Other neglected aspects of internal devaluation

Concomitant with its impact on the employment structure and GVA accounting for the persistence of wage deflation, stagnant productivity and depressed labour share beyond the ‘adjustment’ period, internal devaluation has put in motion other processes weighing down on prospects for future recuperation which deserve consideration.

The first of these processes is demographic. In the case of Portugal, the combination of mass unemployment with wage deflation led to a 3.5 per cent fall in active population numbers between 2011 and 2016 (see Figure 7.22).This decline.

a Sectors arranged from N (low-wage) toT (high-wage), change of weight in the employment structure, 2010—2013

Figure 7.19a Sectors arranged from N (low-wage) toT (high-wage), change of weight in the employment structure, 2010—2013

Source: INE

b Sectors arranged from N (low-wage) toT (high-wage), change of weight in the employment structure, 2013—2016

Figure 7.19b Sectors arranged from N (low-wage) toT (high-wage), change of weight in the employment structure, 2013—2016

a Sectors arranged from N (low-wage) toT (high-wage), change of weight in the Gross Value Added structure, 2010-2013

Figure 7.20a Sectors arranged from N (low-wage) toT (high-wage), change of weight in the Gross Value Added structure, 2010-2013

Source: INE

b Sectors arranged from N (low-wage) toT (high-wage), change of weight in the Gross Value Added structure, 2013—2016

Figure 7.20b Sectors arranged from N (low-wage) toT (high-wage), change of weight in the Gross Value Added structure, 2013—2016

Distribution of job creation across sectors, 2017 (the area of the balloons represents employment creation)

Figure 7.21 Distribution of job creation across sectors, 2017 (the area of the balloons represents employment creation)

Source: INE

Active population (20- to 64-year-olds), 2011-2018

Figure 7.22 Active population (20- to 64-year-olds), 2011-2018

Source: INE

Permanent immigration and emigration, 2008—2018

Figure 7.23 Permanent immigration and emigration, 2008—2018

Source: INE

due to an inversion of previously positive migration flows, was followed by a slight recovery in response to a new reversal of the sign of migration flows initiated in 2016. Nonetheless, despite the recovery of employment, emigration in 2017 and 2018 remained above the threshold prior to the adjustment (see Figure 7.23).This may be partially due to the widening of wage differentials within the EU during and after the adjustment. Given an absence of increased productivity, this decline in the active population, difficult to reverse in the context of protracted wage deflation, weighs down on the prospect of future GDP growth.

The second point to consider is that conditions for productivity growth have also been depleted by the adjustment. Between 2010 and 2016, investment (Gross Fixed Capital Formation) decreased 23 per cent in nominal terms. Moreover, its sectoral distribution changed markedly, biasing the structure in favour of expanding low-wage, low-productivity sectors. Between 2013 and 2016, with the anomalous exception of‘L — real estate’, those sectors increasing weight in the investment structure were low-wage ones, specifically ‘N — administrative and support service activities’, ‘I — accommodation and food sendee activities’, ‘G — wholesale and retail trade’and‘C — manufacturing’ (see Figure 7.24). Since these sectors, with the exception of“C — manufacturing’,are also low-productivity and low-productivity-growth sectors, the prospects for a productivity-led push forward are bleak.

A third aspect worthy of investigation is the changes in channels of financing within the Portuguese economy. During the GFC, the eurozone crisis

Sectors arranged from N (low-wage) toT (high-wage), change of weight in the investment structure, 2013—2016

Figure 7.24 Sectors arranged from N (low-wage) toT (high-wage), change of weight in the investment structure, 2013—2016

Source: INE and the subsequent adjustment, bank-mediated capital flows (under the form of credit) seem to have been partially replaced first by official lending, and subsequently by the outright alienation of assets to non-residents. This is most salient in the case of privatisations and bank bailouts that took place during the adjustment and, more recently, in the real estate boom presently underway, which is fed mainly by capital flows from non-resident real estate funds and individuals. To the extent that the acquisition of assets by non-residents will increase outward flows of capital as a future counterpart, such a shift in the regime of financing the economy may also converge cumulatively in Portugal to preclude a full recovery from the crisis.

The cumulative (and potentially circular) mechanisms of internal devaluation

Internal devaluation in Portugal, albeit effective in terms of rebalancing the current account, served financial interests while triggering a regressive process of structural change leading to the stagnation of real wages, productivity and labour share. The stylised features of this process are as follows:

(1) Internal devaluation in the context of massive unemployment has impacted across all sectors.

  • (2) While low-pay/low-productivity labour-intensive sectors producing for the internal markets have failed to benefit from devaluation due to its detrimental effects on internal demand, sectors exposed to external demand (mainly those linked with tourism, in the case of Portugal) have been able to absorb an impressive proportion of the labour market‘slack’ at low-wage levels.
  • (3) Exports have grown more than imports (due to the reduced imported content of these exports and the compression of internal demand).
  • (4) Driven by external demand targeted at labour-intensive sectors, overall GDP and employment have responded positively. Employment is being created mostly in the expanding low-pay/low-productivity sector and a decline in unemployment has served to feed a mitigated expansion of internal demand.
  • (5) Due to the combined effect of emigration and less unemployment, nominal wages tend to increase, affecting costs and returns in the emergent low-wage, labour-intensive, tradable sectors.
  • (6) Wage revaluation and absence of productivity enhancement will either deplete capital margins in the emergent labour-intensive export-oriented sectors or drive supply prices up, thereby eroding the price competitiveness of these sectors. The balance of current accounts tilts towards a new deficit.
  • (7) A closing of the circular loop is brought about through mounting pressure for internal devaluation stemming from the labour-intensive export sector and external creditors.
 
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