Austerity Is NOT The Only Way: Portugal!

A rally in Lisbon celebrating a political coalition promising an end to austerity policies in 2015.    (Joao Profirio/EPA)

A rally in Lisbon celebrating a political coalition promising an end to austerity policies in 2015.

(Joao Profirio/EPA)

Was austerity the only possible response to the debt that many nations incurred after the global economic mess post 2008? The answer, if one looks at Portugal and some other places, is NO. In other words, what was fed to us—that austerity was inevitable and necessary—was a lie. There was and is another way.

A tiny bit of background:

After the banking and credit mess of 2008, “austerity”— government measures taken to reduce expenditure, usually in response to a debt crisis and often combined with privatization — was frequently touted by many politicians and economists as the ONLY way out of the hole that had been dug for us by the bankers. In nation after nation, public services were cut, wages and pensions were frozen and the funding for all that was deemed inessential was reduced. Public assets were often sold to private corporations to quickly raise money.

As a result, health, infrastructure and education (amongst much else) suffered, and a swath of folks increasingly felt left behind. Not just felt, they WERE left behind. The outcome was a fair amount of resentment, which gets expressed politically in the divisions and populism we see rising everywhere. Economically these policies didn’t work all that well either.

This is not the place to go into the justifications and pressures that were used to implement austerity policies, rather, in the spirit of Reasons To Be Cheerful, I’d prefer to look at a successful alternative.

Here’s what happened in Portugal.

From the New York Times:

[After 2008] The [Portuguese] economy crumbled, wages were cut, and unemployment doubled. The government in Lisbon had to accept a humiliating international bailout.

But as the misery deepened, Portugal took a daring stand: In 2015, it cast aside the harshest austerity measures its European creditors had imposed, The country reversed cuts to wages, pensions and social security, and offered incentives to businesses.

The government’s U-turn, and willingness to spend, had a powerful effect. Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off .

So, this is already pretty encouraging. If one thinks about it, it makes sense. The idea is to get  a national economy back on its feet—but how is an economy supposed to do that when it’s been hobbled by austerity policies? It’s like saying “we need you to do better, but we’re going to make it even harder for you and your people will suffer as well.”

One of the most successful demonstrations in Lisbon in March of 2011 demanding the end of austerity policies. (Mark Fonseca Rendeiro/Flickr)

One of the most successful demonstrations in Lisbon in March of 2011 demanding the end of austerity policies. (Mark Fonseca Rendeiro/Flickr)

How was this achieved?

NY Times again:

[Portuguese] Voters ushered Mr. Costa, a center-left leader, into power in late 2015 after he promised to reverse cuts to their income, Mr. Costa formed an alliance with Communist and radical-left parties, which had been shut out of power since the end of Portugal’s dictatorship in 1974- with the goal of beating back some of the toughest aspects of austerity, while balancing the books to meet eurozone rules [and pay off debt]. [There were ] tax breaks for foreign companies and training for the unemployed.

From The Independent:

In Portugal we devised an alternative to the austerity policy: focusing on higher growth, more and better jobs, and greater equality. The rise in earnings made economic operators more confident, resulting in the fastest economic growth since the beginning of the century and it has produced a sustained rise in private investment, exports, and growth,” Mr Costa said.

Of course, we did things differently, but we stuck to the rules, and today our public finances are in far better shape than they were three years ago. In 2017 we exited the excessive deficit procedure and last year we had the lowest deficit since democracy was restored. Last week the European Commission removed Portugal from the list of countries with serious macroeconomic imbalances.

The Baixa district of Lisbon demonstrates the result of the new construction boom: renovated properties in the foreground, and 5 cranes in the distance signaling a new era of growth. (Bloomberg)

The Baixa district of Lisbon demonstrates the result of the new construction boom: renovated properties in the foreground, and 5 cranes in the distance signaling a new era of growth. (Bloomberg)


And the results? [From the NY Times]

The renewal is visible just about everywhere. Hotels, restaurants and shops have opened in droves, fueled by a tourism surge. Unemployment {has been cut] in half. In the Beato district of Lisbon, [there is now ] a mega-campus for start-ups. Bosch, Google and Mercedes-Benz recently opened offices and digital research centers, collectively employing thousands.

Foreign investment in aerospace, construction and other sectors is at a record high. And traditional Portuguese industries, including textiles and paper mills, are putting money into innovation, driving a boom in exports.

This is all very encouraging. I was there during my world tour and things appear to be booming...one of things we noticed is that folks are moving to Portugal...word is out that it’s a good place to live. Especially amongst Brazilians, whose country is going through a crisis. The mood is upbeat, which has the effect of encouraging investment and innovation.

“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mind-set became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”

And even encouraging news from Portuguese youth returning to the country, as NPR reports, and investing in new business:

Fresh entrepreneurship and an uptick in tourism — [have] fueled Portugal's economic recovery.

"My friends, people I know, who were leaving the country more or less at the same time I did, in 2011 and 2012, a lot of them came back already or want to come back," Mouraz says. "They come full of motivation, with knowledge from other countries and a different mindset."

They are also finding jobs. Wages are up, and Portugal's unemployment rate has dropped to around 10 percent from a high of nearly 18 percent in 2013.

A model for others:

Following the Reasons to Be Cheerful rulebook, I wondered if anyplace else followed the Portuguese model...and it turns out they did. Quite a few Latin American governments (which were also hit hard by the economic crisis) followed this example.

Michael Cohen (NOT Trump’s former fixer!) writes for the Journal of Social Research:

This decision has largely been successful, Latin American experience of more than 60 years strongly suggests that policies restricting spending [on public services] can have major negative impacts on national economic growth and social welfare. Those promoting spending, on the other hand, have a greater likelihood of maintaining aggregate demand at the macroeconomic level while providing key services and infrastructure needed for minimal levels of well-being.

They’re not out of the woods yet…

Young people relax at the renewed waterfront in Lisbon. (EC Europa)

Young people relax at the renewed waterfront in Lisbon. (EC Europa)

In Portugal...There is still a LOT of debt to be paid off… in the words of Mr. Costa:

“We didn’t go from the dark side to the bright side of the moon...There’s still a lot to do...But when we started this process, a lot of people said that what we wanted to achieve was impossible,” he added. “We showed that there is an alternative.”

Overall this is hugely encouraging….it’s proof that the oft espoused bromides and policies are not necessarily the only solutions to our problems. Economists and financial advisors around the world might, given these examples, begin to revise their policies and recommendations—resulting in less pain, less suffering and healthier economies worldwide.