Sunday 28 February 2010

Too far in the West?

In the 1990s, to join the Euro was the overriding objective of Portuguese policymakers. The success in this task implied the most important regime shift in economic policy since the Gold Standard in 1854.
For macroeconomists, the decade of 1990 was quite interesting. After the decision of create a single currency for Europe, there was a lively debate about Optimal Currency Areas. It soon became clear that Europe did not fulfill the basic criteria to qualify as one. Then the debate shifted a little bit. The question was no longer if Europe was an Optimal Currency Area, but rather whether Europe could become one after the adoption of the single currency. The argument was that some of the necessary conditions to have an Optimal Currency Area, would be promoted by a single currency. These conditions included stronger financial linkages, more trade among member states, more labor mobility, harmonized monetary and fiscal policies, etc. Ten years after the Euro, what can be said about Portugal?

The case for an informed policy debate

   Many believe public policy debate in Portugal needs improvement, lacking streamlined arguments and compelling evidence to support theviews. Or, at least, that is my perception.
   When a particular policy is under scrutiny, arguments are seldom justified, often driven by beliefs and dogmas, frequently (thepublic suspects) by personal interests. Most likely than not, claims are not supported by numbers highlighting costs or benefits to the public purse or economic agents, even if only from an accounting perspective. Theoretical arguments that may rationalise the decision are typically out of the way. And empirical evidence showing the need for the intervention, shedding light on agents' related behaviour or disclosing some policy effects are absent.

Portugal and Greece look the same?

   Suddenly, the comparison of Portugal with Greece took the major stage in political and economic discussions.
   The surprising part is how far the discussion has gone. To be clear from the outset, from what I had the chance to see in terms of numbers, the Portuguese and Greek cases share some similarities but for most of the economic fundamentals, the two economies are rather different.
   True that international lenders have tended to see Portugal and Greece more or less in the same class of countries. The first person that pointed that out, to my knowledge, was Luis Campos e Cunha, who noted that our spread in international borrowing was following the Greek one with a delay of a semester (more or less, if I remember well).

Data, data, data

Miguel below seems to be factually right. The average number of hours worked per week in Portugal was 38.6 in 1983 and 35.1 in 2009, a decline of about 10%. See here.

The Power of Beliefs?

   Economists have long recognized the role played by beliefs in determining good and bad outcomes. Just before the last elections, the Spanish Government was accused of being slow in acknowledging the signals of the deep crisis for election purposes. I am, however, convinced that on top of political reasons, the Government delayed the acknowledgement of the crisis because the president Zapatero and his economic team are strong believers on the power of beliefs. Governments as well as other major economic agents have, to some extent, the ability to affect beliefs about the economy. Negative perspectives about the economy may lead to lower investment and lower economic activity.
   Last friday, a private foundation, not politically oriented, launched a campaign called "Esto solo lo arreglamos entre todos" ( aimed at helping "solve" the crisis. The campaign is supported by 18 of the largest Spanish firms and its budget amounts to 4 million Euros. Among its objectives is to improve the image of Spain abroad. This is another example of the idea that beliefs may well turn things around.
   For economists, it would be interesting to know how much will this propaganda contribute to the recovery and whether it is cost-effective.

Pain without the gain?

   Few would disagree that Portugal has to undergo some sort of internal devaluation process. Wages are an obvious place to start. The real question is how much should wages be lowered in nominal terms. A couple of weeks ago I suggested that in order to smooth this process which will be unavoidably painful maybe we should think about raising the 40-hour working week legal duration. Perhaps the reduction of nominal wages could be lessened if the number of hours worked in the economy rose. Say, if we had a 45 or 50-hour workweek.
   At the time, Tiago Mendes, a Portuguese economist based at Oxford University, commented that this

The law of unintended consequences

As the Greek government prepares for harsh cuts on public spending, markets and ratings agencies start fearing private finance will be contaminated by public finance. I could not put it any better:
Fitch Ratings, citing concerns about Greek banks' funding costs and profitability, downgraded the country's four major banks to triple-B, or two notches above "junk" status. Fitch characterized its outlook for Greek banks as "negative."The main worry is that Greece's efforts to lower its deficit through austerity measures will quickly spread deep into the Greek economy, lowering demand for loans and cutting into bank profits.
Will the Greek government rescue a possible next wave of failing banks?

Friday 26 February 2010

Beware of Argentineans bearing gifts

“At the present moment we are going through an economical and monetary crisis which is of a certain gravity, but is not irremediable, inasmuch as the principal causes of the crisis are fleeting and purely temporary. This crisis is in a great measure the counter-result of the general crisis which all the European nations in general, and England in particular, have passed through since the breakdown of Argentine securities. The political question is not nearly as serious as is generally believed... The freedom of the Press exists to a much greater extent in Portugal than in France.”


Currently, Portugal faces not one, not two, but three crises, all of them presenting important challenges for the country‘s policymakers. All these crises are somewhat related, but it is worthwhile to study them separately in order to simplify. What are Portugal’s three crises then? First, in the last decade or so, Portugal has exhibited a low productive potential, which has been reflected in low rates of economic growth. Second, the country is increasingly facing a challenging crisis with regards to its public finances. And, third, in the last few years, Portugal has experienced substantial external imbalances, which have been translated into large trade deficits and an ever-increasing level of indebtness.
In order to understand what’s at stake, it is useful to look at the past to see how all these crises compare to previous episodes in the country’s history. Let’s start with the country’s productive potential, the most important crisis facing Portugal. As we can see in Figure 1, in the last decade or so, average growth rates have fallen to levels that have not been seen in Portugal since the 1910s, an era of substantial political and economic turmoil.

Figure 1 _ Portuguese GDP growth (HP filter), 1900-2007
Source: Maddison dataset

Why did Portugal stagnate since 2000?

How come the Portuguese economy did so well after joining the European Union in 1986, and then became totally stagnant for a whole decade starting around 2000? In a blog about the Portuguese economy, this must and will surely be one of the key questions.
A quick look at the evolution of real GDP per worker since the late 1970s is enough to show how dramatic the picture is. From 1978 until 1986, GDP per worker grew on average at just below 1 percent per year. Economic activity really picked up around 1986, and until 2000 the average yearly growth rate was a very robust 2.6 percent. Since 2000, the economy slowed down abruptly, and growth has been slightly negative... These are 10 long years that Pedro Pita Barros rightly calls a lost decade.

Wednesday 24 February 2010

These days in Spain

In the past two weeks, the Spanish government has been trying to get support from political parties for a "national Pact". The Pact is sought to solve the current crisis, although it is not clear what would its content be. The largest opposition party does not want to pact anything with the Government since its approval rate and chances of winning an election are now higher than ever in the past 6 years. Pact or no pact, the blame gets diluted, some say the crisis started with the financial crisis in the US, some say that it started with the PSOE, some say that the crisis will end soon, some say that it will get worse.


[O blogue é em inglês mas são muito bem-vindos, claro, comentários em português]

Growth before "Growth"

Pedro Lains below suggests that a push for radical current account deficit reduction would definitely endanger Portugal's presumptive recovery. Undoubtedly it will. But the real question facing Portugal in these last, say, 10 years has not been on the demand side of the economy, but rather on the supply side of the economy. To put it in terms that would make the Paul Krugman of the 1990's shiver, Portugal's (firms) "competitiveness" is in


There you have it... I have used every economist's magical word: incentives. Me, the only non-economist around here. Basically I just want to agree with Pedro (Pita Barros - so many Pedros, so little time...) that the main challenge for the Portuguese economy is how to produce goods that it can trade efficiently in the international market. My problem with that challenge is that all incentives in place in Portugal point in a totally

Growth economics and economic nationalism

Robert Solow is definitely one of the heroes of growth economists and economic historians alike, and thus one of my heroes. He signed the FT letter against cutting too soon the government deficit in the UK. Of course. Strangely enough, in Portugal only the far left is widely supportive of a similar position. What happened to our growth economists? Why do most well trained economists in Portugal say that the current
deficit problems are simply the cause of bad government and are asking for dramatic deficit reductions? What about the effects on the recovery? Where does this strong preference for financial discipline come from? Is this all about fear of foreign intervention?

Public and private CDS rates

   One of the fascinating features of the data on credit default swaps is that they exist in very similar terms for both countries and companies. In this case, if (i) the recovery rates on public and private bonds are the same, and if (ii) the stochastic discount factor pricing assets is similarly (un)affected by a default on public and private bonds, then if the CDS premium paid on a company is smaller than that of the country this means that the market is believing that there is a higher probability that the country will default vis-a-vis the company.

Tuesday 23 February 2010

Back to the lost decade...

   For a decade, since roughly 2000, the growth of the Portuguese economy has been low by every standard. Basically, the initial efficiency gains resulting from entering the European Communities in 1986 were exhausted by that time. Most of them resulted from producing basically the same mix and volume of products with less inputs (workers mainly) in the sectors exposed to the international markets, and those workers

Sunday 21 February 2010

A blog on the Portuguese economy

WHO – We are a group of economists and economic historians who like to think about the Portuguese economy in an international context;
WHAT – We deal with the Portuguese economy and her troubles to catch-up to her neighbours' levels of income per capita;
WHERE – We are based in universities in a few countries across the Globe, namely, in Portugal, Canada, the US, Spain and Britain;
WHEN – We deal mainly with present times, but also with bits of historical perspective;
WHY - The Portuguese economy is an interesting topic for many reasons: it is small, but it is neither Belgium, Greece or, for that matter, Andalusia; it is developed and yet still not fully developed. Lessons for European economic integration abound.
For suggestions and post submissions please write to Pedro Lains (Editor) at Posts are in English, but we welcome comments in Portuguese too.