Tuesday 28 December 2010

We all know about hysteresis in unemployment, which basically tells us that the equilibrium rate of unemployment rate depends on current and past unemployment rates. This problem becomes more severe as the duration of unemployment duration increases

In the picture below, one can observe how the unemployment rate and real GDP growth have evolved since 1986 (when Portugal joined the European Union). Unemployment persistence is obvious and it is also obvious that unemployment tends to increase/decrease when the growth rate is below/above 2%.

Using the data on the Picture, I estimate na AR(1) process for unemployment, with real GDP growth as an independent variable. I use this very simple model to make some projections for the evolution of the unemployment rate.

I consider three different scenarios. First, I admit that until 2015 Real GDP grows at 5.46%. This is the average real GDP growth rate in the first six years after joining the European Union. Let’s call this the dream scenario. Second, I will assume that real GDP growth is equal to the last six years average: 0.59%. This is the pessimistic scenario. Finally, I will consider a realistic, some may argue that is optimistic, scenario and assume that the growth rate will be the average since 1986: 2.64%. The results are described in the picture below.

The Spanish Economy

Here's The Spanish Economy. No, it's not a Spanish counterpart to this blog, but rather a website set up by the Spanish government that "provides access to the latest key economic information on Spain in English in a clear and comprehensive manner". A quick visit suggests that it is rather well done, in the sense that most of it is composed of links to documents and data. In other words, it seems "strictly informative", although it is obviously more than that. Most of the official documents to which it links are actually in English, which is no small achievement. If you search "Spanish economy" on Google, the website is already in the top ten links. Judging from what Pedro Lains told us here, maybe the Portuguese government should get some inspiration from this. I'm afraid, however, that the title "The Portuguese Economy" is already taken.

Thursday 23 December 2010

We have a problem

From here.

Tuesday 21 December 2010

Good news, we hope

The budget execution up to November 2010 was announced, and apparently a positive evolution in the budget deficit occurs.
Some information from municipalities and some other institutions is still missing but unlikely to change the tone.
Curiously enough, in the "missing" ones we have the Parliament, the "agency for modernization of public administration" and the "agency for the knowledge society". I thought that these would like to be in the forefront...
Major highlights (by the Government): lower spending growth and increases in revenue (check here - in Portuguese, and you can download the data ; soon to be in English as well).
My highlights - increase in VAT is kicking in and accounts for almost all increased revenue, but also tax on car sales (as people are anticipating purchases of new cars) and tax on tobacco. These last two compensate on decrease of direct taxes on income. Not yet a reduction in nominal spending, but 2011 should see it given the pay cut in civil service.
My wishes for the next budget execution bulletins (or some other bulletins) - a quick-and-dirty assessment of how evolution is linked to measures adopted.

Sunday 19 December 2010

Gulbenkian Prize

Congratulations to Luís Aguiar-Conraria (and his co-author Pedro Magalhães) for the award of the "Gulbenkian Prize for the Internationalization of Social Sciences in Portugal".

Thursday 16 December 2010

Being visionary

Independently of the effect of the new initiative for the Competitiveness and Employment on the Portuguese Economy, it is already scaring to envision that, once the (inter)national crisis surrenders, a great number of new public institutes and projects can be potentially created to evaluate the impact of the new measures. I would suggest that the economic departments of our universities and their researchers take the lead and motivate their doctoral and master students to start working on applied microeconomic and macroeconomic papers to evaluate these measures. Get the data, and do an efficient, independent, and cheaper public service. A win-to-win opportunity, would say.


The title of this post summarizes the new Initiative for Competitiveness and Employment launched today by the Portuguese Government, with 50 (fifty, no mistake) policy measures.
If you can read Portuguese, the announcement is here.
For all the others, a quick summary:
     - measures aimed at exports (15, ranging from export credits to fiscal benefits)
     - measures aimed at bureaucracy removal /reduction (8)
     - measures aimed at the labour market (16)
     - measures aimed at real estate and housing markets (5)
     - measures aimed at fraud and fiscal evasion (6)
This sounds a bit like "carpet bombing" - something will work; in a statistical sense, at least this is likely to happen.

Wednesday 15 December 2010

what if?

Looking at the news this afternoon:
- Government wants to set a ceiling of firing compensation paid by companies
- Government wants to make easier to get out the tenants that do not pay rents
- Minister of Finance denies role of IMF in Government decisions
- Prime Minister meets "social partners" to present the changes in labor law
I wonder whether it would be more credible if for a month only one announcement would be made - how well the Government finances went that month.
In the end, doing many things at the same time may just mean dispersion, while we really need to focus.
Just an idea for this afternoon, stop announcing more and more policy measures, just show and make sure the ones recently adopted work. Please???

Monday 13 December 2010

Portugal and the IMF: 1978-79 and 1983-85

1, 2, 3 times or more I have been asked by journalists, both Portuguese and foreign, about the previous IMF interventions in Portugal: here is a detailed description of the two episodes by Ana Bela Nunes, an economic historian at ISEG.

Labor laws and precarious employment

   It seems more than obvious that one of the reforms that will be taking place in Portugal in the near term is the labor market reform. And no, I am not talking only about making firings cheaper. The truth is that, for better or for worse, more labor market flexibility is simply inevitable, either with this government (if forced by our European partners), or with the next government (the most likely outcome). Why? Because Portugal is the OECD country with the highest strictness of employment protection for individual workers, something that impedes a faster job creation and penalizes the competitiveness of our exports.
   Still, and even though this reform is inevitable, it would be nice if there were more elevation in the public debate arena with regards to these matters. The fact is that, among us, often political and ideological rhetoric take the place of common sense when we talk about these questions. And both common sense and abundant empirical research show unequivocally that out labor laws not only promote unemployment, but also they are the main reason that explain why Portugal is one of the countries with the highest incidence of temporary work in all OECD.
   In order to understand why, it might be worth looking to the graph below, which confirms that Portugal is one of countries of the OCDE with more precarious employment as a percentage of total employment (horizontal axis), something that is intrinsically correlated to our labor laws with regards to individual workers (vertical axis).
   It is also noticeable that, contrary to the (wrong) perception that is prevalent amongst us, many of the countries where labor laws are less rigid (i.e. where it is easier to fire individual workers) are exactly some of the countries that have strong Welfare States (e.g,. Denmark or Canada). That is, to make our labor laws more flexible is not akin to destroy our Welfare State. Quite the contrary. By promoting faster labor job creation and by enhancing the competitiveness of our exports, less rigid labor laws contribute to more wealth creation, which then can be used to protect the Welfare State. Denying this is mere ideological rhetoric.
   The words “Precariedade, precariedade, precariedade” (the incidence of temporary employment) should be front and center in the strategy of the main opposition parties when they defend deeper reforms of our labor laws. They should emphasize that the reform of our labor laws is an imperative because, among other things, we have to combat the incidence of temporary work and we have to create more employment. The truth is that our “irrevocable” labor rights (“direitos adquiridos”) are the main source of temporary work in the Portuguese job market. Labor economists know this for a long time. It would be nice if our politicians as well as all of us knew it too.
Source: OECD, Santos Pereira (2011) "Como Retomar o Sucesso"  

Note: A Portuguese version of this post can be found here.

Friday 10 December 2010

Cronyism and the next government

One of the most interesting papers that I have recently read on the Portuguese economy was the paper (already referenced here) by Pedro Martins on cronyism with regards to public sector jobs. Martins uses the "Quadros do Pessoal" data in order to undergo an extensive empirical investigation of job hirings in public sector enterprises before and after general elections. The paper is important because it confirms fairly convincingly something that many suspected and from which we only had, up to now, anecdotal evidence: that hirings in public enterprises are strongly associated with general elections. Namely, Martins finds that hirings in public sector enterprises goes up immediately before and in the 3-6 months after a general election (see graph below, where period 0 represents the date of the election). Interestingly, but probably not suprisingly, the effect on hirings is stronger when the party in power changes (i.e. if there is a change in the "color" of the party in power), that is, when the jobs-for-the-boys effect comes clearly into play. The results hold even after Martins controls for experience, education, private sector hirings, among others.
   What this points out very clearly is that, in the last 30 years (i.e. at least since 1980, the year the data begin), public sector enterprises have been blatantly used for political gains and to reward whoever helps you get into power. Yes, there are jobs for the boys alright and  they are not only in the public administration or the State. Public companies also do.
   This is certainly not completely surprising, but it is surely very nice to have substantial and unequivocal evidence on the extent of cronyism in Portugal. One of the obvious implications of this study is that we now understand better why public expenditures have been so difficult to control in our country, or why the debt of public enterprises keeps on growing at, on average, about 3 billion euros a year.

Cronyism _ Job hirings in public enterprises before and after general elections
 Source: Martins (2010), and taken, with permission, from here.

   I would like to end with a word of caution about the future. It is widely expected that we will have general elections sometime in 2011 (hopefully sooner rather than later), after the presidential election is over and after the constitutional limits allow. It is also widely expected that there will be a government of a new "color"(to use Martins's terminology),  probably in coalition with a smaller party. Thus, the temptation to emulate the past will be there, with interest groups associated with the new parties in power pushing for new jobs for the boys.  Let's hope this does not happen. If it does, it would be simply unexcusable in times like these. The fact is that it is not worth changing the boys from pink to orange or even to blue just for the sake of doing it. Boys will be boys will be boys. And this "boy" culture and tradition is partly responsible for the sad state of our public  finances. Therefore, if the new government truly wishes to reform the State and get away from the sorry state of affairs that is taking place in Portugal right now, it must avoid, at all costs, the temptation to distribute new jobs for the boys in the State and in public companies. If it does so, the new government will fail and won't be able to implement a truly reformist agenda, something that Portugal desperately needs. Let's hope not. I am sincerely hopeful that next time will indeed be different (even if it is because we really can't afford to do otherwise).

Thursday 9 December 2010

The usual, please

My friend André Azevedo Alves gives his perspective on the Portuguese situation in the Institute of Economic Affairs blog. Check it out.
André insists rightly on the need for a "haircut" on private creditors if a bailout materializes.
I would like to hear him on other serious issues such as private sector debt, the unbalanced relationship between the prices of tradable and untradable goods, or unit labor costs in Portugal. And ultimately membership in the eurozone.

Wednesday 8 December 2010

Cronyism -- no jobs for the boy


Politicians can use the public sector to give jobs to cronies, at the expense of the efficiency of those organisations and general welfare. Motivated by a simple model of cronyism that predicts spikes in appointments to state-owned firms near elections, we regress 1980-2008 monthly hirings across all state-owned Portuguese firms on the country’s political cycle. In most specifications, we also consider private-sector firms as a control group. Consistent with the model, we find that public-sector appointments increase significantly over the months just before a new government takes office. Hirings also increase considerably just after elections but only if the new government is of a different political colour than its predecessor. These results also hold when conducting the analysis separately at different industries and most job levels, including less skilled positions. We find our evidence to be consistent with cronyism and politically-induced misallocation of public resources.

By Pedro Martins (read the working-paper)

Time (in)consistency once again?

   One of the more recurring features of Portuguese politics is the time inconsistency of decision makers. Probably the same happens everywhere.
   I would like to know the contribution of time inconsistency of policies to the slowdown in economic growth. Basically, if you cannot believe in agreements signed with the Government, this should have a cost in terms of economic activity.
   This was brought again to my mind by the agreement on minimum wage - It was signed 4 years ago an agreement involving the Government, the unions and the industry associations (I think the industry associations signed it, not sure, but it is not essential). It stated that minimum wage should go to 500€/month in phased way.
   Now, industry associations want the Government to refrain from it, based on the bad economic conditions. Unions (and left wing parties) argue the Government should stick to the agreement.
   For once, I agree with the later on the grounds of consistency of policies (they use other arguments, of course). Actually, it is in the interest of the industry associations that
the Government does it. Otherwise, any agreement with the Government becomes only valid until the next convenient moment to change it? and if instead of minimum wage would be a VAT tax? or an exceptional tax on sales with "frozen" prices? A bit demagogic, I know, but once you enter the uncertainty that agreements do not bind the parties, everything goes.
   Moreover, I was puzzled by a news report stating that some computations made by the Government showed little impact associated with the minimum wage increase.
   Overall, without entering the discussion of whether a minimum wage has negative effects upon employment and growth of economic activity, I feel that not respecting agreements must also be damaging, in a hardly visible way.

Tuesday 7 December 2010

Making sense of external debt (?)

A few weeks ago, a piece on the FT mentioned that the Irish gross external debt was close to 1000% of GDP (not a typo!). Based on this observation, the FT commentator explained that the EFSF could provide liquidity to Irish banks but certainly not make them solvent. His conclusion might be true, but I believe that inferring solvency from gross (or even net) external debt is not correct. Today most developed countries have very large gross external positions (external gross liabilities and assets of 300% of GDP are quite common). These positions are the outcome of the massive increase in the size of capital inflows and outflows across countries experienced in the last 20 years or so. Most available data on bilateral external positions are based on the concept of residence. This accounting principle implies that a debt by, say a German bank located in Dublin on a French. resident is an external debt of Ireland vis-à-vis France, instead of a German debt. The BIS constructs a different measure (only for banks and for 24 developed countries), called “ultimate risk” basis, that identifies exposures on the basis of the nationality of the ultimate creditor and debtor. In short the “ultimate risk” basis is constructed to identify the bank that is ultimately responsible for the liability and is a better measure to assess solvency and liquidity. According to this measure, at the end of June 2010, European banks had 423 billion dollars claims on Irish banks, while Irish banks had 375.8 billion claims on European banks. Within Europe the net debt of Irish banks was therefore 47 billion or approximately 20% of GDP. The overall net figure is not available but we know that Ireland bank claims vis-a-vis “all countries” amount to 548 billion dollars and the 24 countries claims vis-a-vis Ireland amount to 518 billion. The graph below shows the creditors of Ireland (millions of dollars, June 2010, BIS.) The creditors breakup is useful to assess the transmission channels of a default and the incentives of each nation to bail out their debtor. (click to enlarge)
Portuguese banks have 80 billion dollars claims against other European banks while European claims against Portugal amount to 205 billion. Within Europe Portuguese banks have a net debt of 125 billion or 54% of GDP. Portugal bank claims vis-a-vis “all countries” amount to 140 billion dollars and the 24 countries claims vis-a-vis Portugal amount to 212 billion dollars.

Monday 6 December 2010

Saved by the Irish?

A few days ago I wrote in another blog a post stating that Ireland was lucky to be saved by the EU/IMF fund. But now I am confused. Was the Irish rescue the rescue of the Irish economy? Or was it imposed on Ireland - and on its government that will suffer in next year's polls - to rescue the banks in Europe that hold a large share of the country's sovereign debt, as today's FT argues? In the meantime, Portugal's yields have stabilized. Were we just lucky not to have been "saved" by a similar loan? What's next?

Sunday 5 December 2010

What do they know?

Strangely enough, in the last month or so it seemed that Portugal's politics was going to be run to the beat of the interest paid on sovereign bonds. At some point, 95% of analysts, politicians, and the media, were arguing that there could be no discussion about the 2011 budget, because otherwise the "markets" would ask for higher yields. The correlation however proved to be much lower than expected. Surprise? No, I don't think so. Markets are looking at models and computer screens, not at the Portuguese parliament or newspapers. And I have a hint that that is in fact so: the other day I got this email from a "lead analyst for Portugal in the Sovereign Risk Group" at one of the World top three rating agencies, asking for papers on a certain topic, but they had to be in English because he/she spoke (or read) "absolutely no Portuguese". How do you rate countries like that? And how do you decide about the price of the bonds? By looking at what Pedro Passos Coelho (btw, the leader of the main opposition party) says? Maybe not so. It was of course relavant that the budget passed. But also that there was genuine political dispute, and negotiations between the parties.

Friday 3 December 2010

Courtesy of Portugal, the Daily Show within the New York Times

A lesson from thinking about economics is that the evident truths are, on closer inspection, just plain false or even silly. This piece in the New York Times looks like a sketch out of the Daily Show where a somber "analyst" makes grave statements without realizing how hilariously ridiculous it all is. According to the reporters, the problems of Spain, Portugal, and Greece are that:

i) "You can’t build an economy on real estate, finance and tourism."
ii) "...it’s an absurd idea to have the same currency in a country like Greece or Portugal as in Germany, which has totally different habits and culture."
iii) "They lived on a bubble of credit and real estate development that sent wages and debt soaring."
iv) Deficits and debt are high.

These reporters were looking outside their window to face Manhattan just as I am right now. Funny that they didn't notice that the city in front of them has:

i) An economy built on real estate, finance and tourism.
ii) The same currency as Alabama, Alaska, and California.
iii) Very large increases in credit, real estate development, wages and debt in the last decade.
iv) A huge amount of debt and current deficits in the state government.

Jon Stewart couldn't have done it any better.