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Nuno Santos
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Prof Rodrik thanks for the analysis on Latvia. Portugal has just announced further austerity in part through a type of fiscal devaluation : small reduction in corporate contributions to social security and large increase in employees contributions (equivalent to a month salary). While I like the idea of innovative measures to boost export competitiveness in the absence of exchange rate policy I wonder if this is the way to go? In fact would it not be preferable to have a lengthier adjustment process with reduction in corporate taxes but without further reductions in disposable income? This would just require a greater focus on growth rather than a pure short term credit perspective. In addition would it be possible to think more out of the box and seek to negotiate options for direct support to exporting corporations with aome sort of carrot and stick approach ?
Toggle Commented Sep 13, 2012 on What I learned in Latvia at Dani Rodrik's weblog
Prof Rodrik, thanks for this. Your arguments about liberalization at the expense of inter-sectoral misallocation not necessarily being a good bargain seem to me very appropriate. I would just like to add a comment to your analysis in a dynamic setting as I would like to know if this is something that has already been researched. The idea can be based on your model: it is a case when trade liberalization leads to changes in employment shares positively correlated with productivity levels but only in the short term. This would be a case when liberalization in certain situations leads to greater efficiency in allocation of production factors but only for a while given that it is not sustainable in the longer term. The case I’m thinking of would be Portugal and maybe some other similar countries, which had quite a good deal of domestic savings when they fully liberalized and where liberalization meant that production factors went to the tertiary sector but mainly non-export sectors (construction, banking etc). In my view (would still need to gather all the exact data) this led to a short term efficiency but a longer term inefficiency given that it generated external imbalances (naturally this is just part of the whole story). The ‘industry rationalization’ in Portugal did not seem to lead to short term lower productivity but it did in the longer term because of the particular allocation of factors that resulted from the association of liberalization, convergence in interest rates to lower levels (German like) and high level of subsidies (grants from cohesion funds) towards infrastructure... This inter-sectoral allocation while optimal in the short term resulted unsustainable in longer term leading to very low growth once credit dries and internal demand cannot grow further. The argument would just be a small extension of the idea that markets may not allocate factors of production efficiently in a dynamic sense and you can enter an unsustainable growth path. Would then provide some more further rationale for public intervention in trying to avoid external imbalances due to such type of allocations in a structural adjustment context.
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May 31, 2011