Tuesday, 28 December 2010

We all know about hysteresis in unemployment, which basically tells us that the equilibrium rate of unemployment rate depends on current and past unemployment rates. This problem becomes more severe as the duration of unemployment duration increases

In the picture below, one can observe how the unemployment rate and real GDP growth have evolved since 1986 (when Portugal joined the European Union). Unemployment persistence is obvious and it is also obvious that unemployment tends to increase/decrease when the growth rate is below/above 2%.

Using the data on the Picture, I estimate na AR(1) process for unemployment, with real GDP growth as an independent variable. I use this very simple model to make some projections for the evolution of the unemployment rate.

I consider three different scenarios. First, I admit that until 2015 Real GDP grows at 5.46%. This is the average real GDP growth rate in the first six years after joining the European Union. Let’s call this the dream scenario. Second, I will assume that real GDP growth is equal to the last six years average: 0.59%. This is the pessimistic scenario. Finally, I will consider a realistic, some may argue that is optimistic, scenario and assume that the growth rate will be the average since 1986: 2.64%. The results are described in the picture below.

The Spanish Economy

Here's The Spanish Economy. No, it's not a Spanish counterpart to this blog, but rather a website set up by the Spanish government that "provides access to the latest key economic information on Spain in English in a clear and comprehensive manner". A quick visit suggests that it is rather well done, in the sense that most of it is composed of links to documents and data. In other words, it seems "strictly informative", although it is obviously more than that. Most of the official documents to which it links are actually in English, which is no small achievement. If you search "Spanish economy" on Google, the website is already in the top ten links. Judging from what Pedro Lains told us here, maybe the Portuguese government should get some inspiration from this. I'm afraid, however, that the title "The Portuguese Economy" is already taken.

Thursday, 23 December 2010

We have a problem

From here.

Tuesday, 21 December 2010

Good news, we hope

The budget execution up to November 2010 was announced, and apparently a positive evolution in the budget deficit occurs.
Some information from municipalities and some other institutions is still missing but unlikely to change the tone.
Curiously enough, in the "missing" ones we have the Parliament, the "agency for modernization of public administration" and the "agency for the knowledge society". I thought that these would like to be in the forefront...
Major highlights (by the Government): lower spending growth and increases in revenue (check here - in Portuguese, and you can download the data ; soon to be in English as well).
My highlights - increase in VAT is kicking in and accounts for almost all increased revenue, but also tax on car sales (as people are anticipating purchases of new cars) and tax on tobacco. These last two compensate on decrease of direct taxes on income. Not yet a reduction in nominal spending, but 2011 should see it given the pay cut in civil service.
My wishes for the next budget execution bulletins (or some other bulletins) - a quick-and-dirty assessment of how evolution is linked to measures adopted.

Sunday, 19 December 2010

Gulbenkian Prize

Congratulations to Luís Aguiar-Conraria (and his co-author Pedro Magalhães) for the award of the "Gulbenkian Prize for the Internationalization of Social Sciences in Portugal".

Thursday, 16 December 2010

Being visionary

Independently of the effect of the new initiative for the Competitiveness and Employment on the Portuguese Economy, it is already scaring to envision that, once the (inter)national crisis surrenders, a great number of new public institutes and projects can be potentially created to evaluate the impact of the new measures. I would suggest that the economic departments of our universities and their researchers take the lead and motivate their doctoral and master students to start working on applied microeconomic and macroeconomic papers to evaluate these measures. Get the data, and do an efficient, independent, and cheaper public service. A win-to-win opportunity, would say.


The title of this post summarizes the new Initiative for Competitiveness and Employment launched today by the Portuguese Government, with 50 (fifty, no mistake) policy measures.
If you can read Portuguese, the announcement is here.
For all the others, a quick summary:
     - measures aimed at exports (15, ranging from export credits to fiscal benefits)
     - measures aimed at bureaucracy removal /reduction (8)
     - measures aimed at the labour market (16)
     - measures aimed at real estate and housing markets (5)
     - measures aimed at fraud and fiscal evasion (6)
This sounds a bit like "carpet bombing" - something will work; in a statistical sense, at least this is likely to happen.

Wednesday, 15 December 2010

what if?

Looking at the news this afternoon:
- Government wants to set a ceiling of firing compensation paid by companies
- Government wants to make easier to get out the tenants that do not pay rents
- Minister of Finance denies role of IMF in Government decisions
- Prime Minister meets "social partners" to present the changes in labor law
I wonder whether it would be more credible if for a month only one announcement would be made - how well the Government finances went that month.
In the end, doing many things at the same time may just mean dispersion, while we really need to focus.
Just an idea for this afternoon, stop announcing more and more policy measures, just show and make sure the ones recently adopted work. Please???

Monday, 13 December 2010

Portugal and the IMF: 1978-79 and 1983-85

1, 2, 3 times or more I have been asked by journalists, both Portuguese and foreign, about the previous IMF interventions in Portugal: here is a detailed description of the two episodes by Ana Bela Nunes, an economic historian at ISEG.

Labor laws and precarious employment

   It seems more than obvious that one of the reforms that will be taking place in Portugal in the near term is the labor market reform. And no, I am not talking only about making firings cheaper. The truth is that, for better or for worse, more labor market flexibility is simply inevitable, either with this government (if forced by our European partners), or with the next government (the most likely outcome). Why? Because Portugal is the OECD country with the highest strictness of employment protection for individual workers, something that impedes a faster job creation and penalizes the competitiveness of our exports.
   Still, and even though this reform is inevitable, it would be nice if there were more elevation in the public debate arena with regards to these matters. The fact is that, among us, often political and ideological rhetoric take the place of common sense when we talk about these questions. And both common sense and abundant empirical research show unequivocally that out labor laws not only promote unemployment, but also they are the main reason that explain why Portugal is one of the countries with the highest incidence of temporary work in all OECD.
   In order to understand why, it might be worth looking to the graph below, which confirms that Portugal is one of countries of the OCDE with more precarious employment as a percentage of total employment (horizontal axis), something that is intrinsically correlated to our labor laws with regards to individual workers (vertical axis).
   It is also noticeable that, contrary to the (wrong) perception that is prevalent amongst us, many of the countries where labor laws are less rigid (i.e. where it is easier to fire individual workers) are exactly some of the countries that have strong Welfare States (e.g,. Denmark or Canada). That is, to make our labor laws more flexible is not akin to destroy our Welfare State. Quite the contrary. By promoting faster labor job creation and by enhancing the competitiveness of our exports, less rigid labor laws contribute to more wealth creation, which then can be used to protect the Welfare State. Denying this is mere ideological rhetoric.
   The words “Precariedade, precariedade, precariedade” (the incidence of temporary employment) should be front and center in the strategy of the main opposition parties when they defend deeper reforms of our labor laws. They should emphasize that the reform of our labor laws is an imperative because, among other things, we have to combat the incidence of temporary work and we have to create more employment. The truth is that our “irrevocable” labor rights (“direitos adquiridos”) are the main source of temporary work in the Portuguese job market. Labor economists know this for a long time. It would be nice if our politicians as well as all of us knew it too.
Source: OECD, Santos Pereira (2011) "Como Retomar o Sucesso"  

Note: A Portuguese version of this post can be found here.

Friday, 10 December 2010

Cronyism and the next government

One of the most interesting papers that I have recently read on the Portuguese economy was the paper (already referenced here) by Pedro Martins on cronyism with regards to public sector jobs. Martins uses the "Quadros do Pessoal" data in order to undergo an extensive empirical investigation of job hirings in public sector enterprises before and after general elections. The paper is important because it confirms fairly convincingly something that many suspected and from which we only had, up to now, anecdotal evidence: that hirings in public enterprises are strongly associated with general elections. Namely, Martins finds that hirings in public sector enterprises goes up immediately before and in the 3-6 months after a general election (see graph below, where period 0 represents the date of the election). Interestingly, but probably not suprisingly, the effect on hirings is stronger when the party in power changes (i.e. if there is a change in the "color" of the party in power), that is, when the jobs-for-the-boys effect comes clearly into play. The results hold even after Martins controls for experience, education, private sector hirings, among others.
   What this points out very clearly is that, in the last 30 years (i.e. at least since 1980, the year the data begin), public sector enterprises have been blatantly used for political gains and to reward whoever helps you get into power. Yes, there are jobs for the boys alright and  they are not only in the public administration or the State. Public companies also do.
   This is certainly not completely surprising, but it is surely very nice to have substantial and unequivocal evidence on the extent of cronyism in Portugal. One of the obvious implications of this study is that we now understand better why public expenditures have been so difficult to control in our country, or why the debt of public enterprises keeps on growing at, on average, about 3 billion euros a year.

Cronyism _ Job hirings in public enterprises before and after general elections
 Source: Martins (2010), and taken, with permission, from here.

   I would like to end with a word of caution about the future. It is widely expected that we will have general elections sometime in 2011 (hopefully sooner rather than later), after the presidential election is over and after the constitutional limits allow. It is also widely expected that there will be a government of a new "color"(to use Martins's terminology),  probably in coalition with a smaller party. Thus, the temptation to emulate the past will be there, with interest groups associated with the new parties in power pushing for new jobs for the boys.  Let's hope this does not happen. If it does, it would be simply unexcusable in times like these. The fact is that it is not worth changing the boys from pink to orange or even to blue just for the sake of doing it. Boys will be boys will be boys. And this "boy" culture and tradition is partly responsible for the sad state of our public  finances. Therefore, if the new government truly wishes to reform the State and get away from the sorry state of affairs that is taking place in Portugal right now, it must avoid, at all costs, the temptation to distribute new jobs for the boys in the State and in public companies. If it does so, the new government will fail and won't be able to implement a truly reformist agenda, something that Portugal desperately needs. Let's hope not. I am sincerely hopeful that next time will indeed be different (even if it is because we really can't afford to do otherwise).

Thursday, 9 December 2010

The usual, please

My friend André Azevedo Alves gives his perspective on the Portuguese situation in the Institute of Economic Affairs blog. Check it out.
André insists rightly on the need for a "haircut" on private creditors if a bailout materializes.
I would like to hear him on other serious issues such as private sector debt, the unbalanced relationship between the prices of tradable and untradable goods, or unit labor costs in Portugal. And ultimately membership in the eurozone.

Wednesday, 8 December 2010

Cronyism -- no jobs for the boy


Politicians can use the public sector to give jobs to cronies, at the expense of the efficiency of those organisations and general welfare. Motivated by a simple model of cronyism that predicts spikes in appointments to state-owned firms near elections, we regress 1980-2008 monthly hirings across all state-owned Portuguese firms on the country’s political cycle. In most specifications, we also consider private-sector firms as a control group. Consistent with the model, we find that public-sector appointments increase significantly over the months just before a new government takes office. Hirings also increase considerably just after elections but only if the new government is of a different political colour than its predecessor. These results also hold when conducting the analysis separately at different industries and most job levels, including less skilled positions. We find our evidence to be consistent with cronyism and politically-induced misallocation of public resources.

By Pedro Martins (read the working-paper)

Time (in)consistency once again?

   One of the more recurring features of Portuguese politics is the time inconsistency of decision makers. Probably the same happens everywhere.
   I would like to know the contribution of time inconsistency of policies to the slowdown in economic growth. Basically, if you cannot believe in agreements signed with the Government, this should have a cost in terms of economic activity.
   This was brought again to my mind by the agreement on minimum wage - It was signed 4 years ago an agreement involving the Government, the unions and the industry associations (I think the industry associations signed it, not sure, but it is not essential). It stated that minimum wage should go to 500€/month in phased way.
   Now, industry associations want the Government to refrain from it, based on the bad economic conditions. Unions (and left wing parties) argue the Government should stick to the agreement.
   For once, I agree with the later on the grounds of consistency of policies (they use other arguments, of course). Actually, it is in the interest of the industry associations that
the Government does it. Otherwise, any agreement with the Government becomes only valid until the next convenient moment to change it? and if instead of minimum wage would be a VAT tax? or an exceptional tax on sales with "frozen" prices? A bit demagogic, I know, but once you enter the uncertainty that agreements do not bind the parties, everything goes.
   Moreover, I was puzzled by a news report stating that some computations made by the Government showed little impact associated with the minimum wage increase.
   Overall, without entering the discussion of whether a minimum wage has negative effects upon employment and growth of economic activity, I feel that not respecting agreements must also be damaging, in a hardly visible way.

Tuesday, 7 December 2010

Making sense of external debt (?)

A few weeks ago, a piece on the FT mentioned that the Irish gross external debt was close to 1000% of GDP (not a typo!). Based on this observation, the FT commentator explained that the EFSF could provide liquidity to Irish banks but certainly not make them solvent. His conclusion might be true, but I believe that inferring solvency from gross (or even net) external debt is not correct. Today most developed countries have very large gross external positions (external gross liabilities and assets of 300% of GDP are quite common). These positions are the outcome of the massive increase in the size of capital inflows and outflows across countries experienced in the last 20 years or so. Most available data on bilateral external positions are based on the concept of residence. This accounting principle implies that a debt by, say a German bank located in Dublin on a French. resident is an external debt of Ireland vis-à-vis France, instead of a German debt. The BIS constructs a different measure (only for banks and for 24 developed countries), called “ultimate risk” basis, that identifies exposures on the basis of the nationality of the ultimate creditor and debtor. In short the “ultimate risk” basis is constructed to identify the bank that is ultimately responsible for the liability and is a better measure to assess solvency and liquidity. According to this measure, at the end of June 2010, European banks had 423 billion dollars claims on Irish banks, while Irish banks had 375.8 billion claims on European banks. Within Europe the net debt of Irish banks was therefore 47 billion or approximately 20% of GDP. The overall net figure is not available but we know that Ireland bank claims vis-a-vis “all countries” amount to 548 billion dollars and the 24 countries claims vis-a-vis Ireland amount to 518 billion. The graph below shows the creditors of Ireland (millions of dollars, June 2010, BIS.) The creditors breakup is useful to assess the transmission channels of a default and the incentives of each nation to bail out their debtor. (click to enlarge)
Portuguese banks have 80 billion dollars claims against other European banks while European claims against Portugal amount to 205 billion. Within Europe Portuguese banks have a net debt of 125 billion or 54% of GDP. Portugal bank claims vis-a-vis “all countries” amount to 140 billion dollars and the 24 countries claims vis-a-vis Portugal amount to 212 billion dollars.

Monday, 6 December 2010

Saved by the Irish?

A few days ago I wrote in another blog a post stating that Ireland was lucky to be saved by the EU/IMF fund. But now I am confused. Was the Irish rescue the rescue of the Irish economy? Or was it imposed on Ireland - and on its government that will suffer in next year's polls - to rescue the banks in Europe that hold a large share of the country's sovereign debt, as today's FT argues? In the meantime, Portugal's yields have stabilized. Were we just lucky not to have been "saved" by a similar loan? What's next?

Sunday, 5 December 2010

What do they know?

Strangely enough, in the last month or so it seemed that Portugal's politics was going to be run to the beat of the interest paid on sovereign bonds. At some point, 95% of analysts, politicians, and the media, were arguing that there could be no discussion about the 2011 budget, because otherwise the "markets" would ask for higher yields. The correlation however proved to be much lower than expected. Surprise? No, I don't think so. Markets are looking at models and computer screens, not at the Portuguese parliament or newspapers. And I have a hint that that is in fact so: the other day I got this email from a "lead analyst for Portugal in the Sovereign Risk Group" at one of the World top three rating agencies, asking for papers on a certain topic, but they had to be in English because he/she spoke (or read) "absolutely no Portuguese". How do you rate countries like that? And how do you decide about the price of the bonds? By looking at what Pedro Passos Coelho (btw, the leader of the main opposition party) says? Maybe not so. It was of course relavant that the budget passed. But also that there was genuine political dispute, and negotiations between the parties.

Friday, 3 December 2010

Courtesy of Portugal, the Daily Show within the New York Times

A lesson from thinking about economics is that the evident truths are, on closer inspection, just plain false or even silly. This piece in the New York Times looks like a sketch out of the Daily Show where a somber "analyst" makes grave statements without realizing how hilariously ridiculous it all is. According to the reporters, the problems of Spain, Portugal, and Greece are that:

i) "You can’t build an economy on real estate, finance and tourism."
ii) "...it’s an absurd idea to have the same currency in a country like Greece or Portugal as in Germany, which has totally different habits and culture."
iii) "They lived on a bubble of credit and real estate development that sent wages and debt soaring."
iv) Deficits and debt are high.

These reporters were looking outside their window to face Manhattan just as I am right now. Funny that they didn't notice that the city in front of them has:

i) An economy built on real estate, finance and tourism.
ii) The same currency as Alabama, Alaska, and California.
iii) Very large increases in credit, real estate development, wages and debt in the last decade.
iv) A huge amount of debt and current deficits in the state government.

Jon Stewart couldn't have done it any better.

Friday, 12 November 2010

The decline of the West

I just came back from Korea. Being away for a few days from the problems facing the Fed in the U.S. and the government in Portugal that have been occupying my mind had the virtue of giving me some perspective.
I already knew that the IMF had estimated a 4.5% growth in world output for next year: the highest in a couple of decades. But I just ran across the following graph from the IMF October economic outlook and it really stunned me. If a good image is worth a thousand words, this one is worth a thousand articles and books on the decline of the West (U.S., Europe and Japan) and the rise of the developing world.

I am writing a little more about this (in Portuguese) tomorrow in my column in jornal i.

Wednesday, 13 October 2010

Portuguese Higher Education in a British Mirror

Figure 1

The UK received this week, not without some trepidation, the conclusions from the so-called Browne report on higher education and student finance in England. As was long expected, the review committee recommended an end to the cap on university fees, currently £3,290 per year (€3,800). The report suggests that different universities should charge different fees and, in particular, that world-class institutions should be allowed to charge much higher fees from their students, possibly above £12,000 (€13,800) per year. The report justifies this proposal for increased private contributions as a necessary means “to support high quality provision and allow the sector to grow to meet qualified demand.” The current budget crunch added to the urgency of these conclusions, as the country braces itself for the comprehensive spending review due next week. Today’s newspapers rumoured that the government is set to cut up to 80% of the public funding of university teaching, which would leave UK universities in serious financial strictures.

Earlier in the year, the results of the university admission exercise revealed that more than 150,000 applicants would not get a place, out of a total of 660,000. In the face of such excess demand for university places, elementary economics would suggest that some price rationing was in order. Some politicians, parents’ and students’ representatives have contended that a fee hike would unfairly saddle students with a heavy debt burden at the beginning of their working lives. Furthermore, fees of £12,000 or more would surely dissuade bright or otherwise aspiring pupils with an underprivileged background from applying at all.

The authors of the report disagree and take particular pains at arguing how this dissuasion effect can be avoided. One of the reasons is that graduates can pay more for their education. How much more? The authors rightly leave that to the market, while noting that “compared to other countries, high numbers of students in England complete their degrees and go on to employment with an earnings premium that is high by international standards.” This “earnings premium” is measured as the net benefit (in lifetime earnings) from completing a degree over the expected life-long remuneration of an individual who enters the job market with a high-school diploma. According to the data in Figure 1, this premium in the UK stands at slightly above 200,000 US dollars (€150,000) for a male with higher education. This is a third higher than the OECD average.

We all know the debate, as it has been rehearsed several times in Portugal since 1992. What I found interesting in the report was the oblique reference to Portugal as an outlier in the context of OECD countries. Portuguese university graduates have a staggering relative advantage over their non-degree holding competitors in the labour market. We currently lead the OECD in both net and in gross benefits from higher education. A university education is worth today €265,000 in Portugal, fully 2.5 times the OECD average.

This is clearly not a matter to be proud of. As a university lecturer myself, I refrain from commenting on what a fee hike from the current €920 could represent for the quality and growth of Portuguese universities. But I cannot but see the connection between a very high “earnings premium” and the low fraction of the population that has attained a university degree (Figure 2). Contrary to a contemporary current of opinion, there may not be “too many graduates” looking for inexistent jobs, but too few.

Figure 2

And here is another connection. A very interesting book recently singled out Portugal as an outlier, again for the wrong reasons. The authors of The Spirit Level notice that by level of income inequality, Portugal comes second among OECD economies, just after the USA... Most economists will agree that access to education is a powerful equalizer of opportunities, and that, vice-versa, a restrictive university system is a certain way of perpetuating income (and social) inequalities, particularly in our current skills-intensive model of economic growth. How one may go about increasing access to tertiary education is another question (namely in terms of how to split the cost between the state and the students), but the weight of evidence about the consequences of not doing so cannot be ignored.

Friday, 8 October 2010

Thursday, 30 September 2010

The Price of Irresponsability

A quick assessment of the new austerity measures (in Portuguese... sorry!).

Friday, 24 September 2010

What to think

1) The negotiations between Passos Coelho, the leader of the main opposition party, PSD, and José Sócrates, the Prime Minister, did not really break down. They were simply interrupted. I hope. The two men are clashing in many issues and one of them is certainly their character - I don't need to have lunch with Sócrates to know that I wouldn’t buy a second hand car from him.
2) The Prime Minister wants Coelho to sign a blank cheque before the Budget goes to Parliament, in a fortnight’s time, and of course the latter does not want to do that: we may guess that he wants his MPs (unfortunately he is not one of them because the former PSD leader blocked his election) to discuss the budget, loud and clear, so that he does not loose his electorate.
3) Passos Coelho should not follow the same people in his party that proposed the "revisão constitucional" which was an ideological, badly designed and unnecessary move. He does not need ideology but pragmatism instead.
4) Cavaco Silva, the President, will ultimately help Passos to get out well from this episode.
5) Passos needs to get the Budget passed and to be able to say that he did what was best for the country.
6)It may be necessary to raise taxes in order to fulfil the deficit target for 2011 agreed with Brussels.
7) Contrarily to common sense widely spread in Portugal and abroad, this country has a good record in keeping its international financial obligations and that tradition is well embedded in both the Socialist and the Social Democratic parties.
8) People are not protesting on the streets, contrarily to Greece, France or even Spain, which somehow prouves the point above.
9) Since Cavaco Silva´s reforms, back in the 1990s, Portuguese governments have at their disposal enough tools to cut expenditure and/or raise taxes, as they wish (tools that Mário Soares, for instance, did not have in the early 1980s).
10) Let's see what happens next.

Saturday, 11 September 2010

SCUTs or how to make life messy...

   Last week, the major decision from Government was to introduce tolls in highways that were built under the concept of "no cost to the user" - Government would pay private contractors that built and operate the highway according to traffic (with some "demand insurance" though).
   Now, faced with severe budget constraints and having to cut down public spending, the Government introduced payment in highways where people were already used not to pay.
   But given the protest of local populations, that were using arguments put forward some years ago by the same Government, exemptions and discounts were created, based on household distance to the highway.
   From a pure economics viewpoint, price discrimination, as this is the case here, can be welfare increasing - translating from our jargon, it may be good for society that different prices apply to different people.
   The problem is when pure economics meets political economy - by having differential treatment as a rule, everyone will claim and press the Government to have particular exceptions - thus transforming tolls in highways into a bargaining game.
   I wonder what will be the end result, especially if in highways where no price discrimination exists populations start demanding application of the same rules.

Saturday, 4 September 2010

The monster fights back

In Greece, until July, public expenditure had fallen by 14%; in Ireland 2.9%; in Spain 2.5%. What about Portugal? It raised by 4%.

-- Ricardo Reis

Sunday, 29 August 2010

Nice trend, hum?


Monday, 12 July 2010

Is it so?

"The policies of German Chancellor Angela Merkel in the current economic crisis are comparable with those of Margaret Thatcher, writes economist Pedro Lains in the business paper Jornal de Negócios: 'Although with more pragmatism than ideology Merkel is currently pursuing a similar course to Thatcher's in the 1980s. If Germany got it's way financial discipline would rule in politics, not the money-wasting of the states which in Merkel's eyes is fatal for growth. For Europe she wants less integration and more stipulation of costs as well as regulations on who covers them. What will this stance bring Merkel? Does she represent the majority in Germany? Or is there a more pro-European Germany that is passively waiting for the crisis to end? Merkel's election results of recent months are encouraging for Europe. Perhaps Merkel will suffer the same fate as her predecessor: she'll be toppled once she's solved the main problems. But even if she loses she will win. For Europe will no longer work the way it did when she took office.'"
From Eurotopics.

Wednesday, 7 July 2010

The euro-crisis: necessary versus sufficient conditions of the eurozone framework

   There are two views on the causes of the current European crisis. The following quote by Wolfgang Schauble well represents the first:
   To the question of what caused the recent turmoil in the euro zone, there is one simple answer: excessive budget deficits in many European countries (FT June 2010).
   The second view (here) is that that the markets finally realized that there is no mechanism to correct external imbalances beyond self-equilibrating forces.
   The fiscal irresponsibility of Greece can partially explain the reasoning behind the first view. I say partially because Greece is such a small fraction of the EMU GDP that it cannot be the sole cause of the current crisis. It is true that during the last decade, the fiscal behavior of most other EMU's members, especially the three largest, has not been irreproachable. Nevertheless pointing to excessive deficits as the simple answer of the euro-crisis appears simplistic and ... insufficient. Consider that two of the countries most affected by the crisis are Spain and Ireland. The same two countries have been the most virtuous fiscal entities of the euro-zone, the champions of the Maastricht Treaty criteria so to speak, as the following graph shows (click to enlarge). I take stock of the Irish and Spaniard experience to conclude that lack of fiscal rectitude is not sufficient to explain the current euro-turmoil.

Sunday, 4 July 2010

I'll be back

   Like the famous quote, Telefonica is announcing "I'll be back..." to take VIVO from Portugal Telecom - the fight for the Brazilian joint-venture of the two firms was to be expected, sooner or later.
   Although most of the discussion has been about the recent use (and abuse?) of golden share rights by the Portuguese Government, there is a renewed lesson from all this.
   And that lesson is plain simple, and comes over and over again - the notion of "core national shareholders" in so-called "national champions" is quite elusive and it meltdowns every time
it faces a sufficiently high price. No wonder, and actually I would not expect any company or bank to let go profits just for "national pride". After all, they can always claim they will put the money to good use (and they hope better use) than keeping the current shares.
   Let's take some basic economics (and get corrected if I do something wrong...). First, current shareholders of Portugal Telecom (PT) are not forced to vote in favor of selling Vivo to Telefonica. The single argument to sell is the price.

Friday, 2 July 2010

The importance of Portugal to Portugal Telecom

   In a segment in the night news yesterday, the CEO and chairman of Portugal Telecome (PT) argued that the Brazilian market is crucial for the company. To back it up with numbers, the Brazilian market accounts for 72% of their costumers, 45% of their revenues, and 40% of their profits.
   There's another way to look at these numbers. Even though the Portuguese market only accounts for about 28% of PT's customers, they generate almost 55% of its revenues and 60% of its profits. It looks like what is really crucial for PT is to keep competition out of the Portuguese market. Just imagine if the government (underhandedly) stopped blocking competition from abroad, and Telefonica or others entered the Portuguese market starting a price war?
   PT might not be happy, but the Portuguese customers would be: ultimately, they've been the ones financing PTs Brazilian expansion all along.

Monday, 28 June 2010

Summer, World Cup or both?

   Suddenly, all the discussion about the Portuguese economy faded away, shadowed by the World Cup in South Africa, and by arrival of Summer.
   Still, the worrying fundamentals did not disappear. We will have to come back to them soon.
   Meanwhile, this month taxpayers will be hit by the increase in taxes announced some weeks ago. At the same time, the Ministry of Finance is making available a new instrument of public debt, for long term investments (apparently, for more than 5 years, it pays more than current instruments to the small investor). Good news that Portuguese families can invest at a rate higher than time deposits and Government get funding below rates in international markets.
   I did not went to look into the details of the product, but I would look for clauses that prevent "opportunistic" behavior by future Governments in case rates in international markets fall below that of this new instrument (based on past decisions, future Governments may change conditions, hurting long term small investors).
   However, access to public debt is not yet a couple of clicks away in our computers...

Saturday, 19 June 2010

A Review of "Economia Portuguesa, As Últimas Décadas"

   In today's issue of Diário Económico - a Portuguese daily newspaper on economic and financial affairs - I write a short review of "Economia Portuguesa, As Últimas Décadas", Luciano Amaral's latest book, published by the Manuel Francisco dos Santos Foundation. Read it here.
   Foreign readers will have to forgive me but there is no English version available.

Friday, 18 June 2010

Shy Entrepreneurs

   Last night I had dinner with a group of friends from high-school that I hadn't seen for a long time. It is of course a great joy to meet good old friends, however I anticipated some of our conversation would touch on somber topics. After all, the Portuguese soccer team didn't really put up a promising performance in their first World Cup game. Instead, we didn't discuss soccer at all, all we talked about was the Portuguese Economy.
   Like me, my friends are all about turning 40. Which means they lived through the great Portuguese stagnation during a key period of their life-cycle, their 30's. Their view is that one of the reasons we did so badly over the past decade is that Portuguese entrepreneurs are too shy, in the sense of taking on too little business risk. This is a cultural trait, the argument goes.
   I have heard this argument many times over the years, and I'm very skeptical about it. Cultural traits can change very quickly with incentives. My view is that it is more helpful to think of Portuguese entrepreneurs as rational profit maximizers. If they look shy, then it must be because taking risks doesn't pay-off for them. I can think of a few reasons why. First, why take on risks when, if things go well, you get taxed heavily? Second, why take on risks when, if things go badly, you cannot easily fire workers? Third, do financial markets provide entrepreneurs with enough funding and, if so, do financing terms provide entrepreneurs with some degree of risk-sharing (i.e., allow them to pay back a bit more if things go well, and a little bit less if things go badly - in other words, not the terms offered by standard debt/bank loan contracts)? Why take on risk if you have to bear it all by yourself?

Tuesday, 15 June 2010

world cup and productivity

   Half of the country is stopping today to watch a game on TV; according to newspapers, major companies are allowing workers to see the game (it takes place at 15h00), as long as it does not hurt productivity.
   I wonder what are the effects of this sort of events on productivity, I could not find such an assessment, but likely the main impact is in spirits not on hours worked...

Wednesday, 9 June 2010

700,000 New Emigrants

   During the research for a forthcoming book, I started to think about the impacts of our prolonged stagnation on the job market. Interestingly, in spite of low job creation, until recently unemployment never rose to really high levels. Therefore, I was left to wonder what could cause such a phenomenon. The answer was relatively obvious: emigration. We all know that Europe exhibits a low degree of job mobility, but we also know that, historically, Portugal has been a country of heavy emigration. Thus, I decided to check the emigration figures to see what was going on. Unfortunately, after the introduction of the European Single Market, many European countries stopped collecting data on immigration for European workers. Similarly, Portugal used to have a "passport for emigrants", which allowed us to collect data on migratory flows, but that too was abolished in the early 1990s. 
   The solution to get the emigration data was to use a combination of labor market surveys, registers of national insurance numbers, the OECD immigration dataset, as well as the immigration figures for the countries that still collect them.
   The results of this research truly surprised me. Between 1998 and 2008, around 700,000 Portuguese decided to leave the country in search of better opportunities elsewhere. The figures are still lower than in the 1960s and early 1970s, but not by much. And the trend is accelerating: in 2007 and 2008, more than 100,000 Portuguese decided to emigrate.
   We don't know how much of this emigration is temporary or permanent, but, obviously, even if it is temporary, migratory flows can easily become permanent. No consolation there, even if we assumed that emigration is mostly temporary (which I doubt).
   One thing is certain. The prolonged economic stagnation is starting to have a major impact on the lives  of tens of thousands of workers, who are increasingly opting to find jobs elsewhere, rather than waiting for an illusive economic recovery. Alas, this trend is likely to persist if the Portuguese economy continues to be stagnated in the next few years.

Tuesday, 1 June 2010

P(II)GS: too big to fail.

   A recent Report by economists at the Royal Bank of Scotland estimates that the total amount of public and private debt issued by entities resident in Greece, Spain and Portugal that is held by foreign financial institutions -- financial entities outside the P(II)GS -- is about 2000 billion euros. This is about 22 percent of the euro area GDP.
   (by the way, I found no links to the report itself, but a brief description that essentially corroborates the calculations may be found here .
   The message seems clear: P(II)GS are too big to fail.
   Hence the bail-out that European Union leaders (together with the IMF and the US) have designed for Greece.
   And hence the need for fiscal rules, coupled with fiscal federalism, that several of us have been arguing for in this blog -- stressing, as I have done, how they would be positive for our profligate country in need of importing yet this good that it can not produce domestically (discipline).
   I think, moreover, that this Report makes it clear why the solution that Ricardo Cabral devised in a post to EuVox -- rescheduling and reestructuring -- is economically misconceived. The international financial turmoil would be enormous and the Euro would be in real danger. We wouldn't want to have Argentina in Europe.
This said, the essence of the problem remains to be solved: P(II)GS simply cannot live above their means so systematically and deeply. Think about Portugal: 10 percent of GDP of current account deficit, year after year; a country that is lacking structural competitiveness; and politicians that (some, to be fair) remain autistic about this.
   Against this background, has the Portuguese government done everything to its reach in order to contain the indebtedness of Portuguese entities? I do not think so.
   Public expenditure should be significantly reduced, which I haven't seen so far (at least compared with Ireland and Spain's immediate measures). And -- a crucial 'and', for me -- renewed incentives for residents to hold public debt should be created. The Portuguese twin deficits will only be tackled if and when the Government actually stops spending inefficiently and sucking resources from the public to finance that spending; and when it creates virtuous 'forced savings', instead of the vicious ones that have been recently implemented (increased taxes). If the Portuguese save more because they are stimulated to allocate increased savings to public debt, the international financial exposure of the Government would fall, imports would deccelerate and the international financial exposure of the country as a whole would decrease; the immediate signs needed for Brussels -- cutting the deficit -- should have given much more via spending cuts than they have actually been given.

Thursday, 27 May 2010

The truth behind the passion for education

In the last few years, several of our governments have made a strong commitment to invest in education, in order to improve the economy’s human capital and competitiveness. And commitment there was. After decades of underinvestment in its human capital, Portugal now spends more in Education in percentage of GDP than the average country in the OECD. The big question is thus: how efficient this investment in Education has been to raise both the quality and quantity of human capital? And the sad answer is: not much.
How do we know that? Well, we just have to look at the results of the PISA surveys to know that the quality of education in Portugal is still somewhat lacking. Simply put, nobody in the OECD scores worse in terms quality of education (math, reading and science) than our students, with the dubious exception of Mexico and Turkey. Still, and knowing that the PISA methodology is not perfect, do we have any other evidence with regards to the efficiency of our educational system? The answer is positive. Luckily, the new Barro-Lee dataset has just been published and the results are simply very telling.
There are good news and bad news when we analyze the Barro-Lee data on average years of schooling.
The good news is that, indeed, and as we can see in graph 1, there has been a steady increase in the average years of schooling since the 1950s, and, more particularly, after the implementation of democracy. 

Monday, 24 May 2010

A balanced budget by 2016

Independently of whether we decide to impose constitutional requirements on the growth of public debt and the budget deficit (a good idea, which I have also defended here), I strongly believe that the next government would greatly benefit if it could achieve a balanced budget as rapidly as possible.
More specifically, I believe that a balanced budget could be achieved by 2016 without unacceptable sacrifices or social tensions and without a major recessionary impact. Why? Because, if all goes according to plan (a big if, I know), the budget deficit will be below 3% of GDP by 2013. Hence, the government would “only” need to reduce the deficit by 1 percentage point per year until a balanced budget is reached by 2016. A 1-percentage point per year reduction in the budget deficit does not strike me as recessionary, especially when compared with the targets of deficit abatement already set for 2010 and 2011.
The question is thus: Why should we aim for a balanced budget? Two words: credibility and reform. Let’s start with the former. One of the sad state of affairs of our economic policy is that most of our governments (not all, but most) have shown a total lack of respect by those who ultimately pay the bills: the taxpayers. By expanding public expenditures virtually without restrain, the Portuguese governments are constantly expecting not only that the subsequent rise in the tax burden will not harm the economy, but also that taxpayers will not mind paying the tab for the rise in expenses (obviously, the last few years have increasingly shown that these two premises are simply wrong).
Therefore, it is not totally surprising that, since democracy was implemented, no government was even close to achieving a balanced budget. Far from it. As we can see in the graph below, the Portuguese governments have always maintained significant budget deficits, even at times of fast economic growth, when revenues are higher. 

Wednesday, 19 May 2010

The state of the Union

Even before it began, Europe's moment as a major world power in the 21st century looks to be over. Richard Haass
The euro is in danger…If the euro fails, then Europe fails. If we succeed, Europe will be stronger. Angela Merkel

I think of the current state of the EMU as the result of three events. The first event is the political decision to adopt a common currency leaving EMU members without automatic mechanisms to adjust to external imbalances beyond self-equilibrating forces. The second event is the global financial crisis with her consequences including the recognition that large shocks are not an historical curiosity. The third event is the sudden comprehension by the financial markets of the first event.

The next figure partially summarizes the state of the EMU. The data are from the ECB and are used to set the stance of monetary policy.

Two sub-periods are evident: the pre-crisis and the post-crisis periods. The first 8 years show the performance of the ECB in controlling inflation ad stabilizing it around 2%: impressive. Equally impressing is the inflation oscillation that started in 2008 and is still unfolding. The EMU public debt to GDP ratio was stable at roughly 70% (10% more than the Maastricht rule) until the global financial crisis. The decline in output and the consequent worsening of public finances have now increased the debt to gdp ratio to almost 80%. Similarly the EMU public deficit has fluctuated around the -3% Maastricht limit until it ballooned during the crisis. Notably the EMU area has always had a fairly balanced current account and her actual net external position is small. The EMU growth has averaged 2.3% from 1999 to 2007 to later collapse and the EMU unemployment rate moved around 8.5%.

I see a picture of a sufficiently solid although static euro area that was hit by a large shock. There could be some concerns regarding the control of inflation (personally I am more worried by the downward trend of the inflation rate that excludes energy). The unemployment performance is unsatisfactory but this is not the picture of a collapsing economy. To observe the large imbalances that are threatening the euro we have to shift to a disaggregated picture.
The next figure depicts the state of the individual members of the EMU.

The heterogeneity within the euro is large in every dimension. Some states have very large debts, some have very large current account deficits, some have both and other have incredible unemployment rates for a modern democracy. The crisis has potentially put some of the weakest states in an unsustainable debt position exacerbated by large external imbalances. The heterogeneity per se is not a sufficient condition for questioning the existence of the euro area (and weights matter). For example the US states are very different in terms of employment, fiscal stance, size, productivity, ratings, etc (see here and here). The EMU has to design and adopt the minimum set of adjustment mechanisms that have to be present within a common currency area. There are many proposals that are discussed such as a common bond market and a larger fiscal integration. For the latter it could be interesting for europeans to know how much of the adjustment to the current shock is achieved in the US through automatic stabilizers such as unemployment benefits and how much is achieved through labor mobility (workers migration).
What is really necessary is for the EMU leaders to decide if they want to continue the integration of Europe (and how: a centralized state or the Europe of regions) or decide to go back to the now obsolete nation-state paradigm. A shadow is rising within Europe and it requires courage to dissipate it.

Tuesday, 18 May 2010

New author

We welcome in this blog a new author, Manuel Mota Freitas Martins, who is at the Economics Faculty, University of Porto.

Fiscal federalism

   I found the latest post to this blogue, by Pedro Pita Barros, most interesting, and I dare to take on his challenge and "say something".
   Let me begin with my aprioris.
   1. I consider Luis Amado one of the most intelligent and well prepared Portuguese politicians -- in fact, one of the very few.
   2. I think that the only way out for the Euro to go on is for the Area to embark on some sort of fiscal federalism.
   Hence my interpretation: Luís Amado is setting the stage for such a reform, as well as the Portuguese committment to it: a European fiscal federalism that may be accepted by Germany and the other relevant countries in the Area; only with fiscal rules would the big European countries accept it.
   The European history seems to suggest that the "democratic way" is a receipt for failure, as regards economic reforms. Thus, I think that the way things seem to be going is the right one: politicians should cook everything carefully and have the Parliaments approving fiscal federalism (the problem here are constitucional laws... ok, I'm doing some wishfull thinking here)
   Finally, let me stress that fiscal rules are of the outmost convenience for Portugal and the likes. If only we've had fiscal discipline imported, in the past, as we have imported monetary discipline...

too late for a commitment?

   Yesterday, a surprising proposal was presented by Luis Amado, a member of the cabinet: set a constitutional limit to the public debt and to the public deficit.
   Two issues deserve comment:
   a) the idea itself
   b) the moment it is presented
   A final curiosity - being proposed by a current Minister, who does not hold an economic ministry!
   About the idea, given the reputation of Southern countries spending too much, this could be a credible commitment if the mechanisms in action in case of non-compliance are clear, transparent and fair. What can they be? not sure, suggestions ?
   About the moment, given the "troubled waters" with financing of public debt, I wonder how much this measure can make a difference. It only works for the long term, but that's probably better than just taking measures for the next two weeks.
   Since the problem of the Portuguese economy has been pointed out to be one of sluggish growth, with Government presence in the economy being one of hindering factors, this measure may restore some confidence on better long term prospects for the economy.
   On the other hand, it may be seen as only "lip service" to current difficulties, and be disregarded as irrelevant.
   I lean to the side of considering it adequate, if political parties find a way to make it enforceable, as just writing it in the Constitution does provide much, even if in the short run it does not change much.
   What do you say?

Too many words

Against all odds, Paul Krugman wrote too many words: his argument in this post, which will certainly be quoted by many in Portugal, boils down to this: the euro is impossible. I hope that history will prove him wrong. How many in America bet, in 1948, that the ECSC and the EEC would work out? Are things different now? Yes and no - and the no bit is certainly more relevant.

Wednesday, 12 May 2010

Uncharted waters

Since the beginning of Spring 2010 Portugal's economic policy has effectively ceased to be independent. To put it more accuratelly, it has lost the relative autonomy it still had. For the time being, Brussels and the European Council will be ruling Portugal and Greece (maybe Spain should also be included). We are now travelling in uncharted waters. And we don't know how long the journey is going take.

In good company

"So why not also in Europe under the euro? As I see it, domestic German policies, perhaps aimed at absorbing East German unemployment, forced a structural trade surplus. The strong euro, along with the automatic recycling of Germany’s large trade surplus within Europe, ensured the corresponding trade deficits in the rest of Europe – unless Europeans were willing to enact policies that raised unemployment in order to counter the deficits. As long as the ECB refused to raise interest rates, southern Europe had to accept asset bubbles and rapidly rising debt-fueled consumption. // This couldn’t go on forever, or even for very long. Now southern Europe is paying the inevitable price, and of course the moralists are accusing the south of being shiftless and lazy, confusing the automatic balancing mechanisms in the balance of payments with moral weakness." See here

Tuesday, 11 May 2010

A good visual presentation

Courtesy of Der Spiegel, on the fiscal problems of Europe.

Thursday, 6 May 2010

Portugal external position

A graph is worth a thousand words. Still I will give you a story. Portugal trade balance (TB) deficit has always been present (from 1985 to 2008 the average was -7.4% per year). It is intrinsically structural and has a large negative effect on the current account (CA). From 1985 to 1995 the surplus in invisible current transactions (including those without a quid pro quo) kept the CA balanced. The decrease in transfers and the expected participation into the EMU spurred an increase in consumption and investment worsening the CA. Today the CA deficit is larger in absolute value than the TB deficit. A dry story. Portugal must reverse the CA trend and the consequent deterioration in its external position. Within the EMU the old short run fix offered by a devaluation (it might have worked in the 80's but was massive) is not possible anymore. I wonder what part of the CA can be timely influenced by policy. Should short run rebalancing focus on the invisible transactions? The current transfers cannot be controlled (meaning they are at other's discretion). Can a better management of the external Investment have some effect? I suspect that long run rebalancing will only come with a transformation from a net importer into a net exporter (as it is suited to a small open economy). I might have an intuition on how to do it but I need to dig a little deeper into the details and anyway it is long run idea. Another graph.

Wednesday, 5 May 2010

Debt, expectations and reality

Private debt in the Portuguese economy increased sharply after the mid-1990s – households and non-financial firms’ debts increased from 26% and 47% of GDP, in 1995, to 99% and 115%, in 2009, respectively. Lower inflation rates and interest rates (that followed the adhesion to the EMS and to the Euro), high GDP growth rates until 2000, development of the financial system and urbanization are among the main causes of that trend. Although consumption smoothing is the obvious explanation for households’ behaviour, the causes of the huge non-financial firms’ indebtedness is not so obvious (it does not show up in productivity statistics, for example). Public debt as a percentage of GDP was fairly stable in this period, despite the increasing weight of public expenditure in GDP. The increasing trend in private debt coincided with a decreasing trend in households’ savings. Greece, Spain and Ireland shared some of those trends and its corollary: significant current account deficits.

In the first years of the euro, there was a scholarly discussion on the implications of current account deficits in the context of the European Monetary Union. The position that prevailed in this debate was that external imbalances were benign and should not be the cause of concern: poorest countries were catching up and needed more investment (which was expected to get a higher return in these countries). This was also the conclusion of Olivier Blanchard and Francesco Giavazzi, in 2002, published in Brookings Papers in Economic Activity:

The fact that Portugal and Greece are members of both the European Union and the euro area, and the fact that they are the poorest members of both groups, suggest a natural explanation for today’s current account deficits. They are exactly what theory suggests can and should happen (…).
(…) we discuss whether the current attitude of benign neglect vis-à-vis the current account in the euro area countries is appropriate, or whether countries such as Portugal and Greece should take measures to reduce their deficits. We conclude that, as a general rule, they should not.

The behaviour of interest rates suggests that, until the disruption of the international financial crisis, markets shared that view, that is, they seemed to have taken Germany and Portuguese debt as almost perfect substitutes.

The recent increase in the risk premium of Portuguese debt seems to be an adjustment to reality. We hope there is not too much overshooting in that process. And, of course, we should improve our reality.

Saturday, 1 May 2010

The best electoral system for Portugal?

Pedro Passos Coelho, the new leader of the main opposition party, PSD, has called for a revision of the Portuguese constitutional law. Among other things, he wants to change the Portuguese electoral system.

Thursday, 29 April 2010

A Little Common Sense

In the last few days, we witnessed dramatic reactions to the downgrade of the rating of the Portuguese public debt and to the volatility in the financial markets. Some analysts and politicians went as far to alert us that we were pretty much on the edge of an abyss and that the country has no future. Some have even argued that the spreads are increasing so much that soon enough we will not be able to repay our debts and we will have to declare bankruptcy. They might as well be right (although I suspect, and I hope, that they are not). Still, in spite of all the hype and drama, shall we have a little common sense here? How can anyone honestly say that 6%-7% interest rates are unprecedented and that will make the repayment of our public debt unsustainable? Really? It might worthwhile remembering some things from our recent past then. When the IMF came to Portugal in 1983, Portuguese public finances were also in very bad shape, and thus the IMF imposed some draconian measures in order to put things back in shape. A couple of years after, the IMF was praising Portugal for being so successful in correcting its fiscal imbalances (there are important lessons to learn from this period, in fact). It is also interesting to remember that, at the time, the government was paying more than 20% interest rates in order to finance its debts (see table below). In fact, we don’t even have to go that far in time. In the 1990s, before we started the process of nominal convergence on the way to the euro, the interest rates on government bonds were still hovering around 10%.
What has changed since then? Well, we stopped growing (our biggest problem) and the country’s external indebtedness increased substantially. Thus, the risks associated with our debt are now greater. Still, this does not mean necessarily that we are on the edge of the abyss. As long as the government is responsible enough to follow some good policies (i.e., cut expenditure, suspend the large public works projected, and stops increasing future public debt through the PPPs), we will certainly be a lot more prepared to convince the markets that we don’t deserve their wrath. The big question is thus whether this government can, for once, stop behaving irresponsibly. After the latest news, I am not so sure.

Wednesday, 28 April 2010

An Investment Opportunity?

For everyone blaming the markets: it seems we have a great investment opportunity here. How about investing their own personal wealth in Portuguese government bonds? This should pay out handsomely, given that the high spreads are not justified by the risk of default. Is anyone doing it? Some food for thought ;-)

How far can we go?

   Globalization is good for the World. Europe may be loosing a few positions in the race for prosperity, but China, Brazil and India, have gained a lot. Only Africa is not playing the game (because it is too poor to take advantage?). But Globalization is also mad and needs to be somehow controlled. Otherwise it implies that the haves get a disproportionate share of the gains from it, in comparison to the have-nots. It is bearable, because it is not about the transfer of income per se, but about the distribution of the gains of the more global economy (look at Africa, again, but also at the gains of the financial system around the World). Globalization also needs to be governed because it is a source of instability and this is even more important. We should worry about that, because Globalization is certainly reversible.
   The European periphery in the eurozone is now facing a tremendous crisis, which ultimately affects the whole monetary union. The crisis is the consequence of three intervening factors: the international crisis, which originated in 2007 in the US; the performance of peripheral governments; and consumer preferences. These are the direct causes, of course. It is relevant to ascertain the relative importance of those factors, but that requires research with an appropriate analytical framework for which we are still waiting for.

Shame on Europe

   Even though I do strongly believe that the current financial instability is largely our fault, it is hard to believe the lack of leadership that, once again, is plaguing Europe. The current turmoil is partly our fault because our governments have not understood the unsustainable path that they have been undertaking (spending and increasing future expenditures as if there was no tomorrow, or, at least, as if we did not have to pay the bill sooner or later), and because our current government has behaved in a reckless and irresponsible way when all the symptoms that we could be facing this situation were all there at least since the end of 2009. What have our political leaders done? Instead of acting decisively trying to persuade the markets that we were in control of the situation, our political leaders decided to point fingers at the financial markets (bad, bad markets!), and to pretend that only the Greeks were at risk, not us. Instead of designing a credible plan that could be sold to our European partners and to the financial markets, we opted for a so-so plan that promised much, but did not deliver enough. Instead of focusing on our grave economic problems, our political leaders preferred to spend their time arguing about political scandals and the looming prospects of new elections. Simply regrettable. We might end up paying a very hefty price for this carelessness and for this irresponsibility. Let’s hope not. Let’s hope that today’s meeting between the Prime Minister and the leader of the opposition marks the start of a new beginning, in which we are able to design an improved plan that is able to convince the markets that we are committed to sounder public finances and more realistic economic policies.

Sunday, 25 April 2010

On the funding of university education

   In the current period of tightness in public finances and economic difficulties, one would expect most important areas of public spending to come under scrutiny. One area that has seldom made it into the headlines in Portugal is the funding of university education. This is not common to some other countries, where the issue receives substantial interest.
   Publicly funded education has been argued for as a matter of fairness and efficiency: the quest for equal opportunities for all together with perceived high public returns to the investment in terms of crime, health or democratic participation are the most common arguments. But common agreement finishes at the end of secondary school. For public returns are more difficult to be perceived and private returns seem to be very substantial. Short-run credit constraints were scrutinised has a potential explanation for underinvestment and the need for subsidies aimed at making university studies affordable to all in developed economies. However, results are far from clear and no consensus has been achieved.
   Despite all the funding that goes into education at all levels, the common wisdom is still that university graduates come from comparatively better off backgrounds, are more competent academically and possibly in the labour market, and move to enjoy the returns from their investment. If this is the case, how fair and efficient is it to transfer the much sought after funds to this comparatively advantaged group? And if private returns are so high, why isn't private investment higher as well?

Photos of Lisbon, 1957-1974

You can't really understand growth without looking into the past. And there are many ways of looking back. Photography is of course one of them and yesterday I stepped into a fantastic book by Eduardo Gageiro on Lisbon in the years from 1957 to 1974. Sometimes we look back only to be reassured that some regimes or policies are better than others. Although that certainly is an interesting exercise, we also need to look back just to know where a country - or, for that mater, an economy - comes from and what it has achieved in the years since.
(Lisbon, Bairro Alto, 1969)

Thursday, 22 April 2010

Rescuing Portugal from the wrath of the markets

   In the last few days, several prominent economists and international organizations expressed their fears that Portugal might be the next European country to be targeted by the markets in the sovereign debt saga. Portuguese politicians protested and contested such an assessment, but, up to now, all has been in vain. The wrath of the markets has, indeed, turned on us with a vengeance, and the next few weeks will be crucial to see how we can weather the storm. Therefore, one of the most important questions that we face currently is: what will it take to calm down the markets and avoid substantial damage? How can we restore the confidence of the markets in Portugal? So far, our policymakers have argued that things are under control and that everything is going according to plan. The main problem is that the markets are not so certain about how controlled things really are and, even worse, they seem to believe that the plan is not so good, or, at the very least, not comprehensive enough. In fact, arguing that markets are irrational and/or that we don’t deserve this fate and/or that there is even a conspiracy against us (or the euro) is more often counterproductive than not and a road to nowhere. Therefore, it would be probably wise if our policymakers started designing a Plan B to prevent bigger harm to the country and to the Portuguese economy.

A one-page summary of Portugal's problems

   The Economist has just come out with a 1-page summary of which are, and which are not, the problems of the Portuguese economy. Get it here. I agree with 90% of what is in it, and from their writings here, I think most members of this blog do too.
   Informed Portuguese readers of Portuguese newspapers will find this article boring---it just states succinctly what many economists (including some that write in this blog) have been writing in the Portuguese press for a long time. The article will only be useful to those insufferable people in the country who are continuously criticizing the Portuguese press and its hard-working journalists, but then bow uncritically to anything that comes out in a foreign publication. (The term for them, in Portuguese, is "parolos".)
   English-speaking readers, however, get a lot of noisy signals. In the past week, these have included the blank statement: "Portugal is the next Greece," which is always mysterious, sometimes misleading, and in some contexts either spot on or just plainly factually incorrect. For those, this article might be useful.

Wednesday, 21 April 2010

The Portuguese Low Income Maintenance Program

   A few figures (and thoughts) on the Portuguese low income maintenance program, the "Social Integration Income''. Firstly, it is very low, by any standards. The reference individual income amounts to 187 euros a month (the minimum wage is equal to 450 euros). As usual, the transfer is equal to the difference between the reference value and the total household income. Appropriate equivalence scales are applied. The average individual transfer, as of 2008 (last available detailed data, can be found here in Portuguese) was as low as 86,74 euros a month. The total budget of the program was roughly 425 million euros in 2008 and 507 million in 2009. For 2008, again, this represents around 2% of the total Social Security expenditure. The S&GP defines a ceiling for the total spending with this (arguably modest) program. The ceiling aims at putting the program back into its 2007 expenditure by 2013 (370 million euros).
   True, the total expenditure with the program has been increasing since its introduction in the late 90's. There are (at least) two reasons for this. The first is just the natural evolution of a transfer program. Initially, potential beneficiaries are not aware of their entitlements and it takes time for the program to reach its steady state. The second one is obvious: the pervasive crisis that has hit the country and the ever-increasing unemployment levels.

Tuesday, 20 April 2010

The Health of the Portuguese - a note on copayments

   In the Health Care jargon, the term “copayment” means the amount paid by the patient (usually out-of-pocket) each time he/she uses a health care service. The main objective of copayments is to control the demand for health services i.e. to restrict the (ex-post) moral hazard due to insurance. Copayments are not restricted to private insurance. The Portuguese National Health Service is one example where copayments were introduced to control the demand for public health services. One concern with the introduction of copayments in a NHS is the reduction of Equity since typically copayments are not a function of income but a fixed amount per service. The other major concern is the potential postponement and interruption of necessary health care, which may result in worse health outcomes and more expensive treatments.
   Copayments tend to vary across health services to account for differences in demand elasticity. Services where demand is less elastic should face lower copayments because there is not much moral hazard to start with.
   From the beginning of 2010, the Portuguese stopped paying a copayment for hospitalizations in public hospitals. Although not much publicized in the media, this decreto-lei probably affects positively the health of many. Up to the beginning of the year a hospitalized patient would pay 5.2 Euros/day during the first 10 days of stay, which represented more than 10% of the national (monthly) minimum wage. Bare in mind that physicians, not patients, decide on hospitalizations. Demand for hospitalizations represents, therefore, most of the time, necessary treatment and hospitalizations are one of the least elastic (to price) services. The now abolished copayments on hospitalizations were probably reducing the level of necessary care. Good news then.

Monday, 19 April 2010

Growth and Debt and Miracles

In a recent paper - "Growth in a Time of Debt" - Carmen Reinhart and Kenneth Rogoff make use of their deep empirical knowledge of financial crises and their aftermath to establish some relations between real growth and debt. Their general findings are important though not altogether surprising. Briefly stated, they find that there is no strong link between real GDP growth and public debt below the threshold of 90 per cent of GDP. Only when public debt goes beyond that threshold does growth suffer with accumulating debt. For emerging markets, and as far as external debt (both public and private) is concerned, the threshold for the appearance of a strong relationship between weak real growth and debt is at 60 per cent of GDP.
Before the current crisis, Portuguese public debt was little above 65 per cent of GDP. Since then, things went out of control. Large budget deficits coupled with zero nominal GDP growth, to say the least, here as well as in Greece, which had a far larger public debt to start with, forced - and are forcing - public debt way up. According to the Portuguese government's own projections, public debt will reach Reinhart and Rogoff's threshold by 2012. (And don't forget Portugal's huge demographic problem.) Also, it is a widely known fact that Portuguese external debt has already gone beyond the 100 per cent of GDP threshold.
According to Reinhart and Rogoff's findings, emerging economies with external debts exceeding 90 per cent of GDP have had, in average, negative real growth. Unfortunately, the authors's paper does not analyse the problem of external debt in advanced economies for lack of data (we may assume that the corresponding threshold is a little bit higher for reputational reasons).
It is difficult to decide whether Portugal is on the side of advanced or emerging economies. That question notwithstanding it is a safe bet to say that growth perspectives in Portugal look grim. Not only the economy-wide deleveraging process is going to be costly, not only do we have the historical-empirical evidence against us, but try to take a few percentage points of GDP off aggregate demand each year - due to deficit contraction - with investment down, consumption going nowhere and exports weakened by everything else - real appreciation, relatively high labour costs, weak foreign demand (keep in mind that miserable Spain is our biggest trade partner). Put on top of that insignificant nominal GDP growth in the next few years which will make it even more difficult to reduce our public debt.
Did anyone ask for a miracle? "Miracle" is nowadays a code word for "surge in productivity" among Portuguese economists and other people of good faith. Fortunately, the Pope will be visiting us next month.