Reforms are the order of the day as a solution to all our problems!, Ariane Dinis

Policies and reforms are necessary to improve an underperforming economy, resulting in an increase of growth. In an economic sense, policies create or smooth market distortions. Distortions can be seen as a reallocation of economy’s resources that create an inefficient production; these can be seen as the gap between the value attributed by society and by individual. Policymakers are responsible of maximizing social welfare considering resource constraints and existent distortions.

Portugal is being bombard from all sides with advice and demand of reforms in various sectors.  I question if these reforms are necessary, productive or even fundamental for economical growth. Many agents play an important role in the reforms implemented in Portugal influencing the social and economical future of the country.

The government reform plan reflects many types of reforms with a variety of different objectives. Some are born from fiscal constraints and constant pressure to pay-out loans following agreements made with creditors. Other reforms implicitly take into account the convergence process to the EU standards. Many critics consider austerity as an EU widespread policy reform – this is seen as a key to the convergence between member states. Additionally, new regulations and directives are made by the commission and proved by the parliament and council to be adopted by all member states – representing the Principles of EU.

In the national political sphere the reform proposals are ideologically-based. Portugal’s recent history plays a prominent role in the divergence of ideologies- in a short time span the country has gone from an authoritarian (fascist regime) to a socialist state. This results in a never-ending ideological debate of a unified understanding of Portugal’s future path.

Summing up, we have reforms born from fiscal need; reforms in sectors such as environment, agriculture, transports, economics etc. rise from EU directives; and finally reforms brought by the National principles and social belief. These reforms may have very different social and economical directions.

The widespread reform strategy, known as “reform as much as possible” implying reforms in all sectors, has an implicit notion that any reform is a good reform. Basically, the reforms chosen using this strategy are the most practical and politically feasible. Empirical evidence shows that this strategy has many times proved to fail leading to no economic growth or no increase in welfare.

Hausmann et al. (2005) highlights the importance of not considering solely the direct effects of a policy, but also the side-effects on other markets and their interaction with other reforms. A reduction of a distortion alleviates directly and may result in alleviating other distortions; leading to an increase in welfare. But, sometimes, a distortion existed beforehand to alleviate a distortion in another market; a policy to remove the distortion can bring a significant loss in welfare.

Any one reform or group of reforms cannot guarantee an increase of welfare in presence of numerous of other distortions. Hausmann et al. (2005) makes a point that it is important to select the most needed major structural reforms as to understand the second effects and interactions in the economy. And from there decide other necessary reforms. Only this process guarantees more effective reforms that generate economic growth.

Looking back to the history of reforms made in Portugal, we can extract many examples of reforms that side-kicked to unsatisfactory results due to inference of other policy reforms (eg Energy sector). Hopefully, our political sphere has had eye-opening experience, and sees the need of creating a long term structural reform plan to boost economic growth.

References:

– Why an exit from EU would be bad for British business. By Richard Branson -Jan 03, 2013

http://europa.eu/about-eu/basic-information/decision-making/index_en.htm

– Hausmann, Ricardo, Dani Rodrik, and Andrés Velasco, 2005, “Growth Diagnostics,” John F. Kennedy School of Government, Harvard University (Cambridge, Massachusetts)
http://ksghome.harvard.edu/~drodrik/barcelonafinalmarch2005.pdf

About the author,  Ariane Dinis: Currently a Master student in Economics in NOVASBE. Fields of interests include macroeconomics and economic development.

 

Advertisements

Leave a comment or suggestion

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s