" It currently costs the same to buy 5-yr protection on Egyptian bonds (454 bps) as on Portuguese bonds (456 bps)". By transitivity, Portugal is also riskier than Iraq. That is all.
h/t to Angry Bear
Sunday, 30 January 2011
Germany's pact for competitiveness
Tomorrow we will read the details of the German plan for an "economic government" of the euro area. Most likely the plan will list a set of proposals such as rigorous competitiveness measures and strict fiscal deficit limits (zero for the structural deficit). Germany's preferred approach to the euro governance are rules, but the term "economic government" appeared in the German press. This new term is probably there to convince the French (who are certainly not happy of their trade balance evolution in the past 6-7 years). Anyway let's wait tomorrow and read what they have decided .
Locus of control
According to psychologists that study personalities, some people tend to believe that what happens to them depends mostly on their own choices and actions - they are said to have a high internal locus of control - while other individuals give more emphasis to chance and events that they can't control - high external locus of control.
Studies have shown that this locus can play an important role in terms of a number of areas. For instance, the unemployed with a high internal locus of control tend to send more job applications and to wait longer until they obtain a better job offer, as shown in a paper presented at a recent conference on economics and psychology.
What about the locus of control of the Portuguese economy, in particular with respect to the current borrowing challenges and the dismal economic growth record? Are the policy choices over the last 15 years to blame - or is it all the fault of the "speculators" and the financial crisis?
The presidential election could have been a fantastic opportunity to discuss this and make sure that any errors made in the past are not made again in the future. Alas, the strange noise from BPN and BPP deafened any attempt at shedding some light on whose fault it is that we are where we are.
At least it is relatively clear that the media should shoulder some of the blame for such a noisy public debate.
Studies have shown that this locus can play an important role in terms of a number of areas. For instance, the unemployed with a high internal locus of control tend to send more job applications and to wait longer until they obtain a better job offer, as shown in a paper presented at a recent conference on economics and psychology.
What about the locus of control of the Portuguese economy, in particular with respect to the current borrowing challenges and the dismal economic growth record? Are the policy choices over the last 15 years to blame - or is it all the fault of the "speculators" and the financial crisis?
The presidential election could have been a fantastic opportunity to discuss this and make sure that any errors made in the past are not made again in the future. Alas, the strange noise from BPN and BPP deafened any attempt at shedding some light on whose fault it is that we are where we are.
At least it is relatively clear that the media should shoulder some of the blame for such a noisy public debate.
Friday, 28 January 2011
A "dry" political system?
An interesting paper on "the political problem":
Economic Performance and Political Coordination in Portugal’s “Dry” Political System, by Carlos Pereira and Shane Singh:
"(...) we hypothesize that growth-promoting economic policy is more likely to be formulated when veto players have incentives to cooperate and are able to form solid, intertemporal agreements. Cooperative actors can rapidly adjust to changing external and internal factors and therefore formulate well-tailored economic policies. (...) In general, the Portuguese political system does not enhance cooperation among political players because it is “dry.” That is, it lacks tradable currencies capable of compensating coalition players for potential loses, it lacks internal and budgetary coordination capacity of governing, and it lacks a credible enforcement mechanism as a result of a politicized and inefficient judiciary system."
I have a number of quibbles with the paper, but I find the general argument concerning the difficulties in reaching agreements persuasive. Another good reason to read it, at least for me, was to be reminded of another article that focuses on more general aspects of the institutional impediments to growth in Portugal.
Economic Performance and Political Coordination in Portugal’s “Dry” Political System, by Carlos Pereira and Shane Singh:
"(...) we hypothesize that growth-promoting economic policy is more likely to be formulated when veto players have incentives to cooperate and are able to form solid, intertemporal agreements. Cooperative actors can rapidly adjust to changing external and internal factors and therefore formulate well-tailored economic policies. (...) In general, the Portuguese political system does not enhance cooperation among political players because it is “dry.” That is, it lacks tradable currencies capable of compensating coalition players for potential loses, it lacks internal and budgetary coordination capacity of governing, and it lacks a credible enforcement mechanism as a result of a politicized and inefficient judiciary system."
I have a number of quibbles with the paper, but I find the general argument concerning the difficulties in reaching agreements persuasive. Another good reason to read it, at least for me, was to be reminded of another article that focuses on more general aspects of the institutional impediments to growth in Portugal.
Why not...
... use the EU funds to pay off the public debt?
It's unlikely that the rates of return of future projects involving EU funds exceed the current cost of borrowing, especially given all their rent-seeking, crowding-out and misallocation costs.
Sooner or later, Portugal will have to come to terms with the fact that the nature of State intervention in economic activity in the country is such (asymmetric information, waste, cronyism), that the less the State does, the better-off the people will be.
It would be much better to focus on getting right what really makes a difference: courts, schools, hospitals.
It's unlikely that the rates of return of future projects involving EU funds exceed the current cost of borrowing, especially given all their rent-seeking, crowding-out and misallocation costs.
Sooner or later, Portugal will have to come to terms with the fact that the nature of State intervention in economic activity in the country is such (asymmetric information, waste, cronyism), that the less the State does, the better-off the people will be.
It would be much better to focus on getting right what really makes a difference: courts, schools, hospitals.
Thursday, 27 January 2011
The State problem
I agree that we have a political / institutional problem as suggested in previous posts. It seems to me that we have a major domestic political failure in the design of most state organizations. Several reforms of the public administration, even the development of regulatory organizations have been often confusing, during the last 20 years.
Before discussing their costs we should discuss first the rationale for many of the state organizations paid with current taxes and debt. The commitment of resources to each one should depend of course on a careful appraisal of their objectives. So the question is: how can we improve policy to make sure that this type of reasoning is not forgotten in institutional design?
Before discussing their costs we should discuss first the rationale for many of the state organizations paid with current taxes and debt. The commitment of resources to each one should depend of course on a careful appraisal of their objectives. So the question is: how can we improve policy to make sure that this type of reasoning is not forgotten in institutional design?
Saturday, 22 January 2011
Labour law and firm performance
A previous post asks: "Has labour market rigidity been hindering the performance of Portuguese firms?" So let me take this opportunity to mention one of my papers that addresses specifically this issue - here's the link.
The analysis compares the changes in the performance of firms that were able to dismiss workers for cause in a slightly less burdensome way following the 1989 labour law reform (probably the most important labour reform since 1975) with similar firms but that did not benefit from such streamlined approach.
The results indicate that the performance levels of the former group increased significantly compared to the latter. One possible explanation is that workers behaved differently once they realised that the burocracy of the law did not protect them in the same way as before, especially the one or two "rotten apples" that can be so detrimental to the overall performance of their firms - and therefore the wages of their colleagues.
Although this evidence is relatively old (unfortunately there are not many labour reforms in Portugal for one to study!), this problem appears to remain relevant in 2011. For instance, the CEO's of Jerónimo Martins and BPI have recently emphasised the importance of streamlining individual dismissals. However, the constitutional court declared void the timid changes in that direction that resulted from the 2009 review of the Labour Code.
The analysis compares the changes in the performance of firms that were able to dismiss workers for cause in a slightly less burdensome way following the 1989 labour law reform (probably the most important labour reform since 1975) with similar firms but that did not benefit from such streamlined approach.
The results indicate that the performance levels of the former group increased significantly compared to the latter. One possible explanation is that workers behaved differently once they realised that the burocracy of the law did not protect them in the same way as before, especially the one or two "rotten apples" that can be so detrimental to the overall performance of their firms - and therefore the wages of their colleagues.
Although this evidence is relatively old (unfortunately there are not many labour reforms in Portugal for one to study!), this problem appears to remain relevant in 2011. For instance, the CEO's of Jerónimo Martins and BPI have recently emphasised the importance of streamlining individual dismissals. However, the constitutional court declared void the timid changes in that direction that resulted from the 2009 review of the Labour Code.
An Economic or a Political Problem?
Source: P. Pereira et al. (2009) Economia e Finanças Públicas, Escolar Editora, LisboaWhen we look at the history of public finances after the revolution (1974) four main facts emerge. Firts, Portugal never had a superavit in 36 years of democracy. Second, the only time it reduced the weight of public expenditure in GDP (without off-budget measures) was after the second IMF intervention (1983-84).
Third, the growth of public debt has been curved down only through privatization of a huge amount of public assets nationalized after the revolution (a pattern followed with and without the IMF). Fourth, there is a strong evidence of political business cycles over the last 20 years in all legislative elections (1991, 1995, 2002, 2005, 2009) except one (1999).
Now, do we have an economic or a political problem? As we all know a deficit of 3% would not be a problem with a nominal growth rate of 5%, because it woul stabilize the debt to GDP ratio at 60%. The problem is that we did not have that growth rate in the last decade and will not have it in the next decade. So, we have an economic problem.
However, we also have a political problem. As I see it Portugal (and peripheral mediterranean countries) has the instituional disease Mancur Olson identified almost 3 decades ago in The Rise and Decline of Nations: institutional sclerosis. And only a strong government with wisdom, and a majority support in parliament can tackle it. It is a necessary (but not sufficient) condition...
We also have political problems!
(for my articles in Portuguese see Publico http://jornal.publico.pt/noticia/22-01-2011/execucao-do-oe-2011-bussiness-as-usual-21079652.htm and for earlier writings http://www.iseg.utl.pt/~ppereira/finpub)
Tuesday, 18 January 2011
Is the labour market too rigid?
In times of crisis, such as the current sovereign debt crisis, labour market flexibility is frequently mentioned as a necessary requirement for exiting the crisis. For instance, in a paper on Greece’s adjustment program, produced by the European Commission’s ECFIN, it is written that “Employment Protection Legislation has been hampering the functioning of the labour market. [...] These initiatives will increase adjustment capacity of firms, ultimately boosting employment.” (ECFIN, 2010, pp.41-42). The same recipe has been applied to Portugal.
However, the EC was vocal on the need of labour markets reforms before the current sovereign debt crisis, mentioning it in many instances as a necessary condition for making the European Union the world’s most competitive economy. In fact, in the last decade there was a significant decrease in employment protection: the OECD Employment Protection Legislation (EPL) index shows an easing of the hiring and/or firing conditions in countries with traditionally very rigid labour markets, like Germany and Denmark. Portugal, which has been one of the countries with more stringent labour market regulations, has also shared that downward trend, mainly through a reduction of the components of the index related to individual dismissals and temporary contracts.
This recent trend has made many, namely trade unionists, argue that the Portuguese labour market is already flexible enough. Moreover, there are also Portuguese corporate officials reported as saying that labour market regulations have not hindered their activities. For instance, in November 2010, Paulo Azevedo, CEO of Sonae SGPS, one of the biggest employers in Portugal, with over 30 thousand employees, mentioned on a TV interview that labour market legislation has not been a constraint on his company’s business (however he also mentioned that his colleagues complain about too much labour market rigidity).
These views suggest that actual labour market flexibility should be explored by means of adequate indicators, others than the ones based on legislation such as EPL. This hypothesis has led me and my co-authors to investigate differences in sectoral labour market flexibility, based on actual data from “Quadros de Pessoal”. We use that information to compute an index of sectoral labour market flexibility. Our sectoral labour market flexibility index shows that all sectors display a trend towards increased flexibility, resulting from the reduction of the share of workers covered by collective agreements and working full time. It also shows that the increasing trend became more pronounced after 1999. Our index lags the EPL index, which may be explained by the fact that it takes time for legislation to affect firm behavior. Although high technology sectors tend to face more flexible labour markets, there are low technology sectors among the most flexible labour markets.
However, the real issue is still to be dissected: has labour market rigidity been hindering the performance of Portuguese firms? That is, is the labour market too rigid? We are looking at that.
Monday, 17 January 2011
Cues about "the political problem"
What a difficult question raised by the posts below. What counts as "political"? What kind of a problem is "the problem"?
Let me suggest that, if by "political" we mean political institutions and by "problem" we mean budget deficits, ineffectiveness and rent-seeking, Persson and Tabellini provide the inevitable starting point (and let me stress starting point) for the discussion: parliamentary regimes with proportional electoral systems (such as ours) generate more government spending and deficits, larger counter-cyclical responses in spending, lower ability to scale down spending during economic upturns, and greater spending in election years. If this is not a familiar picture, I don't know what is.
Furthermore, details in the electoral system also seem to matter for other sorts of "problems". (Perceptions of) government ineffectiveness and corruption are higher in systems where no form of direct accountability of MP's is possible, i.e., in purely list-based proportional systems (although size of districts have the opposite effects, suggesting that low barriers to entry combined with means to make MP's directly accountable would the best solution). I'm sure Paulo Trigo Pereira will have more to say about this.
Could this be "the political problem"? In a sense, it seems "too easy" (just change the rules and outcomes will change), with little attention to other sorts of "institutions" (for example, the fact that the unionization rate in Portugal is below 20% while it is above 60% in Sweden certainly has to make some difference for what kind of policies are set, who they benefit and what kind of credible commitments can be reached). But it's a starting point for discussion.
Let me suggest that, if by "political" we mean political institutions and by "problem" we mean budget deficits, ineffectiveness and rent-seeking, Persson and Tabellini provide the inevitable starting point (and let me stress starting point) for the discussion: parliamentary regimes with proportional electoral systems (such as ours) generate more government spending and deficits, larger counter-cyclical responses in spending, lower ability to scale down spending during economic upturns, and greater spending in election years. If this is not a familiar picture, I don't know what is.
Furthermore, details in the electoral system also seem to matter for other sorts of "problems". (Perceptions of) government ineffectiveness and corruption are higher in systems where no form of direct accountability of MP's is possible, i.e., in purely list-based proportional systems (although size of districts have the opposite effects, suggesting that low barriers to entry combined with means to make MP's directly accountable would the best solution). I'm sure Paulo Trigo Pereira will have more to say about this.
Could this be "the political problem"? In a sense, it seems "too easy" (just change the rules and outcomes will change), with little attention to other sorts of "institutions" (for example, the fact that the unionization rate in Portugal is below 20% while it is above 60% in Sweden certainly has to make some difference for what kind of policies are set, who they benefit and what kind of credible commitments can be reached). But it's a starting point for discussion.
No political problem?
Pedro Lains said here that Portugal does not have a "political problem", but rather an economic one. I must disagree. The quickest way to express my disagreement is to say that there is a certain way of doing things in Portugal, a certain way of dealing with public funds, a certain way of coupling (nominally) private companies, political parties and public rents; in a word, there is a certain way - let's call it our regime - of creating economic problems where there were none. This is surely political and it sure has economic consequences (deficient allocation of economic resources, for starters). It also generates pernicious moral consequences, which in turn will again create more economic problems. But that is another matter.
Sunday, 16 January 2011
You're Not Alone
Friday, 14 January 2011
Debt average interest rates
memo: 5.83pc is the average interest rate to the 85bn "rescue" package to Ireland.
Is the Forest Black?
The average interest Portugal is paying for [the stock of its] 10-year bonds is about 3%. Right? As the new issues cost 7%, the average rate is increasing (La Palisse). I wonder whether someone has already estimated the pace of growth of the interest rate. But the feeling is that this cannot last for much longer.
Now that Passos Coelho, the leader of the main opposition party, the Social Democratic Party, is seeing his chances of becoming prime minister increasing, many people are finally joining the old conclusion that our mess cannot be solved by the national government alone, whichever party is in power. Even less so by the President whose powers are quite limited. It seems that everyone here is now finally seeing the forest.
Portugal’s problem is a European problem, fortunately, and thus it needs a European solution, fortunately or not.
And Portugal's problem is different, considerably different, from those of Ireland, Spain or Italy (let's not speak about Greece here because Greece is where Greece is). Portugal still didn't have the time to find its proper position within an open European economy. Its economy was weaker and poorer when it joined the Communities, the Single Market and the euro (yes, we can learn a few lessons from Economic History), and still hasn’t adapted. It has an economic problem, with financial overtones, not a political problem.
The bottom line is that we need an answer quickly about how the mess is going to be solved, within the European Union. If the answer takes too long, we can always go back to the protectionist mode (which wont’ happen…).
Now that Passos Coelho, the leader of the main opposition party, the Social Democratic Party, is seeing his chances of becoming prime minister increasing, many people are finally joining the old conclusion that our mess cannot be solved by the national government alone, whichever party is in power. Even less so by the President whose powers are quite limited. It seems that everyone here is now finally seeing the forest.
Portugal’s problem is a European problem, fortunately, and thus it needs a European solution, fortunately or not.
And Portugal's problem is different, considerably different, from those of Ireland, Spain or Italy (let's not speak about Greece here because Greece is where Greece is). Portugal still didn't have the time to find its proper position within an open European economy. Its economy was weaker and poorer when it joined the Communities, the Single Market and the euro (yes, we can learn a few lessons from Economic History), and still hasn’t adapted. It has an economic problem, with financial overtones, not a political problem.
The bottom line is that we need an answer quickly about how the mess is going to be solved, within the European Union. If the answer takes too long, we can always go back to the protectionist mode (which wont’ happen…).
Thursday, 13 January 2011
Interpreting the news...
We are told that Portugal placed 599 million at 6.716% for 10 years while the previous auction commanded a rate of 6.8086%. The result is that Portugal has avoided spending 10 million in interest payments (relative to the last auction results).
We are also told that Portugal placed 650 million at 5.396% for 4 years while the previous auction commanded a rate of 4.041%. The result is that Portugal will pay an extra 40 million in interest payments.
I thought interest payments matter for assessing the debt sustainability but of course I am open to other interpretations.
We are also told that Portugal placed 650 million at 5.396% for 4 years while the previous auction commanded a rate of 4.041%. The result is that Portugal will pay an extra 40 million in interest payments.
I thought interest payments matter for assessing the debt sustainability but of course I am open to other interpretations.
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