Wednesday, July 25, 2018

Portugal and austerity: lessons in 101 Economics?

My wife, who is half Portuguese, brought to my attention an article on Porto and how lovely it is.  In searching for the article (as she rarely bookmarks sites...), I found a NYT article that caught my attention.  The article's title is telling: Portugal Dared to Cast Aside Austerity. It’s Having a Major Revival.

Portugal decided to ditch austerity and instead pursued a more Keynesian (?) stance:
Portugal took a daring stand: In 2015, it cast aside the harshest austerity measures its European creditors had imposed, igniting a virtuous cycle that put its economy back on a path to growth. The country reversed cuts to wages, pensions and social security, and offered incentives to businesses.  The government’s U-turn, and willingness to spend, had a powerful effect. Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off...
And, the Prime Minister explains:
“What happened in Portugal shows that too much austerity deepens a recession, and creates a vicious circle. We devised an alternative to austerity, focusing on higher growth, and more and better jobs.”
Mr. Costa (the Prime Minister) made up for the givebacks with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 percent of its gross domestic product, compared with 4.4 percent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficits
And, if you wonder about the importance of the level of confidence households and businesses have (the 'feel good' factor as we say in class), look at this:
While discouragement lingers in Greece after a decade of spending cuts, Portugal’s recovery has pivoted around restoring confidence to get people and businesses motivated again.
“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mind-set became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”

Lastly, the description of the production technology of a olive oil producer featured in this article is interesting:
Elaia says it generates 14 percent of Portugal’s olive oil today, contributing to a renaissance in Portuguese exports, which now constitute 40 percent of economic activity. Drones buzz over vast olive groves, precision-planted with 2,000 trees per hectare, or roughly 2.5 acres, compared with around 150 trees for a traditional farm, monitoring crops for insect infestations, water levels and optimum harvesting time. Olives are picked by machine. Instead of field hands, the company hires technicians to operate the robots, and it has teamed up with universities for research.
Of course, 'good governance' is needed for such a path to prove successful.  But, good governance is not necessarily available in all debt-ridden countries...

BTW, the article my wife alerted me to on Porto, and how beautiful it is, is this one: Pret a Porto: Portugal’s second city is ready for the limelight.

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