A common topic in this blog has been the Portuguese depression of the past decade. Economic growth has been close to zero, and the last decade already shows one of the largest cumulative divergences between living standards in Portugal and the rest of Europe.
As with all depressions, figuring out why this happened is both terribly important, as well as maddenly elusive. One can do simple and more sophisticated growth accounting exercises, and they point to that mysterious "TFP residual" that economists like to call productivity. But beyond telling us that growth in Portugal didn't reach a halt because the working population left, suddenly lost their skills, threw their machines into the ocean, or buildings were eaten by Godzilla, I'm not sure this tells us that much more.
One hypothesis that I have been entertaining, and which as far as I know has not been very explored, is that the blame is in the privatizations of the late 1990s. Wait, before you recoil in horror, I am not about to defend a nationally-planned economy filled with public companies. Give me the benefit of the doubt and read to the end.
The privatizations in Portugal put a series of quasi-monopolies in the hands of the private sector, many of which protected from foreign competition. With this came a large transfer of rents to the private sector, which they gladly took. These rents were appropriated by a handful of powerful economic groups, that quickly came to dominate large sectors of the economy. They used part of their rents to co-opt two key agents, politicians and regulators.
Regulators have allowed for electricity, gas, water, or until recently phone services in Portugal to be considerably more expensive than elsewhere in Europe. As the economic groups control many key sectors, and as most regulators do not have internationally marketable competences, the self-interest of the regulators clearly told them how soft to be.
Politicians were co-opted by the lure of well-paid high-end positions in the new private companies. These new positions allowed the party in government to control some decisions in a less open way than when the companies were public. More importantly, it also gave access to a few key positions with which to reward some of their members, or send potential opponents into political exile. Recent scandals in Portugal involving major private banks, telecom, and electrical companies revealed some highly paid upper-level management with questionable qualifications.
How does this fit together into the decline in Portugal's productivity? For maximizing efficiency and welfare, there is only one thing worse than a public monopoly: a government-protected private monopoly. Markups increased, and innovation was curtailed because of the protection from foreign competition. With key decisions being made by political cronies at the upper echelons of these companies, inefficiencies and wastefulness abound. Combining all of these, you get the stagnation of productivity.
While I am still not completely convinced by this story, and I have no hard evidence to put forward to defend it, it strikes me how simple and promising it is. Moreover, it fits well with two more general debates in economics: (i) the role of privatizations in Eastern Europe and Russia, and (ii) the role of barriers to technological progress that economists going back to Smith and more recently Parente and Prescott's book put forward. I'll be thinking about some of the details in the months to follow, and hope to report progress in this blog.