The Portuguese Economy Towards 1992
The Portuguese EcoDomy Towards 1992 Proceedings of a conference sponsored by Junta Nacional de I n v e s t icientffica g a c ; e o Tecnol6gica and Banco de Portugal. Edited by J030 Ferreira do Amaral Diogo Lucena Ant6nio S. Mello SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data The Portuguese economy towards 1992 : proceedings of a conference sponsored by Junta Nacional de I n v e s t Cientifica i g a ~ o e Tecnologica and Banco de Portugall edited by J o Ferreira o do Amaral, Diogo Lucena, Antonio S. Mello. p. cm. ISBN 978-1-4613-6618-8 ISBN 978-1-4615-3638-3 (ebook) DOI 10.1007/978-1-4615-3638-3 1. Portugal-Economic conditions-1974- -Congresses. 2. European Economic Comrnunity-Portugal-Congresses. 3. Labor market -Portugal-Congresses. 1. Amaral, J o Ferreira o do. II. Lucena, Diogo de. III. Mello, Ant6nio Sampaio. IV. Junta Nacional de I n v e s t Cientifica i g a ~ o e Technol6gica (Portugal) V. Banco de Portugal. HC392.P699 1992 330.9469'12-<1c20 91-39506 Copyright 1992 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1992 Softcover reprint of the hardcover 1 st edition 1992 AII rights reserved. No part of Ihis publication may be reproduced, stored in a retrieval system or transmitted in aoy form orby any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+ Business Media, LLC. Printed an acid-free pa per.
Contents Preface Vll Business Cycles in Portugal: Theory and Evidence 1 Isabel Horta Correia, Joao Cesar das Neves and Sergio Rebelo Financial Liberalization and Adhesion to EMS - Dynamics of Adjustment in Portugal Mario Antao and Paulo Brito Foreign Entry and Domestic Welfare, with an Application to Portuguese Life-Insurance Pedro P. Barros and Luis M. B. Cabral Concentration and Competitive Dynamics Jose Mata Why Are Wages in Portugal Lower than Elsewhere in the EEC? Fernando Branco and Antonio S. Mello 65 101 117 131 Some Aspects of the Portuguese Labour Market, 1977-1988: Neutrality, Hysteresis and the Wage Gap 153 Leonor Modesto, Manuel Leite Monteiro and Joao Cesar das Neves Trade-Off between Emigration and Remittances in the Portuguese Economy 175 Alfredo M. Pereira Labour Supply in an Environment with Emigration: an Empirical Study of the Portuguese Case 199 Jose Pedro Barosa and Pedro Telhado Pereira v
VI Co-Integration of Macroeconomic Time Series: an Application to the Consumption Function Vitor Gaspar and Maximiano Pinheiro 207 Allocation of Common Costs in Portuguese Telephone Service 223 Diogo Lucena, Antonio P. N. Leite and Vitor Gaspar Comparative Advantage and Structural Change in the Portuguese Pattern of Trade in Manufactures 233 Anthony S. Courakis and Fatima Moura Roque List of Participants 257
Preface This book contains papers presented at a conference held in Vimeiro, Portugal, on March 23 and 24, 1991. The purpose of this conference was to discuss several aspects of the portuguese economy, namely issues and problems related with the european integration of 1992. The sponsorship has been provided by the Junta N acional de I n v e s t icientifica g a ~ i i o e Tecnologica, the portuguese science and technology foundation, as well as by the Banco de Portugal, the central bank. The first paper, by Horta Correia, Cesar das Neves and Rebelo represents an attempt to characterize and to analyze the main features of the portuguese business cycles. Making use of the real business cycle methodology, the authors contrast the properties of the portuguese empirical regularities with those of other OEeD countries and conclude that the economic fluctuations in Portugal seem much more severe. On the other hand, the relative volatility of the various series analyzed, as well as their co-movement and serial correlation properties, are of the same order of those in other DECD countries. Horta Correia, Cesar das Neves and Rebelo evaluate the properties of the portuguese time series in light of the predictions of two dynamic general equilibrium models: a closed economy model and a model of a small open economy. Surprisingly, their closed economy model provides a good fit for the portuguese fluctuations, while the small open economy model predicts unplausibly low volatilities for both aggregate consumption and the trade balance. The next paper, by Antao and Brito, analyses the effects on the portuguese economy of both the liberalization of capital movements within the EEC and the adhesion to the European Monetary System. Two scenarios are compared in this work: full liberalization with immediate EMS adhesion, and liberalization with precommitment to EMS adhesion at a future date. The authors find that the latter strategy will likely imply a smoother transition from lower losses in the country's competitive position, provided that the announcement of the EMS timely adhesion is credible. From the model, a dynamic relationship between the real exchange rate and the real VII
Vlll Preface interest rate parity is derived. Antao and Brito successively test the hypothesis that the former causes the latter with recourse to co-integration techniques: real exchange rate disturbances significantly determine the variations in the Fisher open gap, as it is suggested by the study of impulse response functions. Interestingly, a strategy of preannouncement of EMS adhesion coupled with increasing liberalization of exchange controls characterizes the strategy followed by Portugal in recent years. The third paper, by Barros and Cabral, focuses on the welfare aspects of foreign direct investment. The authors develop a theoretical model which is then applied to measure the effects of recent foreign penetration in the portuguese insurance market. Barros and Cabral show that the marginal effect of entry is welfare improving if and only if foreign firms' market share is above some threshold level. Also, they show that the global effect of foreign entry is only positive when the consumer's surplus effect from greater competition compensates the transfer of profits from domestic to foreign firms. In their model de-novo entry is contrasted with entry by acquisition. By applying their model to the case of the portuguese life-insurance sector, which has been the target of intense penetration by foreign firms and subject to a significant restructuring in light of the recent european financial reforms, the authors conclude that, in general, the global effect is negative but the marginal effect is positive. Consequently, although recent foreign entry has decreased domestic welfare, additional foreign entry can contribute to improve it. Jose Mata provides an empirical analysis of entry and exit flows of firms in the portuguese manufacturing industry, in recent years. Using different measures of firms' mobility the author concludes that resources in Portugal seem to display much less rigidity than it is suggested in a country where layoffs, bankruptcies and reorganizations are often subject to difficulties of various types. An appreciable capacity for adjustments and some degree of flexibility in the alternative use of resources are crucial features to accommodate rapidly and decisively the reforms required in the process of economic integration created by 1992. The next four papers are devoted to the analysis ofthe portuguese labor market. First, Branco and Mello attempt to explain why wages are much lower in Portugal than in other EEC countries. The authors decompose the wage gap in three main components: the exchange rate, productivity and industrial relations. Productivity seems to matter more than any other factor, while industrial relations shows a negative contribution to the wage gap, perhaps because unions have greater power and labor laws are relatively more stringent in Portugal. Branco and Mello observe a narrowing of the wage gap since Portugal's joined the EEC, a fact that gives credit to the convergence argument in favor of european integration. Next.,
Preface ix Modesto, Monteiro and Cesar das Neves discuss the neutrality hypothesis and conclude that in the long run, productivity changes are almost comvietely reflected in increases in wages, although that is far from true in the short run. Labor markets in Portugal also reveal imperfections which seem to be characteristic of situations where unions give priority to active membership, in detriment of outsiders. In both the papers by Alfredo Pereira and Barosa and Pedro T. Pereira the issue of labor mobility across borders is raised. The first studies the effects of emigration in the 1960's on the portuguese economic growth and welfare. By analyzing the experience of a large migration of workers to Central Europe, the author is able to draw conclusions, of course temptative, from the liberalization of labor force movements brought about by the european integration. The study emphasizes two opposite effects of emigration: one negative from slower economic growth resulting from lower labor force and one positive due to the remittances sent home by the emigrated workers. In the work by Barosa and Pedro T. Pereira the choice between working at home or abroad is modelled and tested. They show that wage differentials and its expectations, as well as capital market imperfections are important variables that help to explain domestic labor supply and emigration in the case of the portuguese worker. Gaspar and Pinheiro estimate a consumption function for Portugal using co-integration relations between consumption, interest rates and aggregate income. They measure the short run dynamics of real private consumption and identify how it relates with the long run behavior of this variable. The next paper is by Lucena, Leite and Gaspar and focuses on the allocation of common costs among Portugal's long distance telephone operators. Their paper is topical in a time of greater deregulation of markets and increased competition. Finally, Courakis and Roque study the pattern and evolution of trade of the portuguese economy and conclude that Portugal has a comparative advantage in products of industries that are intensive in unskilled labor coupled with a comparative disadvantage in products of industries that are intensive in skilled labor or display economies of scale; the disadvantage in skilled labor intensive products seems more pronounced in products requiring intensive lower quality, as opposed to higher quality. Moreover, in recent years, the country has evolved from a pattern of trade characterized by a comparative disadvantage in physical capital intensive products to a stage of comparative neutrality. As always in a project of this type there are many people to thank: the authors of the papers, who promptly responded to the call, and the discussants, Antonio Pinto Barbosa, Jose Ferreira Machado, Ana Paula Martins, Vasco D'Orey, Joao Pontes, Vasco Santos, Victor Santos. Fatima Branco
x Preface for the excellent preparation of the manuscript. David McConnell, the editor, always enthusiastic about Europe. Antonio Borges, Vice-Chairman of the Banco de Portugal and Ramoa Ribeiro, Vice-President of JNICT, for their support. All these people have contributed to make better known the experiences of the small, highly open and semi-developed portuguese economy in its path towards Europe 1992. Joao Ferreira Amaral Diogo Lucena Antonio S. Mello
The Portuguese Economy Towards 1992