57.

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  • Vamvakidis, Athanasios, 2003, “The Convergence Experience of the Greek Economy in the EU: Lessons for EU Accession Countries,” in Successes and Failures in Real Convergence, National Bank of Poland, Conference Proceedings, forthcoming.

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  • Vamvakidis, Athanasios, and Luisa Zanforlin, 2002, Selected Euro-Area Countries: The Determinants of Growth—The Experience in the Southern European Economies of Greece and Portugal, IMF Country Report No. 02/91.

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IMF Research Bulletin, December 2003
Author: International Monetary Fund. Research Dept.