Wednesday 9 February 2011

Export incentives

After the more macroeconomic point of view in the previous post by Francesco Franco, let me offer some microeconomic remarks, in my case partly motivated by the grandiose Exports Congress held yesterday:

1. While it’s clear that Portugal needs to pay off its debt, it is far from obvious that “incentives” to exporters are the best way of achieving that. For instance, the asymmetry of information between applicants and the civil servants in Terreiro do Paço (or anywhere else) picking applicants is such that it is very difficult in practice to select probable winners. If one then factors in the “small worlds” people in Portugal live in and the short-run perspective induced by the current stage of the political cycle, it is likely that most picks will actually be losers, not winners.

2. Funding these schemes will imply taxes (either now or in the future), which will distort choices and create inefficiencies. One needs to be sure that the benefits outweigh the costs – an obvious comparison but, alas, often ignored in many public programmes. Even if exporting may make firms more productive, is that effect big enough that one really wants to cut public servants salaries and social spending again in a few years time?

3. Supporting these schemes will not only generate inefficiencies from taxes. It will also distort competition by destroying any (slim) chances of a level-playing field and economic mobility in the industries affected. How discouraging it must be for a business to have a good product or service to sell (in the domestic or international markets) but then be systematically passed over because competitors happen to know the right people and/or don’t bother to follow laws that actually are not really enforced?!

4. As Olivier Blanchard made clear in a paper mentioned before, improvements in the non-tradables sector (and I would include here all public services, in particular the justice system) may actually be a much more effective way of increasing the efficiency (and “competitiveness”) of the tradables sector. But this is the back-of-the-scenes management work (streamlining processes, monitoring practices, setting sensible incentives, etc) that unfortunately does not get headlines and systematically falls down in the long list of politicians’ priorities.

5. Many of these themes that are now currently being rehearsed by the government have already received a lot of attention in the very promising but apparently defunct “Plataforma para a Exportação, Inovação e Competitividade”, launched in 2005.

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