The unsustainable lightness of wages

The recent and accentuated development of tourism is one of the exponents of this paradigm and, to be honest, it was, until the Covid-19 crisis, an important vector of the economic recovery, mitigating the effects of the financial crisis and especially of the subsequent recessive measures .

In Portuguese public opinion, there was a consensus that the appropriate model for the economy would involve orienting national production towards tradable goods, aiming at their export. This option has been seen as the panacea for all problems, namely by promoting increased competitiveness and thus productivity of companies.

The recent and accentuated development of tourism is one of the exponents of this paradigm and, to be honest, it was, until the Covid-19 crisis, an important vector of the economic recovery, mitigating the effects of the financial crisis and especially of the subsequent recessive measures .

The primacy of the orientation towards external demand has, however, resulted in non-negligible economic and social costs, the most evident manifestation of which is the relative stagnation of wages in favor of competitiveness, often in labor-intensive and low-value sectors added. And competitiveness is not necessarily synonymous with productivity.

Going back to the 1950s and 1960s, the reference thought advocated the protection of domestic production in order to achieve autonomy vis-à-vis the outside - the substitution of imports. Through barriers to the entry of goods such as customs tariffs and import quotas, in a certain revival of mercantilist practices, the so-called nascent industry of the country was defended, solving the problem of external dependence in a settled way. A weak currency, because it makes imports more expensive, would have the same type of effect.

The industrialization of Brazil is a prototype for the application of this model, with restrictions on the entry of external products being maintained until today. The development and industrialization of Spain in the period of the weak peseta is also the result of the same model. Part of the success of this strategy resulted from the extension of its domestic markets, which ensured a sufficient level of demand to feed the productive machine to be protected.

The Portuguese economic growth of the same period resulted from a curious application of the protectionist model on a scale that was then lacking in the embryo of the small open economy. In the EFTA free trade space, Portuguese exports, combined with restrictions on imports, found the dimension that made possible, for example, the development of the textile sector.

The progressive change in international rules of the game, both under the aegis of the GATT and within the framework of economic integration agreements, has paved the way for the liberalization of external exchanges. In the case of the Portuguese economy, the adoption of the single currency was the zenith of this process. Due to the need to find new solutions, the bet on external competitiveness gained expression.

Achieving external competitiveness served as an argument to justify the reduction of nominal wages during the period of austerity. And if the model had the desired success, its sustainability seems doubtful. Economic activity supported by depressed wages has not, in general, been brilliant, sailing at the expense of low growth external demand compared to the standards of the past, while facing weak domestic demand given the low purchasing power of the population.

External competitiveness has encouraged the development of the informal sector, as well as the increase of precarious and poorly paid jobs, accelerating the deregulation of the labor market, as it becomes more exposed to the international dynamics. As collateral damage, it calls into question the investment of decades in the training and qualification of the population, which is over-specialized in view of the available jobs.

To be successful, the foreign bet, which guarantees the scale that the Portuguese economy does not have, cannot be based on low wages that depress the economy. On the contrary, it must demand the creation of qualified jobs, which can increase competitiveness through productivity. A sustainable model will be able to retain the critical mass of the population, avoiding a bleeding of qualifications that will compromise, in the long run, the ability to break the spiral of low productivity and low wages.

The atavistic model, based on light wages, generates in a vicious circle that compromises not only sustained internal demand, which can counteract external demand in recessive periods and thus guarantee economic stability, but also compromises innovation, mortgaging the much sought after economic growth.

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