OECD fiscal policies and the relative prices of primary commodities

Nonfuel primary commodity prices fell more than 30 percent in real terms between 1984 and 1990, even though global economic growth was reasonably strong. The collapse of international commodity agreements, rapid increases in supply for some crops, and agricultural policies in industrial countries have been responsible for some of the price decline. But all nonfuel primaries - agricultural and nonagricultural - experienced a sharp decline in real prices. That calls for a more general explanation. The authors investigatehow the relative price of (nonenergy) primary commodities and manufactures depend on fiscal policies in the OECD countries. It has been argued, for example, that expansionary policies in the OECD countries lead to increases in commodity prices. The authors show that it is not sufficient to establish whether policies are expansionary or contractionary; one must define the policy mix to know what impact it has. Previous studies have used partial equilibrium models to examine the link between maroeconomic policies and commodity prices. In those studies as in this one, the main channel of transmission of monetary and fiscal shocks is the interest rate. The authors use a general equilibrium model of the simultaneous determination of the relative price of commodities and the real world interest rate. The model's logic suggests that OECD fiscal expansion increases the real interest rate and reduces the relative price of commodities to equilibrate world labor product, and asset markets. Econometric estimates based on reduced form equations, using annual data since the 1950s, cannot reject the hypothesis that higher fiscal deficits are associated with a lower relative price of commodities. The estimates suggest that when the fiscal deficit of the G-5 rises one percentage point of GDP, the relative price of commodities drops about 2 percent. When the U.S. deficit rises by one percentage point of GNP, the relative price of primary commodities drops about 3 percent. This evidence provides good reason to believe that macroeconomic policies have been responsible for at least part of the little-understood decline in primary commodity prices over the past decade.Environmental Economics&Policies,Economic Theory&Research,Access to Markets,Markets and Market Access,Economic Stabilization

Before and after the political transition of 1974: institutions, politics, and the economy of post-war Greece

This paper reviews, analyses and interprets the evolution of the state and the economy of post-war Greece, before and after the political transition to democracy in 1974. The transition led to a regime-change involving a very large part of the ideological and institutional edifice that characterised Greece in the twenty-five years between the end of the civil war in 1949 and the transition to democracy in 1974. Although social and political institutions and performance improved significantly after 1974, economic performance deteriorated sharply. The analysis suggests that although this was to be partly expected because of international developments, the sharp deterioration is economic performance was mainly the result of the failures of the post-1974 political regime to substitute the commitment and coordination mechanisms that had contributed to the economic ‘miracle’ of the 1950s and the 1960s, follow appropriate and consistent rules in economic policy and introduce the necessary reforms. In addition, Greece entered the E.U and, later, the euro area relatively unprepared, something which contributed to the deterioration in its economic performance and, eventually, the debt crisis of the 2010s and the great depression that followed. The final section of the paper discusses several reforms that could help put Greece back on track economically, consolidating and improving its position in the E.U and the euro area, while strengthening the desirable social and political characteristics of the post-1974 regime

The state and the economy of modern Greece: key drivers from 1821 to the present

This paper reviews, analyses and interprets the history of the state and the economy of modern Greece, from the eve of the war for independence in 1821 to the present. It identifies three major historical cycles, the cycle of state and nation building, 1821-1898, the cycle of national expansion and consolidation, 1899-1949, and the post-1950 cycle of economic and social development. During these two hundred years, Greece managed to almost triple its national territory, to increase its population by almost 15 times and to increase its real GDP per capita by another 15 times. Yet, Greece was also characterized by long periods of low economic growth and political and economic instability, including national ‘schisms’ and civil wars, high inflation, international over-indebtedness, and sovereign debt crises and defaults. The analysis focuses on the key drivers of these developments, exploring the dynamic interactions of ideas and values, economic and social conditions, political and economic institutions, geopolitical circumstances and international economic and financial regimes

The twin deficits, monetary instability and debt crises in the history of modern Greece

This paper reviews, analyses and interprets the determinants and the implications of the twin, fiscal and current account, deficits in the history of modern Greece. The analysis focuses on the determinants and the dynamic interactions among the twin deficits, domestic monetary regimes, and access to international borrowing. Two are the main conclusions: First, when Greece did not have access to international borrowing, fiscal imbalances usually led to monetary destabilization and inflation. Second, when it did have access to international borrowing, fiscal imbalances were generally larger, led to external deficits and, eventually, sovereign debt crises and defaults. The monetary and exchange rate regime also mattered. The 1950s and 1960s were the only prolonged period in which the twin deficits were tackled effectively and, as a result, the only period in which Greece enjoyed high economic growth, monetary stability, and external balance simultaneously

Greece and the euro: a Mundellian tragedy

This paper analyzes the process of destabilization, crisis and adjustment in the Greek economy since the accession of the country to the European Union and, subsequently, the euro area. It reviews four policy cycles of the past 40 years, the four acts of the Greek tragedy, and discusses alternative ways forward, following the sudden stop and the great depression of the 2010s. It concludes that despite the significant constraints implied by continued participation in the euro area, namely a stark Mundellian conflict between internal and external balance, exiting the euro area risks further destabilizing the economy and bringing about a return of the problems of the 1980s. The current challenge for Greece is to seek to remain and prosper in the euro area. This would require a policy mix based on supply side reforms which would allow for a sustained recovery without the reemergence of external imbalances

International Costs and Benefits from EMU

In this paper we examine the international implications of monetary union in the European Community (EMU), and the associated international costs and benefits. We consider prospective changes in international institutions, the potential role of the ecu as an international currency, and the implications of EMU for the international coordination of monetary and fiscal policies.

Macroeconomics and politics in the accumulation of Greece’s debt: an econometric investigation, 1975-2009

This paper focuses on an econometric investigation of the macroeconomic and political factors that contributed to Greece’s excessive debt accumulation and its failure to adequately address its fiscal imbalances, from the restoration of democracy in 1974 till the crisis of 2009. The econometric investigation is based on a model in which two political parties alternate in power, and in which governments choose primary expenditure and taxes to minimize deviations from politically determined expenditure and tax targets, subject to a debt accumulation equation. The model predicts a political equilibrium in which primary expenditure and taxes follow feedback rules which go in the direction of stabilizing the debt to GDP ratio. However, this stabilization incentive is weaker in election years. The model also predicts potential partisan differences in the evolution of primary expenditure and taxes, due to the different preferences of political parties. Estimates of government reaction functions to public debt for the period 1975-2009 suggest a rather weak stabilizing reaction of primary deficits to public debt. This stabilizing reaction disappears in election years, which are characterized by strong fiscal expansions. We find no evidence of partisan differences in the reaction of primary deficits to inherited debt, but we do find evidence of lower primary deficits in the post-1992 Maastricht treaty period. Overall the model accounts for the accumulation of Greece’s government debt in terms of the trend increase in primary expenditure, the positive shocks to primary expenditure in election years and the weak stabilizing reaction of government revenue, due to tax smoothing

Greece’s sovereign debt crisis: retrospect and prospect

This paper provides an analysis and assessment of the Greek sovereign debt crisis, and examines alternative solutions to the problem. In order to put the current fiscal predicament of Greece in perspective and discuss how the Greek debt crisis might possibly be resolved, the paper first provides a detailed account of how the sovereign debt of Greece was accumulated and then stabilized relative to GDP. It then proceeds with an account of how the international financial crisis led to a destabilization of Greece’s sovereign debt, and with an assessment of the adjustment program currently in operation. We address the question of solvency, and whether the current program is sufficient for the resolution of Greece’s debt crisis. The paper concludes with proposals for tackling the confidence crisis and speeding up the recovery of the Greek economy

Historical cycles of the economy of modern Greece from 1821 to the present

This paper reviews and interprets the history of the economy of modern Greece, from the eve of the war for independence in 1821 to the present day. It identifies three major historical cycles: First, the cycle of state and nation building, 1821-1898, second, the cycle of national expansion and consolidation, 1899-1949, and third, the post-1950 cycle of economic and social development. During these two hundred years, the country and the economy have been radically transformed. Compared to the first Greek state, Greece managed to almost triple its national territory, to increase its population by almost 15 times and to increase its real GDP per capita by another 15 times. From the margins of south-eastern Europe, it has moved to the core of today’s European Union. The paper focuses on the main determinants of economic performance during these cycles, with particular emphasis on the role and interactions of social and economic conditions, ideas, institutions and geopolitics. During the first two cycles, the economy underperformed, as state building and the pursuit of the ‘great idea’ were the top national priorities. Despite the early introduction of appropriate economic institutions, fiscal and monetary instability prevailed in the context of a relatively stagnant economy, due to wars, internal conflicts and the international environment. The economy and the welfare state only became a top priority during the third cycle, when a number of domestic and international factors contributed to economic and social development. Greece seems to have largely achieved many of its national goals, having consolidated both its borders and democratic institutions and become a relatively prosperous country in the core of the European union, despite the alternation of triumphs and disasters and the frequent occurrence of wars and internal conflicts, debt crises, ‘defaults’ or economic depressions. Yet many problems remain and the challenge for the future is to focus on reforms that will ensure even higher security and prosperity for the future generations of Greeks