sexta-feira, março 02, 2012

Troika maintains Taboo over Trade

A quick comparison with Iceland raises the question of which is the less orthodox balance of payment adjustment programs for the highly indebted countries.

Contrary to what the IMF Survey says, Iceland followed the traditional orthodox  récipe for cutting the external deficit: 
- Sharp devaluation of over 50%  in 2008
- higher local interest rates,
- capital controls
This lead to rising exports, cutting imports and a rapid and highly visible improvement in the CAB   Current Account Balance.

In the alternative universe of the Single Market and the Single Currency that is the Eurozone, all of these critical measures are taboo, so the Troika-sponsored program focuses on just about anything else, no matter how ancillary.
One exemple of this side-show is the so-called “liberalization of the electricity sector” to overcome regulatory failures and to give Portuguese consumers a choice of which company will supply them with imported electricty in the future, EDP, Endesa or Galp. If there are monopoly rents in the the regulated monopoly industries, it would make more sense to improve regulation and do away with capture of the Regulator, or with capture of the Concedent in the the case of the PPPs.

Meanwhile, the third Troika review tests nearly everything but what matters, like an exam at a third-rate University which overlooks the core curriculum.  The Troika gives Portugal much deserved kudos for the “large fiscal correction in 2011”, including the creative national accounting achieved with the transfer of the bank pension funds, and the tripartite labor agreement that will slash 20-30% from the incomes of most households in 2012.  

But the Troika barely mentions that the “external adjustment is proceeding”, even the face of ever “stronger headwinds”, Troika-speak for weak external demand as the Eurozone surplus countries impose their own austerity, instead of stimulating their domestic demand as some economists, including Paul Krugman, recommend. 

While the Troika review monopolized the headlines, the really important story was  the external sector.

And there the good news was the 15.2% increase  in Portugal’s exports, achieved without the help of a devaluation and of even of pre-export credit.  But Portugal’s imports still rose 1%, despite  the reduction of -1.5% in GDP in 2011.  This reflected the 3.4% increase in energy imports to €10.288 million,  but also an increase of 1.4% in agri-food imports to €8.697 million.

Here are some important questions to study prior to the next Troika exame :
- Will the liberalization of the energy market lead to the needed reduction in the energy imports and in the energy trade deficit?
- Does Portugal need to opt out of the CAP Common Agricultural policy in order to cease being one of the countries most dependent on food imports?
- Why is the external sector adjustment not addressed explicitly in the adjustment program?

And the biggest question of all: How big a recession will be necessary, in terms of cumulative drop in GDP, to secure the necessary cut in imports, given the  truly "unorthodox" mispricing of imports and the inability to impose direct import restrictions?

Mariana Abrantes de Sousa 
PPP Lusofonia

Portugal trade - € millions

X-Exportações (fob)
M-Importações (cif )
  Net Trade - Saldo (fob-cif )
-      20.291  
-      15.249  
  X/M Cobertura (fob/cif )