Monday, 26 September 2011

Portugal's productivity curse and the need for credit/investment

According to Olivier Blanchard (IMF Chief Economist) in a recent interview provided to the "Jornal de Negocios", Portugal needs a productivity boost since the "fiscal devaluation" strategy will be insufficient to get us out of the current crisis.
To put this in perspective, below I plot the growth rates of TFP for the total economy between 1960 and 2012 (estimate) for both Portugal and the EU15 average.

We do observe that since the last economic and financial crisis (in 2008) Portugal has had an average productivity growth rate of -0.18% and this is expected to remain below zero in 2011 and 2012 (in line with the latest GDP growth projections), contrarily to EU15's average which foresees a better performance for the year to come (and which has shown, over time, smaller volatility as well).
To this end, more investment and lower unit labour costs are necessary but not sufficient conditions to increase productivity levels. One also needs such approach to be coupled with banks' recapitalization so that credit flows into the economy at the "right" speed (and amount). Such idea has been reinforced in recent meetings held in Washington DC this past weekend where the European crisis was scrutinized by world leaders and economists. Raghuram Rajan, (former IMF Chief Economist) stressed exactly the financing point in today's article in the Financial Times (here). More specifically, some of the EFSF funds will have to be used to recapitalise banks that are not able to get money from the markets. The problem is the lack of consensus in this matter. For Rajan, "the world has to recognise that the eurozone’s problems are too big to leave to eurozone countries alone to deal with. The world has a stake in their resolution. And it has an institution that can channel help, the IMF." He suggests that the IMF could set up a special vehicle that would offer large lines of credit to illiquid countries like Italy or Spain. This is one additional suggestion that joins a plethora of others being considered for Europe's crisis resolution.


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