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.

Civil servants' wage cut

The Price of Irresponsability

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

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.

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.

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

Nice trend, hum?

Unemployment

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.

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.

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.

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.

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...

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.

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?