Post on 18-Jul-2015
transcript
Piketty, Acemogluand how to break the pattern of economic crises in Portugal
Mariana Abrantes de Sousa
Economist - PPP Lusofonia
PWN Professional Women’s Network Annual Conference
Lisbon 20 - NOV-2014
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Contents
Portugal – A history of economic crises
Portugal – A crisis of history
From deficit to deficitoAcemoglu and Robinson (2012) – Why Nations Fail
oPiketty (2013) - Capital in the XXI Century
This time is different, same causes, different consequences
What needs to be changed
How to become part of the solution
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Declaration of interests
Personal quest
Born in Portugal, studied and worked abroad 25 years, returned 25 years ago
Economics not enough to understand why Portugal is poor
Understand the problem, become part of the solution
Portugal is worth changing for the better
- Exit, Voice, Loyalty, Neglect (Hirschman 1970 ): Choose VOICE
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Portugal – A history of economic crises – 1890
June 1892 Bankruptcy with suspension of payments on external debt, default
Triple crisis - banking , currency crises, and external debt
Heavy dependency on foreign financing for large catch-up investments
Foreign concessionaires
Chronic trade deficit, imports manufactured goods, exports of goods wih low value added ,
X /M = 50% export import coverage ratio
Dependency on emigrants’ remittances
External credit boom in a currency not controlled by the national authorities, £ Pound Sterling, devaluation
External credit retraction due to financial crisis in Argentina and new republic in Brazil 1989
British Ultimatiom 1890 January, Mapa Cor-de-Rosa
Interest on public and foreign debt toook up to 40% of Government budget
Austerity, starting with Rei D. Carlos “Primeiro nos Sacrificios”
External debt restructuring in 1902
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Source: Silveira, http://pt.slideshare.net/BarbaraSilveira9/a-crise-financeira-de-188090
Trade Balance 1896 - 1904
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Portugal – A history of economic crises – 1970-1980s
1974-1984 Debt crisis without suspension of payments on external debt, avoiding default
Colonial war absorbed around 40% of Government budget
Chronic trade deficit, current account deficit reached 9,2% of GDP in 1977 and 13.5% of GDP In 1982
First OPEC oil price shock in 1973
Second oil-shock in 1979
International economic recession reduced emigrants’ remittances and tourism receipts
Revolution and political instability
Abrupt decolonization and need to absorb increase of nearly 8-10% in population in less than one year
IMF first stand-by arrangement in May 1978, with conditionality
Huge increase in public debt, and external debt increased from about one third of GDP between 1979 to 90% of GDP in 1984
IMF second arrangement in September 1983, rearranged in June 1984, with conditionality including sharp currency devaluation, increases in subsidized prices, etc
Severe unemployment, wage arrears, austerity
Strong increase in X / M coverage rate, from less than 50% in 1980-81 to over 80% in 1986-87
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2010-2015 Bankruptcy and debt crisis without suspension of payments on external debt, avoiding default
Current account deficit over 12% of GDP in 2008, balanced in 2013, returning to deficit in 2014
X/M = 62 % in 2010
Energy trade deficit reduced from 6% of GDP in 2012 to from 3,8% in 2013
Large portion of population heavily dependent on the State, pensioners
Within Single Market and Single Currency, unable to: devalue, impose capital
controls, increase import tariffs, or increase interest rates
Severe contraction of commercial and export credit , consumer credit finances imports
Austerity, budget tax increases, wage and pension cuts
Unemployment topped reached 18%,
Distress sales of assets, privatizations, “compra-se ouro” stores
Huge gross external debt EUR 410 Bln Sept 2014, GDP 171 Bln
Vulnerable to increasing real debt burden with internal deflation
Portugal – A history of economic crises – 2010 +
Quem compra o que não pode, vende o que não quer 7
Seven reasons or Portugal’s empoverishment and economic depression, mostly endogenous
1. Competition from China's entry into WTO World Trade Organization2. Diversion of FDI foreign investment to Eastern European countries
1. Poor of human resources, labor market rigidities 2. Costs of context that limit business activity3. Outflow of capital in the 1970s never recovered, low savings rate 4. Excessive growth of the State, public administration and State owned
companies 5. Weak productivity growth, weak commercial
Source: Reis 2013
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Portugal – A crisis of history
Repeated external and debt crises
Small, fragile peripheral economy
Fewer and fewer policy instruments within Single Market and Single Currency
Highly vulnerable to external shocks
No room (but excessive tolerance) for internal policy errors
Government budget deficits, excessive government spending
Poor productivity, poor public services
Uncontrolled credit and poor bank management
Corruption and lack of transparency
Path dependency – Is history destiny ?
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From deficit to deficit- key drivers
Consequences:
Government budget deficit
External tade and CAB current account
Debt, public or external
Causes:
Deterioration in the terms of trade
External shocks (exogenous)
Governance deficit (endogenous)
Planning deficit
Democracy deficit
Literacy deficit, only 35% in 1920
Negotiating skills deficit
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From deficit to deficit – key drivers
Governance Deficit
External Deficit
GovernmentDeficit
If excessive borrowing is at the root of our financial crises, - T why does Portugal accumulate public and external debt repeatedly, - contrary to our traditions of prudent financial management ?
Quem não tem dinheiro não tem vicios ... Quem compra o que não pode vende o que não
quer Ao bom pagador não doi o penhor Quem não deve não teme
Because we count on someone else will pay the bill !
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From deficit to deficit – democratic governance Acemoglu and Robinson (2012) – Why Nations Fail
Poor countries are poor because those in power make choices that create poverty,
often on purpose (pg 68)
Diverging economic institutions are the fundamental cause of differences in economic development among countries
• Extractive political (and economic) institutions, top-down, hierarchical, non-democratic, State captured
• Inclusive institutions, bottom-up, democratic, difficult to capture, low tolerance for abuse
Economic growth under extractive institutions is not sustainable
Characteristics of concern in the case of Portugal
• Late investments in human capital, only recently
• Ineffective justice system
• Archaic labor system, among the worse in Europe
• Inefficient public services
• Ineffective taxation
• Poor leadership, elites
Dangers in divergence: EU was created to avoid disparities and conflicts among member countries 12
From deficit to deficit – trade Piketty (2013) - Capital in the XXI Century
• Income inequality within countries tends to increase because return on capital is consistently higher than growth
Inequality mechanism: r > g except in short exceptional periods such as wars and recovery periods
• Income from capital (rents dividends, interest, profits) grows more than total national income, increases inequality between those who receive capital verus labor income
• Initial inequality of wealth increases progressively
• But rise in global inequality over last 200 years comes mostly from “between-country inequality”, a wider gap between rich and poor nations
• Income inequality among countries increases when countries diverge, with net creditors/investors and net debtors
• Net creditors countries – national income is greater than national output
• Net debtor countries - national income is less than national output
• Net creditor countries receive a positive flow of income from the net borrowing countries (as high as 10% of GDP)
• Countries that have achieved sustained growth financed investments in physical and human capital domestically
• Conversely, “countries “owned by other countries” have been less successful, ...specializing in areas with less development potential, suffering from political instatbility when pressed to pay external creditors and investors
• Asian countries ... have benefitted more from open market for goods and sevices than from free capital flows or borrowing
• Gains from free trade come mostly from diffusion of knowledge, not from trade specialization (error of Ricardo) 13
Piketty Q & A
Q: Which is more likely ?• « Oligarchic divergence », rise of global billionaire wealth: billionaires own a rising
share of global wealth, or
• « International divergence, rise of foreign wealth: countries own other countries
A: Both can happen.
• But international divergence is relatively easier to deal with through capital controls*.
• Oligarchic divergence is harder to deal with, because it requires detailed information on individual wealth levels and strong international coordination, as wealth moves to off-shores distorting the NFA - net foreign assets positions of many countries.
(* Single Market Single Currency like the Eurozone do not allow capital controls)
Zucman 2013, « The missing wealth of nations: are Europe and the US net debtors or net creditors? »
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Devil in the divergence – income
Forces of convergence exist
• Diffusion of knowledge (education, scholarships)
• Investment in education
• Legitimate and efficient government
• Foreign lending and foreign direct investment (in theory)
Forces of divergence are stronger
• r>g, return on capital exceeds growth
• Top earners have the power to set their own remuneration (pg 25)
• Accumulation and concentration of wealth higher when growth is weak, r>g widens
• Debt (negative wealth)
Source: https://www.youtube.com/watch?v=ULfosfhWZ7c
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From deficit to deficit – Governance Governance systems function at various levels, in sequence, with checks and balances, redundancies, back-ups
Portugal’s first bankruptcy of the XXI Century due to a tragedy of errors In Portugal
• Excessive and illegal government spending, hidden Government liabilities • Eexcessive lending and borrowing, "Folia dos Fiados“ • Poor bank regulation and supervision, failures of prudent financial intermediation • Poor public administration • Unproductive public and private investments, empty roads, empty houses • Poor management of PPPs, swaps and other innovations • Corruption, lack of transparency, tolerance of abuses
Outside of Portugal• Excessive (subprime) lending, incorrect policy and price signals • Unwillingness to take losses on subprime lending within the Eurozone • Growing divergence and extenal imbalances, lack of adjustment instruments
A quem do seu foi mau despenseiro, não confies o teu dinheiro
Quando a esmola (subsídio) é grande, o pobre (contribuinte) desconfia
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Good governance needed at every level Good governance
Effective, efficient, and ethical management
Overcome power distance, fear, indifference
In hierarchical countries, top down,
all it takes to capture the State is
to capture the top, “cupolas do poder”
Corruption often masquerades as incompetence
Use diversity to avoid capture
Need vaccination against bad governance
Maitain memory of the crisis alive to avoid repetition
Zero tolerance for abuses, imprudent actions
Portugal to Norway: Hold the cod, send governance
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This time is different- in the Eurozone
Same problems
External deficits
External debt
Excessive spending
Different consequences
No FX devaluation
Wage and pension cuts
Higher unemployment
Much more debt
Much more taxes
Adjustment costs now supported almost entirely by the borrower, for the next several generations
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Alerts: When solutions turn into problems
Abuses
Interest rate subsidies for first time home buyers (bonificações ao crédito à habitação)
PPP – public private partnerships
Golden visas
Interest rate swaps
Regulatory failures
“BdP did all it could (?) within the strict letter of the law”, which proved insufficient in the changing circumstances
New circumstances require solutions unforeseen in the law
EU and Eurozone are new experiements, unprepared to avoid and deal with unexpected severe divergence of fortunes
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What needs to be changed
Ourselves
Buy local - monitor your family’s “foreign trade balance”, cut imports
Increase savings, reduce debt
Increase productive investment, education, marketable skills
Reduce waste Denounce abuses, intolerance for
corruption
Join together and speak up, VOICE
Lead by example
Our country
Increase bottom-up democracy Organize sector associations to gain
critical mass
Export, together
Gain bargaining capacity Negotiate better external debt
repayment terms
Tax consumer credit
Increase quality and productivity
Set high standards, high objectives
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Actions: How to become part of the solution Watch for warning signs of economic
mismanagement o Excessive credit and debt accumulationo Hidden expenditures o Abusive implementation of potential
solutions o Lack of transparency o Collusion (uma mão lava a outra)o ...
Set objectives high o Match productivity of strongest of the
smaller countries
Zero tolerance for corruption
Demand good management
Organize and join together
Build consensus Share sacrifices, especially with
creditors
Demand accountability
Correct Portugal’s negative image abroard with real stories
Speak up, overcome fear and indifference
Maintain memory of the crisis alive, as a vaccine against abuses in the future
Povo que Aguenta Povo que Supera
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We cannot continue doing business-as-usual, the same old way. Albert Einstein : "Insanity is doing the same thing over and over again and expecting different results "
In summary:
• Struggling to overcome a legacy of underdevelopment, Portugal has suffered repeated financial crises, from 1892 to the 1970’s and 1980s, to today.
• First, we must look for the truth and look to authors like Piketty on “Capital” and to Acemoglu on “Why Nations Fail”
- To understand the origins of the current and past financial crises, and
- To create solutions that may prevent similar problems in the future
• Then, we must have the courage and the political will to take action by implementing the necessary changes in economic governance at all levels
Those who ignore the lessons of history are condemned to repeat it
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PPP Lusofonia
Obrigada!Mariana ABRANTES
de Sousa
PORTUGAL
ppplusofonia@gmail.com
Blog PPP Lusofonia http://ppplusofonia.blogspot.com
All rights reserved
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Presenter background
Mariana ABRANTES de Sousa • Independent Financial Consultant and PPP Specialist in advisory,
training and evaluation of PPP projects and programs, and in credit and banking
• WPO Women Presidents’ Organization Portugal Chapter Chair
• Professor of Project Finance, Nova School of Business and Economics
• Member of the Board and credit committee of Infrastructure Crisis Facility (PIDG/KfW)
• Member of the Supervisory Board of FLO CERT GmbH
• Former Financial Controller in the Ministries of Transport and Health reporting to the Minister of Finance, Portugal
• Former international banker with ABN AMRO Bank (Portugal), European Investment Bank and The Chase Manhattan Bank, in Lisbon, Luxembourg, New York and Mexico City
• Economist with BA -UC Berkeley and MPA - Princeton University 1975
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How is the current financial collapse of Portugal within the Eurozone different from the financial crises of the 1890s and 1970s?
Who’s fault is it anyway, who is responsible for the current debt crisis?
How many bottles of wine did Portugal export to pay for your imported smartphone?
If you were a Member of the Board of a bank under stress, would you “see nothing and say nothing”, until the final collapse?
Are you dependent on the State budget ?
Are you satisfied with the quality of public services ?
Do you work for a company which is a net exporter or a net importer ?
Is Portugal condemned to suffer repeated financial collapses?
Can we incresase productivity just by producing more?
If we can’t export more and generate a current account surplus, will our foreign creditors accepta interest payments in kind, bottles of the real Port wine and hotel vouchers ?
What can we do together so that Portugal can avert the next three financial crises over the remainder of the XXI century?
For further reflection
25Lisboa, 20-Nov-2014