Monday 28 June 2010

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...

Saturday 19 June 2010

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.

Friday 18 June 2010

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?

Tuesday 15 June 2010

world cup and productivity

   Half of the country is stopping today to watch a game on TV; according to newspapers, major companies are allowing workers to see the game (it takes place at 15h00), as long as it does not hurt productivity.
   I wonder what are the effects of this sort of events on productivity, I could not find such an assessment, but likely the main impact is in spirits not on hours worked...

Wednesday 9 June 2010

700,000 New Emigrants

   During the research for a forthcoming book, I started to think about the impacts of our prolonged stagnation on the job market. Interestingly, in spite of low job creation, until recently unemployment never rose to really high levels. Therefore, I was left to wonder what could cause such a phenomenon. The answer was relatively obvious: emigration. We all know that Europe exhibits a low degree of job mobility, but we also know that, historically, Portugal has been a country of heavy emigration. Thus, I decided to check the emigration figures to see what was going on. Unfortunately, after the introduction of the European Single Market, many European countries stopped collecting data on immigration for European workers. Similarly, Portugal used to have a "passport for emigrants", which allowed us to collect data on migratory flows, but that too was abolished in the early 1990s. 
   The solution to get the emigration data was to use a combination of labor market surveys, registers of national insurance numbers, the OECD immigration dataset, as well as the immigration figures for the countries that still collect them.
   The results of this research truly surprised me. Between 1998 and 2008, around 700,000 Portuguese decided to leave the country in search of better opportunities elsewhere. The figures are still lower than in the 1960s and early 1970s, but not by much. And the trend is accelerating: in 2007 and 2008, more than 100,000 Portuguese decided to emigrate.
   We don't know how much of this emigration is temporary or permanent, but, obviously, even if it is temporary, migratory flows can easily become permanent. No consolation there, even if we assumed that emigration is mostly temporary (which I doubt).
   One thing is certain. The prolonged economic stagnation is starting to have a major impact on the lives  of tens of thousands of workers, who are increasingly opting to find jobs elsewhere, rather than waiting for an illusive economic recovery. Alas, this trend is likely to persist if the Portuguese economy continues to be stagnated in the next few years.

Tuesday 1 June 2010

P(II)GS: too big to fail.

   A recent Report by economists at the Royal Bank of Scotland estimates that the total amount of public and private debt issued by entities resident in Greece, Spain and Portugal that is held by foreign financial institutions -- financial entities outside the P(II)GS -- is about 2000 billion euros. This is about 22 percent of the euro area GDP.
   (by the way, I found no links to the report itself, but a brief description that essentially corroborates the calculations may be found here .
   The message seems clear: P(II)GS are too big to fail.
   Hence the bail-out that European Union leaders (together with the IMF and the US) have designed for Greece.
   And hence the need for fiscal rules, coupled with fiscal federalism, that several of us have been arguing for in this blog -- stressing, as I have done, how they would be positive for our profligate country in need of importing yet this good that it can not produce domestically (discipline).
   I think, moreover, that this Report makes it clear why the solution that Ricardo Cabral devised in a post to EuVox -- rescheduling and reestructuring -- is economically misconceived. The international financial turmoil would be enormous and the Euro would be in real danger. We wouldn't want to have Argentina in Europe.
This said, the essence of the problem remains to be solved: P(II)GS simply cannot live above their means so systematically and deeply. Think about Portugal: 10 percent of GDP of current account deficit, year after year; a country that is lacking structural competitiveness; and politicians that (some, to be fair) remain autistic about this.
   Against this background, has the Portuguese government done everything to its reach in order to contain the indebtedness of Portuguese entities? I do not think so.
   Public expenditure should be significantly reduced, which I haven't seen so far (at least compared with Ireland and Spain's immediate measures). And -- a crucial 'and', for me -- renewed incentives for residents to hold public debt should be created. The Portuguese twin deficits will only be tackled if and when the Government actually stops spending inefficiently and sucking resources from the public to finance that spending; and when it creates virtuous 'forced savings', instead of the vicious ones that have been recently implemented (increased taxes). If the Portuguese save more because they are stimulated to allocate increased savings to public debt, the international financial exposure of the Government would fall, imports would deccelerate and the international financial exposure of the country as a whole would decrease; the immediate signs needed for Brussels -- cutting the deficit -- should have given much more via spending cuts than they have actually been given.