Wednesday, March 18, 2015

Lapavitsas on Greexit

Costas Lapavitsas, who is now a member of parliament for Syriza, on Greexit, which he sees as the best option.
"There are three stages. First, as I said, is the negotiated, consensual, orderly exit. 
Second stage is recovery and that would depend very much on recovery of domestic demand which is very heavily repressed in this country. There are vast resources lying unused. Small and medium enterprises would be reactivated, that’s what would really restart the Greek economy. Not exports - this worship of exports is nonsense. 
But obviously that is not really a path for sustainable growth. What Greece would need after that would be an industrial policy to restructure its productive base, to integrate itself in the world economy on a different basis. That would take a few years. 
But Greece would be still part of a common market, as a member of the EU. So it is not so easy to go back to domestic demand and to the SMEs, because it would have to kick out the big companies that could still sell cheaper.

I believe that Greece could out-compete imports very easily. Unfortunately, wages have been destroyed during the last 5 years due to bailout policies. A devaluation of 15-20% (but no more since as I said the ECB would defend the exchange rate) would give a tremendous competitive advantage. Wages would then gradually rise again."
Read the whole interview here. My guess is he is assuming that it would give competitive advantage to domestic production, and allow for growth without increasing imports too much. Costas seems to be less hopeful about the effects on exports, which would seem reasonable. I would suggest that relying on the exchange rate would not be sufficient, and that some sort of import substitution would be necessary too.


  1. “I would suggest that relying on the exchange rate would not be sufficient, and that some sort of import substitution would be necessary too.” I think that sentence needs clarifying because devaluation automatically does bring about a fair amount of import substitution.

    1. Nope. Devaluation changes relative prices and making foreign goods more expensive reduces imports. Note that if the whole point is to get out of the euro to be able to increase fiscal spending (domestic demand), then this leads to an increase in imports. First is a relative price effect (substitution), and second an income one. Income effects tend to be larger. So you need an ISI policy, that is, an explicit government policy of reducing imports, tariffs, quotas, import licensing, etc. That's ISI, which is different than devaluation. Historically, ISI policies were actually pursued in Latin America with relatively overvalued (even if multiple exchange rates were used) exchange rates.

  2. If C Lapavitsas is arguing that the Greece economy can do well with the level of GDP, exports and imports it had in 2000-2001 and again in 2013-2014, and also needs structural reforms, then that's the programme agreed with the other 18 EU governments and that SYRIZA let expire on June 30th.

    Sure, Greece has much higher unemployment in 2013-2014 then in 2000-2001, even if levels of GDP, imports, exports are similar, but that's a distributional choice that Greece has made.

    1. No, I think he believes that Greece can grow after exit. I posted a more recent video in which he seems to suggest just that. I'm more skeptical as a result of the current account effects of higher growth. Costas uses Argentina as an example, but I have argued elsewhere that Greece is not Argentina


Trade and Finance

Teaching a course on international economics (trade and finance) for international relations students. More on that later. Just wanted to p...