Greece vs. Bulgaria. Who Is The Rich One Here?

PUBLICATIONS / Newsletters / 2015 / Newsletter June

Greece vs. Bulgaria. Who Is The Rich One Here?

Looking at the history of Bulgaria and Greece, these neighbouring Balkan countries were most of the time equally poor. How does it come that nowadays their gross domestic product and wages differ so much? How does it come that Greece with its notoriously high-debt performs twice (or three times, depending on different criteria) better in the world economic charts?

Ever since it entered the EU, Greece was enjoying a lot of attention from foreign economists, media and public. This attention is deserved, as the Greek economic performance is a façade. Since the early eighties, the country has been spending what was not yet earned.

Greece has created an enormous debt and lived on the expense of the future generations. When deadlines came and money had to be paid back, suddenly the government started using words like solidarity, right wing extremism, and international conspiracy. By then, the borrowed money of one of the oldest democracies in the world was long spent on the salaries of state employees, social benefits, pensions and the Olympics.
For the past 30 years, the wages in Greece grew at a pace that did not match the growth of productivity. The country stopped being competitive. More and more was spent to maintain and increase the standard of living. This caused an unprecedented growth of debt: both state and private.
The problem now is not only the debt itself but the country’s inability to produce and to compete. There are not many takers for Greek products and services, and not many looking at Greece as an attractive investment opportunity.
So what is the reason that Greece shows a two to three times higher GDP than Bulgaria? Is the Greek economy really that much better?
The thing is, Bulgaria struggled through dark decades of a socialist regime. The non-functional Marxist planned economy left its mark on the country. However, in many respects, Bulgaria is much better positioned for future growth.
Bulgarian industrial activity accounts for 30 percent of the economy and employs 35 percent of the work force. In Greece, industrial activity only contributes 16 percent to the economy and to 15 percent of the workforce.
The Bulgarian industry is younger and thus more modern and it already shows quite good foreign trade statistics. In 2013, Bulgaria exported goods amounted to USD 3,800 per capita while in Greece, this was only USD 2,600. Bulgarian value of imports is USD 4,500 per capita versus the Greek USD 4,600.
Direct consumption of the Greek government accounts for 17 percent of GDP, in Bulgaria this is only 8 percent. Greek capital investment amounts to 12 percent of GDP against 21 percent in Bulgaria.
Why is it that with these figures the gross domestic product of Greece is still higher?
The answer lies in the dominance of Keynes’ economic idea popular with those in power. According to Keynes pretty much all that matters is consumption, no matter how it comes about, no matter if it is all financed with borrowed money. That is what GDP measures; not the investment in capital goods, i.e. goods that will contribute to future production, but how much is consumed. So it must not be much of a surprise that the much envied Greek lifestyle is perfectly compatible with a high GDP – at least temporarily. By spending more than earning, the national Greek debt grew to 175 percent of GDP. And this is only the first part of the horror story. The private sector debts are really scary too. Economists tend to overlook private bank loans but Greek households and businesses owe an enormous USD 325 billion to banks. This represents almost 180 percent of GDP. The borrowed money is gone. An economy as heavily indebted as Greece is a recipe for disaster. Future generations will be blessed with insolvency and banking crises; unless of course the current politicians succeed in passing the bill to other European tax payers in the name of solidarity. The rescue programs won’t rescue much. They are based on milking the private entrepreneurs and squeezing their throats for the last drops of their money. Many of them shifted their assets abroad already.
In the meantime, Bulgaria paves its way to further growth. Its economy is based on the old fashioned, decidedly non-Keynesian idea that private investment precedes growth. With 10% corporate tax, low labour costs, solid government finances (a constitutionally mandated balanced budget) and increasing level of infrastructure, eventually, the gap between Greece and Bulgaria will shrink.
Which of the two economies would you rather invest in? Bulgaria is not rich and its economy is nowhere near perfect. But in terms of finance and production it is much healthier.
 
If you want to find out more about Bulgaria, check out Doing Business In Bulgaria.
 
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