First, I would like to say that this is a very interesting article, because it covers the content learnt in the last classes and one of today's main issues of the Portuguese Economy: Public Finances (Fiscal Policy and weight of the Government in the Economy). For the Erasmus Students who can't read the article, I will try to make a brief review while comparing it to class material. Note that this is my interpretation and may not correspond to the truth.
The article is about "the Dutch Disease". It talks about a country, "Portugal" (fictitious name), where the disease corresponds to the entrance in the European Monetary Union and to the obligation of the Stability Pact to reduce the Government's debt, which provided a massive plafond of credit to the "Portuguese" (again, fictitious) agents, at very low interest rates (this is the so called "manna"), which allowed a boost in consumption, increasing the aggregate demand. As the supply did not evolve with the demand, imports increased and exports decreased (in tradables), and the price of non-tradables (for example, houses) rose. As you all know by now, this changes the relative prices, decreasing λ (PT - fixed, PN - ↑), changing the industry (in other words, "killing" the industry of tradables).
As the author (Dr. Miguel Lebre de Freitas; for those of you who don't know him yet...well...you should!) says, this was simply an adjustment between to states.
Nowadays, the economy of "Portugal" (once more, fictitious) faces the threat of diminishing internal and external demand. The "gift from heavens" - the opportunity to increase debt - is now ending, as all the agents already have their portfolios well (and I mean "very well") levered, and now have to think about other issues not correlated with this... something called interest and principal payments (don't know if you heard about this dreadful thing... it 's terribly unpleasant, and usually follows debt acquisitions). So, the question that poses now is how to adjust, that is, what policies to use. "To raise or not to raise public expenses?! That IS the question!"...or NOT!
As a solution, the Government should now give incentives towards the production of tradables. Furthermore, in order to adjust λ, wages must go down (and this is the particularly difficult part). Nevertheless, the solution should not pass by increasing the weight of the Government in the Economy.
However, this article raised me some questions (not critics):
Firstly, the author (the distinguished Professor Lebre de Freitas) says that the solution goes through the creation of incentives to allocate the supply towards the tradable goods, as well as the demand towards the non tradables. Why should the demand be allocated to the non tradables? Is that because the fall of the non tradable prices is not desirable, in order to avoid the recession? But weren't we trying to adjust λ?
Secondly, can we say that the rise of non tradable prices, and thus the fall of relative prices, caused by the increase of demand, is the Balassa-Samuelsson effect? Because it wasn't caused by the rise in productivity of the tradable industry.
PS: I apologize for any mistake in spelling, grammar and in economic theory... But after all, we are all here to learn, right? Labels: Gaiola Aberta |
