Monday, 28 February 2011
Bail whom?
The presidents of the top three Portuguese private banks have been saying that they are against an eventual IMF/EU loan to Portugal. Today Ricardo Salgado, the President of Banco Espírito Santo, explained why: because, he says, a negative correlation between the bailout and deposits by residents could be observed in Greece and Ireland. The link is that the bailout reduces confidence and thus domestic savings. Is this so? Is there a literature on the determinants of domestic savings, particularly in those two countries and Portugal? Salgado's reasoning seems a bit odd to me. He certainly knows better, but I wonder whether his "feeling" would be confirmed by a proper analysis of the data.
Friday, 25 February 2011
Portugal and the euro: expectations and reality
Faculdade de Economia da Universidade de Coimbra, wednesday 23 February 2011: João Ferreira do Amaral and Miguel Beleza shared their views on the Portuguese performance under the euro, in another event of the project "1986-2010 A Economia Portuguesa na União Europeia".
João Ferreira do Amaral's main thesis was the following. 1) Adoption of the euro led to a systematic bias in the allocation of resources from tradable goods sectors to non-tradable goods sectors; 2) the only way to possibly avoid such bias (and, thus, to prevent the current foreign debt crisis) would have been to devalue the national currency.
True; if (and only if) Portugal merely aims at avoiding foreign debt crisis. But I always thought we wanted to improve our real per capita income (in purchasing power parity, obviously).
Think about the crawling-peg 1976-1990. It was instrumental to rebalance our payments balance. To the cost of postponing structural change in our tradable goods sectors. See where that led us: low structural competitiveness and... a foreign debt crisis.
It is simply too hard to believe in an exchange-rate devaluation policy as a means to promote a positive structural productive change.
I thought we all believed that monetary policy is ineffective in the long-run.
Correction: monetary policy may effectively destroy the stability conditions that a healthy growth process requires. Thank you, Miguel Beleza, for reminding that to last wednesday's audience (those with hears will have heard).
If only fiscal policy had countered the aggregate demand expansion that we all knew would arise after adopting the euro... we wouldn't have the twin deficits crisis that we do have (yes, please do not forget that the public deficit is at the center of the problem).
Healthy fiscal policies would have structurally balanced the budget and, also crucial, would have given private economic agents the proper message and incentives on their inter-temporal budget constraints. That could avoid the twin deficits-debts crisis.
I fear that a corollary that some may extract from João Ferreira do Amaral's thesis is that we are, after all, devaluing our wages, which is the macro equivalent to an exchange-rate devaluation.
Well, not quite the micro equivalent, though (and, thus, not quite the macro equivalent). What is necessary and should be done is to devalue the wages in the sectors and firms that are not achieving high enough productivity growth. An exchange-rate devaluation devalues all the wages in the economy. I fail to see the point in doing that, if we want to stimulate structural change.
Last wednesday's audience was largely composed of students that were born after the end of the crawling-peg, after the creation of the single market and who do not have any recollection of the pre-euro years. If only they had experienced life in a highly protected domestic market, with a chronic devaluation of their international purchasing power, with high and volatile inflation...
The best way to repeat an error is to forget about its consequences when we last did it. Hence the importance of good pedagogy in explaining the current crisis and its possible solutions. Thank you, Miguel Beleza.
João Ferreira do Amaral's main thesis was the following. 1) Adoption of the euro led to a systematic bias in the allocation of resources from tradable goods sectors to non-tradable goods sectors; 2) the only way to possibly avoid such bias (and, thus, to prevent the current foreign debt crisis) would have been to devalue the national currency.
True; if (and only if) Portugal merely aims at avoiding foreign debt crisis. But I always thought we wanted to improve our real per capita income (in purchasing power parity, obviously).
Think about the crawling-peg 1976-1990. It was instrumental to rebalance our payments balance. To the cost of postponing structural change in our tradable goods sectors. See where that led us: low structural competitiveness and... a foreign debt crisis.
It is simply too hard to believe in an exchange-rate devaluation policy as a means to promote a positive structural productive change.
I thought we all believed that monetary policy is ineffective in the long-run.
Correction: monetary policy may effectively destroy the stability conditions that a healthy growth process requires. Thank you, Miguel Beleza, for reminding that to last wednesday's audience (those with hears will have heard).
If only fiscal policy had countered the aggregate demand expansion that we all knew would arise after adopting the euro... we wouldn't have the twin deficits crisis that we do have (yes, please do not forget that the public deficit is at the center of the problem).
Healthy fiscal policies would have structurally balanced the budget and, also crucial, would have given private economic agents the proper message and incentives on their inter-temporal budget constraints. That could avoid the twin deficits-debts crisis.
I fear that a corollary that some may extract from João Ferreira do Amaral's thesis is that we are, after all, devaluing our wages, which is the macro equivalent to an exchange-rate devaluation.
Well, not quite the micro equivalent, though (and, thus, not quite the macro equivalent). What is necessary and should be done is to devalue the wages in the sectors and firms that are not achieving high enough productivity growth. An exchange-rate devaluation devalues all the wages in the economy. I fail to see the point in doing that, if we want to stimulate structural change.
Last wednesday's audience was largely composed of students that were born after the end of the crawling-peg, after the creation of the single market and who do not have any recollection of the pre-euro years. If only they had experienced life in a highly protected domestic market, with a chronic devaluation of their international purchasing power, with high and volatile inflation...
The best way to repeat an error is to forget about its consequences when we last did it. Hence the importance of good pedagogy in explaining the current crisis and its possible solutions. Thank you, Miguel Beleza.
Tuesday, 22 February 2011
From politics to policies
The current problems of the Portuguese economy highlight the desperate need for public debates on concrete policies: the country needs to discuss the positives and negatives of different alternatives, the relative urgency of each policy, their likely effectiveness in terms of addressing the current bottlenecks. This is particularly important now that difficult choices need to be made by the government on a daily basis - opportunity costs are everywhere and this cannot be hidden any more.
How to fix the justice system is probably the most conspicuous example of the urgency of specific proposals for reform. On the other hand, teacher evaluation - a terribly important idea that, in my view, was terribly implemented - is a good example of the problems that can arise when big reforms are introduced without prior debate. In fact, the education ministry is still discussing how to implement that reform already four years after first introducing it.
In an ideal world, political parties would present their manifestos - where they outline the key reforms they plan to introduce in a relatively detailed way - and then stick to them if they get elected. But, apparently, it seems that nobody wins elections in Portugal by announcing unpopular reforms, especially when the other parties can take the populist route and claim that all is well, that we can borrow our way out of the current mess and that, in the end, the State will sort everything out.
But the blame needs to be shared. For instance, a media that does not like to discuss "details" doesn't help. (Is this because they somehow know that "details" don't sell - or because they simply don't have the know-how to do "details" properly, despite the abundant number of graduates available at low salaries?) On the other hand, many academics in Portugal either target their efforts on international journals - which, for understandable reasons, won't care too much about case studies involving Portugal - or simply do not engage with public policy issues, at least not in a way that will generate reasonable prospects for evidence-based policy.
PS [24 Feb] - Things may be changing.
How to fix the justice system is probably the most conspicuous example of the urgency of specific proposals for reform. On the other hand, teacher evaluation - a terribly important idea that, in my view, was terribly implemented - is a good example of the problems that can arise when big reforms are introduced without prior debate. In fact, the education ministry is still discussing how to implement that reform already four years after first introducing it.
In an ideal world, political parties would present their manifestos - where they outline the key reforms they plan to introduce in a relatively detailed way - and then stick to them if they get elected. But, apparently, it seems that nobody wins elections in Portugal by announcing unpopular reforms, especially when the other parties can take the populist route and claim that all is well, that we can borrow our way out of the current mess and that, in the end, the State will sort everything out.
But the blame needs to be shared. For instance, a media that does not like to discuss "details" doesn't help. (Is this because they somehow know that "details" don't sell - or because they simply don't have the know-how to do "details" properly, despite the abundant number of graduates available at low salaries?) On the other hand, many academics in Portugal either target their efforts on international journals - which, for understandable reasons, won't care too much about case studies involving Portugal - or simply do not engage with public policy issues, at least not in a way that will generate reasonable prospects for evidence-based policy.
PS [24 Feb] - Things may be changing.
Tuesday, 15 February 2011
Exports and Public Policy
I believe the discussion on export incentives should focus on having a public policy framework driven by exports. The distinction between tradables and non tradables does not seem particularly interesting in this context. The main point should be the evaluation of public policy options, including investment options, according to an export promotion criteria. Moreover, we should not discard the need to have a policy of positive export discrimination, as long as it is consistent with the Lisbon Treaty.
Wednesday, 9 February 2011
Export incentives
After the more macroeconomic point of view in the previous post by Francesco Franco, let me offer some microeconomic remarks, in my case partly motivated by the grandiose Exports Congress held yesterday:
1. While it’s clear that Portugal needs to pay off its debt, it is far from obvious that “incentives” to exporters are the best way of achieving that. For instance, the asymmetry of information between applicants and the civil servants in Terreiro do Paço (or anywhere else) picking applicants is such that it is very difficult in practice to select probable winners. If one then factors in the “small worlds” people in Portugal live in and the short-run perspective induced by the current stage of the political cycle, it is likely that most picks will actually be losers, not winners.
2. Funding these schemes will imply taxes (either now or in the future), which will distort choices and create inefficiencies. One needs to be sure that the benefits outweigh the costs – an obvious comparison but, alas, often ignored in many public programmes. Even if exporting may make firms more productive, is that effect big enough that one really wants to cut public servants salaries and social spending again in a few years time?
3. Supporting these schemes will not only generate inefficiencies from taxes. It will also distort competition by destroying any (slim) chances of a level-playing field and economic mobility in the industries affected. How discouraging it must be for a business to have a good product or service to sell (in the domestic or international markets) but then be systematically passed over because competitors happen to know the right people and/or don’t bother to follow laws that actually are not really enforced?!
4. As Olivier Blanchard made clear in a paper mentioned before, improvements in the non-tradables sector (and I would include here all public services, in particular the justice system) may actually be a much more effective way of increasing the efficiency (and “competitiveness”) of the tradables sector. But this is the back-of-the-scenes management work (streamlining processes, monitoring practices, setting sensible incentives, etc) that unfortunately does not get headlines and systematically falls down in the long list of politicians’ priorities.
5. Many of these themes that are now currently being rehearsed by the government have already received a lot of attention in the very promising but apparently defunct “Plataforma para a Exportação, Inovação e Competitividade”, launched in 2005.
1. While it’s clear that Portugal needs to pay off its debt, it is far from obvious that “incentives” to exporters are the best way of achieving that. For instance, the asymmetry of information between applicants and the civil servants in Terreiro do Paço (or anywhere else) picking applicants is such that it is very difficult in practice to select probable winners. If one then factors in the “small worlds” people in Portugal live in and the short-run perspective induced by the current stage of the political cycle, it is likely that most picks will actually be losers, not winners.
2. Funding these schemes will imply taxes (either now or in the future), which will distort choices and create inefficiencies. One needs to be sure that the benefits outweigh the costs – an obvious comparison but, alas, often ignored in many public programmes. Even if exporting may make firms more productive, is that effect big enough that one really wants to cut public servants salaries and social spending again in a few years time?
3. Supporting these schemes will not only generate inefficiencies from taxes. It will also distort competition by destroying any (slim) chances of a level-playing field and economic mobility in the industries affected. How discouraging it must be for a business to have a good product or service to sell (in the domestic or international markets) but then be systematically passed over because competitors happen to know the right people and/or don’t bother to follow laws that actually are not really enforced?!
4. As Olivier Blanchard made clear in a paper mentioned before, improvements in the non-tradables sector (and I would include here all public services, in particular the justice system) may actually be a much more effective way of increasing the efficiency (and “competitiveness”) of the tradables sector. But this is the back-of-the-scenes management work (streamlining processes, monitoring practices, setting sensible incentives, etc) that unfortunately does not get headlines and systematically falls down in the long list of politicians’ priorities.
5. Many of these themes that are now currently being rehearsed by the government have already received a lot of attention in the very promising but apparently defunct “Plataforma para a Exportação, Inovação e Competitividade”, launched in 2005.
The path ahead
“Long is the way, and hard, that out of trade deficit leads up to trade balance”
I feel a little unease to edit Milton but I am searching for strong words to convey a truth that is hard to accept. It will take time and efforts to convince international investors that the Portuguese economy external position is sustainable. The news that exports are increasing is good. Notice that imports too are increasing and what ultimately matters for the current account balance is the difference between exports and imports. Consider the data published by the Portuguese statistical office: in 2010 exports of goods have increased by 15.7% (to 36.8b) and imports of goods have increased by 10.2% (to 56.8b). The trade balance for goods is negative and therefore contributes to increase the current account deficit. The fact that Portugal imports are still much larger than exports (1.5x) implies that the trade balance for goods has deteriorated by 2.1% and therefore contributes negatively on GDP growth. Now assume (imagine) that from this day on exports continue to increase by 15.7% per year and imports continue to increase by 10.2% per year. If that was true, net exports would start to improve in 2012 (contribution to GDP growth) and become positive in 2019 (finally helping the current account). These dates are wrong as they do not take into account the correct growth forecasts for exports and imports, but they convey part of a truth. It will take time to adjust the trade balance of goods. And the whole truth is that it will also require efforts to adjust the trade balance within our currency area. In a now classic paper, cited a few days ago in this blog by Pedro Martins, Olivier Blanchard described back in 2006 the difficulties and the efforts required for the current account adjustment to occur. And there is no doubt that the adjustment has to predominantly occur inside the euro area (Eurostat).
The day when the current account will become positive will be the day Portugal will start to repay its external debt. Policies aimed at bringing that day closer might be welcomed by external creditors.
Maybe one day the many euro area national debts will be guaranteed by the single currency area and become one. That would help decrease the income outflow. Maybe that day will not happen. Concessions from euro area creditors would certainly help. In any case Portugal debt must be brought on a sustainable path.
Monday, 7 February 2011
Interview with Mário Centeno
Mário Centeno's interview to the newspaper Público deserves a close reading (although only for those of you fortunate enough to read Portuguese, I'm afraid)
Thursday, 3 February 2011
Some economics of teacher evaluation
A chapter in the forthcoming Handbook of the Economics of Education, "The Design of Performance Pay in Education", by Derek Neal, includes this extract motivated in part by the Portuguese reforms:
In private firms, the person who evaluates a worker’s performance is either an owner of the firm or an agent of the owner. In public education, subjective performance evaluation is more problematic because many principals and administrators work under employment and salary rules that create only weak links between the quality of their personnel decisions and their own compensation. Thus, some may not be surprised that performance pay systems that involve one group of public employees making subjective determinations about the bonus payments given to another group of public employees did not generate noteworthy gains in student achievement.
More details here.
In private firms, the person who evaluates a worker’s performance is either an owner of the firm or an agent of the owner. In public education, subjective performance evaluation is more problematic because many principals and administrators work under employment and salary rules that create only weak links between the quality of their personnel decisions and their own compensation. Thus, some may not be surprised that performance pay systems that involve one group of public employees making subjective determinations about the bonus payments given to another group of public employees did not generate noteworthy gains in student achievement.
More details here.
Tuesday, 1 February 2011
Economic history
Probably the most important prediction of the current challenges of the Portuguese economy - and including many suggestions for reform: the address delivered at the 2006 Bank of Portugal conference on economic development by Olivier Blanchard, then at the MIT, now at the IMF.
The paper was subsequently published by the Portuguese Economic Journal in early 2007. The abstract is:
"In the second half of the 1990s, the prospect of entry in the euro led to an output boom and large current account deficits in Portugal. Since then, the boom has turned into a slump. Current account deficits are still large, and so are budget deficits. This paper reviews the facts, the likely adjustment in the absence of major policy changes, and examines policy options."
The paper was subsequently published by the Portuguese Economic Journal in early 2007. The abstract is:
"In the second half of the 1990s, the prospect of entry in the euro led to an output boom and large current account deficits in Portugal. Since then, the boom has turned into a slump. Current account deficits are still large, and so are budget deficits. This paper reviews the facts, the likely adjustment in the absence of major policy changes, and examines policy options."
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