Thursday 15 April 2010

The elusive source of Portugal's depression: privatizations?

   A common topic in this blog has been the Portuguese depression of the past decade. Economic growth has been close to zero, and the last decade already shows one of the largest cumulative divergences between living standards in Portugal and the rest of Europe.
   As with all depressions, figuring out why this happened is both terribly important, as well as maddenly elusive. One can do simple and more sophisticated growth accounting exercises, and they point to that mysterious "TFP residual" that economists like to call productivity. But beyond telling us that growth in Portugal didn't reach a halt because the working population left, suddenly lost their skills, threw their machines into the ocean, or buildings were eaten by Godzilla, I'm not sure this tells us that much more.
   One hypothesis that I have been entertaining, and which as far as I know has not been very explored, is that the blame is in the privatizations of the late 1990s. Wait, before you recoil in horror, I am not about to defend a nationally-planned economy filled with public companies. Give me the benefit of the doubt and read to the end.
   The privatizations in Portugal put a series of quasi-monopolies in the hands of the private sector, many of which protected from foreign competition. With this came a large transfer of rents to the private sector, which they gladly took. These rents were appropriated by a handful of powerful economic groups, that quickly came to dominate large sectors of the economy. They used part of their rents to co-opt two key agents, politicians and regulators.
   Regulators have allowed for electricity, gas, water, or until recently phone services in Portugal to be considerably more expensive than elsewhere in Europe. As the economic groups control many key sectors, and as most regulators do not have internationally marketable competences, the self-interest of the regulators clearly told them how soft to be.
   Politicians were co-opted by the lure of well-paid high-end positions in the new private companies. These new positions allowed the party in government to control some decisions in a less open way than when the companies were public. More importantly, it also gave access to a few key positions with which to reward some of their members, or send potential opponents into political exile. Recent scandals in Portugal involving major private banks, telecom, and electrical companies revealed some highly paid upper-level management with questionable qualifications.
   How does this fit together into the decline in Portugal's productivity? For maximizing efficiency and welfare, there is only one thing worse than a public monopoly: a government-protected private monopoly. Markups increased, and innovation was curtailed because of the protection from foreign competition. With key decisions being made by political cronies at the upper echelons of these companies, inefficiencies and wastefulness abound. Combining all of these, you get the stagnation of productivity.
   While I am still not completely convinced by this story, and I have no hard evidence to put forward to defend it, it strikes me how simple and promising it is. Moreover, it fits well with two more general debates in economics: (i) the role of privatizations in Eastern Europe and Russia, and (ii) the role of barriers to technological progress that economists going back to Smith and more recently Parente and Prescott's book put forward. I'll be thinking about some of the details in the months to follow, and hope to report progress in this blog.


  1. Talvez uma boa forma de comprovar (parte)desta teoria, passe por comparar os custos com comunicações e energia suportados por empresas portuguesas vs outros países, como os ja referidos paises do leste europeu.

  2. As far as I remember, the latest IMF report on Portugal stated that the country faced rigidities both in the labour market, and in the product and service markets. To the extent that such firms have large market shares in some of the p&s markets, or even act as monopolies, your hypothesis seems highly plausible. Certainly, we need to discuss more rigidities in such markets.

  3. If there are large rents they are probably in the non tradable sector and therefore depress the competitiveness of Portugal. One could compare the relevant markups across countries.

  4. The other day I checked household electricity tariffs in Portugal alongside those of other European countries, and the results were not what I expected: tariffs were in the lower end of the spectrum. Perhaps the tariffs for firms are relatively more expensive.

  5. I think this is an interesting starting point to study the the whole of the problem. It only explains the more "low political" part of the problem. The remain dynamics must be taken into account. For instance, the lack of a strong civil society and public opinion with power to not just reveal the hidden or merely discrete actions of the cronies but to take legal action against them or pressure the lawmakers to do their job well. Also, the (weak) political elite (less elite than it should be) has no interest in enforcing good practices because they are competing for those high positions in the private "monopolies". If one could discover the full dynamics of this problematic system maybe the identification of the most promising (counter) actions might be performed.

  6. I'd add the old-fashioned *land* rent variable to the equation. During the late 90's we may have suffered a real estate bubble — which converted our economy into a complicated game of wealth transfer from consumer's pockets into real estate developers', meanwhile obliging a large swath of the population to subscribe a huge mortgage. Of course, the major economic groups soon converted themselves into developers, hoping to catch windfall gains from manipulations in Land Use Plans.

  7. Last week I attended a seminar by Cesar Hidalgo and he has done some very interesting work with networks and economic development. I think that Portugal's economic lethargy would make an interesting case study to be analyzed under this framework.

    There is no doubt that Portugal has the potential to be greater than this, it has good natural resources, the education system works fairly well so the labor force has become more educated--in fact, Portugal has a comparative advantage in exporting its educated labor force. Thus, there has to be some sort of inability of the country to use its resources to make itself grow. Maybe it could be the rigidities in the markets in which resources are no allocated to their most efficient uses; instead they are allocated to/by those that have the most market power like you say. Or maybe it's the country's linkage network between resources, intermediary g&s and final g&s that is not very dense.

    Rita Carreira

  8. This is all so ridiculous. So, if these companies were state-owned instead of public, prices would be lower? Please...

    And regarding the 1st comment (Ricardo Santos), the meaningful comparison is what are the costs now, compared with what would they be if the companies were still state-owned.
    Portugal does not have the salaries of the eastern european economies, you know...

    Have you consider the hypothesis that the crisis is due to a competitive gap with eastern economies because of too much bureaucracy and a complex and very expensive tax code? Do you ever give a thought to why Denmark has made its labour market more flexible and countries like Portugal, Spain, France and Italy didn't (and then compared the results)? Have you ever thought about all the changes in Sweden in the nineties and WHY they did them?
    Have you happen to notice that the more liberal economies in the world are also the best performing? And that the ones are becoming more liberal are improving their economy, while the ones becoming more socialist are going down (US) or changing its options (Sweden)?
    Have you thought why Chine is liberalizing and going up, while US is nationalizing huge sectors and going downwards?
    Please. To confuse contemporaneity with causality can be acceptable, but not in this case!

  9. There is quite a lot of material regarding capture of the Regulator, caputure of the the State in procurement transactions and more recently "capture of the Concedent".
    In the case of PPP contracts with low traffic usage,which have contributed to the reduction of overall investment productivity, it is evident that strategic behaviour by concessionaires may have lead to renegotiations that are quite onerous and unsustainable for the Concedent.
    Availability PPPs and renegoations with changes in risk allocations are an integral part of the "low productivity / high debt" problem in Portugal, certainly not a part of the solution.
    Mariana Abrantes de Sousa
    See Game Theory and PPPs and PPP Agency and sustainability in PPP Lusfonia blog

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