On Portuguese austerity and why we are (probably) not paying back anything


Adjustment with growth; the three key words our governors should never forget. In the late 70s, early 80s, in a succession of publications (see Anne Krueger, Milton Friedman and Deepak Lal for example) and events that culminated with the 80s widespread debt crisis in the developing world, the neoliberal thinking took over, succeding to keynesianism as the dominant economic paradigm. Highlighting the failures of the state, namely bad governance, selfishness, corruption and rent-seeking, this school of economic thought defends a subsidiary role for the state and the free market – through a clean price system – as the most efficient form of allocation of resources. Neoliberal reforms thus pursue the reduction of the State – both in size and power – and the establishment of free markets and clean price systems, distorted until then by the action of the State. The Bretton Woods institutions (IMF and World Bank) were the primary vehicle for the implementation of such agenda thorough the world using the infamous conditionality on their loans: “you’re getting our money only if you implement the economic reforms we believe to be necessary” – fiscal discipline, positive market-determined insterest rates, competitive exchange rates, trade liberalization, liberalization of foreign investment, privatization, deregulation. These beliefs were oficialized in the even more infamus Washington Consensus.

Let’s be honest: WC’s not good enough. There’s no such thing as an universal recipe for development; neoliberal orthodox thinking is simplistic, ahistorical and is empty of moral considerations and ethics. Despite the recent concern with good governance and the new political condicionality, neoliberal economics ignore the importantce of  institutions and that their markets are not natural vehicles of allocation of resources but instead institutional constructions created by the man to serve its imediate needs and facilitate transactions. More important: even if we agree that all the points of the WC are necessary conditions all healthy economies must fulfill, there are plenty of paths that can lead to its realization.  Honestly, even if one says “yeah, that’s ok you’re right but foreign investment is essencial and these are the conditions investors demand” that’s not true. There’s one major condition international investors demand: profits. Ask the chinese.

Smith, Ricardo, Marx, Schumpeter, Malthus, George. The list could go on. What have they in common? The study of policies and measures that promote economic justice, growth and long-run wealth accumulation for the nations. Both the notions of path and active policy are present in classical political economy. Even assuming neoliberal economics as a valid laboratory to study and describe the functioning of the markets in a perfect competition world full rational maximizing people, such paradigm will always describe better than explains. In my opinion, no sarcasm here, neoliberal economics are in fact very useful tools but need to be complemented by a broader multidimensional and multidisciplinary approach to the problems of growth and development. We all know about state failures and market failures and about their possible coexistence and complementary roles, so it’s time to adopt path sensitive hybrid approaches. Nothing new here.

In most cases, IMF interventions are like a very cold bath: countries pass through some very hard times and then they seem to recover and return to the path of development and growth. For how long? Nobody knows. It depends, every economist would say. Depends on what? Nobody knows. What’s really bothering me is that we’re doing nothing but trying to make sure we’ll get back our lenders money. This way, I assure we’re not getting back anyone’s money. The difference between Ireland and Portugal? Easy question: check out their figures, Ireland’s growing or at least is not in economic recession. That’s why they can still have hope. The greatest effects of the aggressive austerity measures imposed in Portugal are the reduction of the economic activity and the worsening of a no end in sight economic and social crisis. No real reforms, no real plans, no real nothing. No justice. Same old problems prevail. Just pure old school Washington Consensus economics – regardless our economic, cultural or historical paths – with the not-so-small difference that we have no power over our exchange rate and this expensive currency is hurting our already poor competitiveness. I know there’s a lot of people working hard out there but if nothing changes, we’re not paying anything. And that’s the smallest of our problems.

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2 responses to “On Portuguese austerity and why we are (probably) not paying back anything

  1. Portugal had no problems to use, more than a decade, more resources than it should. Loan after loan to support a heavy, corrupted and lazzy State. Now finally the financial markets woke up and is time to pay back.

    The Monetary Policy is other topic.”Expensive currency is hurting our already poor competitiveness.” As we have not any “monetary” solution for the weak economics the exchange rate will adjust in time, even ECB don’t want to for the possibility of inflaction chrisis.

    A quick reflection about Euro zone and the current times.
    Do you know other time in European history that so many countries were supporting each other, together to a same goal?
    Maybe I am wrong, but is true that EuroZone has lower debts/GDP than USA? If is correct, why all attention is pointing to Europe?

    In the end, Euro is the last symbol of European Union, the last master piece done since the whole 60’s Social dream project.
    A dream that we have no other choice than believe. Because in the end,we are trully living.

    FMS

  2. Thanks for the well-written insight!

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