Competitiveness in the Real Economy by Silva Rui Vinhas da;

Author:Silva, Rui Vinhas da;
Language: eng
Format: epub
Publisher: Taylor & Francis Group
Published: 2013-08-15T00:00:00+00:00

Reality Check…

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Nothing is Sacred: A Dispassionate Perspective on Government Deficits

Not too long ago the world-renowned Harvard economist Robert Barro, of the monetarist tradition, published a book, which he decided to aptly name Nothing is Sacred. In it he dealt with an area of intellectual query that has always attracted the interests and opinion of many an economist and commentator from all sides of the ideological spectrum. In effect there has been for some time a hot point of contention and controversy surrounding government compliance with target public debt and budget deficits. In recent times, given the truly alarming debt problems afflicting not only eurozone economies such as Greece, Ireland and Portugal, but also, and most critically, the US and Japan, there are more and more calls for strict spending and debt reduction policies.

In the cases of the smaller EU economies, including Greece, Ireland and Portugal, the debate, albeit important, is somewhat redundant as these and other economies no longer enjoy any room for manoeuvre. Incapacitated in their ability to formulate or even influence macro-economic policy and unable to manipulate exchange rates, these economies cannot not issue money. In sharing a common currency they are not allowed the lever of currency devaluation that would make their products cheaper and more competitive in export markets outside the eurozone. Often in the smaller economies in the eurozone ad-hoc currency devaluation had arguably contributed to the perpetuation of a culture of competitive relaxation. This in essence aided companies with limited strategic vision who would lobby successive governments for the devaluation of the national currency. This would artificially make local products cheaper in foreign currency and more competitive in export markets. Of course what this also did, and perhaps their most detrimental collateral effect, was that these successive devaluation measures only served the purpose of creating a false sense of security, deviating attention from the true determinants of global competitiveness. These remain as always a country’s ability to export products that consumers want because of their quality and not only because they are cheap. This is particularly true in market economies where individuals have disposable income and are able to discern between competing offers. In a way, successive devaluations only help to take the eye off the ball of the true determinants of organizational and national competitiveness.

For the countries within the eurozone, the European Central Bank conducting monetary policy means that it is no longer feasible for the particular interests of an economic sector, or those of a group of companies, to condition the monetary policy of individual state governments. This is particularly true for the small economies. These are left with running fiscal policy. On the revenue side of the equation we have taxes and on the other public spending. With regards to fiscal efficiency, governments attempt to create effective mechanisms of tax collection, namely by improving the crossing of sources of information. This ensures a more rigorous monitoring of tax collection leading to a reduction in tax evasion and a more effective and equitable fiscal process.

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