08 February 2012

Ricardo Hausmann: Ireland can show Greece a way out of the crisis

It is less painful to raise exports than to cut spending. But two problems conspire against this more humane solution. First, while in the eurozone, Greece cannot devalue to make its exports more competitive. Second, Greece does not have what it takes to be as rich as it is.

Here’s the bad news for Greece: in our sample of 128 countries [taken from 'The Atlas of Economic Complexity'], it had the biggest gap between its current recorded level of income and the knowledge content of its exports. Greece owes its income to borrowed foreign spending it cannot pay back. It produces no machines, no electronics and no chemicals. Of every 10 US dollars of worldwide trade in information technology, it accounts for one cent.

This problem cannot be addressed by fiscal Keynesian stimulus, by bland trade facilitation or by paying lip-service to structural adjustment, as the November International Monetary Fund agreement implicitly assumes.

The problem in Greece is uncommon in Europe. Ireland, for example, is also struggling with a fiscal burden caused by the bursting of its housing bubble, but has been able to move quickly to a current-account surplus, thanks to the knowledge base of its competitive export sector. In other words, Ireland does have what it takes to be as rich as it is now.

Greece should use its international support to reduce rather than postpone the pain of adjustment. It needs to expand its export base, not delay pension and public wage cuts. It needs to be able to fund Irish-style institutions that lure potential new exporters by guaranteeing specific investments in infrastructure, labour training and research and development. This should be funded by the EU but, if not, it is better to make cuts elsewhere.

Greece is a good place to try to replicate this aspect of the Irish model. We have calculated how easy it would be for countries to move to exporting more complex goods. Greece ranks second only to India in this dimension, a heartening finding. It needs to identify the missing knowledge and infrastructural inputs required by new industries and assure their provision, the way the Irish Industrial Development Agency does. Putting resources into creating the productive base for a more prosperous future is more important and less painful than wasting them in protecting an unsustainable past. Unfortunately, this lesson is not being heeded and Greece is ever closer to the brink.

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