## 6/11/11

### How long will last the crisis in Greece?

In our previous posts, we discussed the evolution of real GDP per capita in selected developed countries. One of striking examples of dramatic changes is Ireland, where we predicted a deep fall many years ago. This prediction was based on the empirically justified concept of constant annual increase in real GDP per capita, G, in developed countries. We found that in the long run the trajectory of G is a linear function of time:
G(t-t0)= G0+B(t-t0)
where G0 is the initial level of GDP per capita at time t0 in a given country, B is the country dependent increment measured in (chained) dollars. Because of the constancy of the annual increment of real GDP per capita (in the long run) in developed countries we call this type of real economic growth the inertial growth. It is an analog of mechanical notion of inertia.
It should be noticed that the rate of growth, dlnG/dt, has to decelerate with time:
dlnG/dt = B/G
Empirically, the introduction of a constant increment gives excellent statistical results and explains the evolution of real GDP per capita in the biggest developed countries. For Greece, we first calculated coefficients A and B in 2003 using data from the Conference Board . Figure 1 depicts two curves dG/dt vs G. The original curve is based on the published data. The corrected curve takes into account the ratio between total and working age population. Technically, one should not calculate per capita values using total population since only working age population produces all goods and services. In 2002, the slope of the annual increment (also show in the Figure) was large and positive. It was lower than that for Ireland or Norway but larger than in the biggest European countries. Since we predicted a deep fall in Ireland, we also could expect a smaller drop in the increment for Greece. It was not our primary interest, however.
Fig. 1. Annual increment of real GDP per capita in Greece as obtained from the Conference Board database. The mean value for the period between 1951 and 2002 is shown for the population corrected time series.
The current economic and financial crisis in Greece has attracted enormous attention. The reasons behind the crisis were actively discussed and we propose a simple explanation as based on the inertial economic growth.  Figure 2 demonstrates that the constancy of annual increment is a fundamental feature of real GDP growth. Several years of extraordinary fast growth in Greece observed in the 2000s must be finished in order to return the trend of the increment curve back to the mean value. The slope in Figure 2 is much smaller than that in Figure 1. Thus, one can expect that the annual increment of real GDP per capita in Greece may return to the level of \$520 any time soon. The fall between 2008 and 2010 has played its stabilizing role and the Greek economy is almost ready to continue its healthy growth.

Figure 2. The increment of real GDP per capita vs. real GDP per capita in Greece between 1951 and 2010.