Liberalism and enlightenment are sometimes taken as synonymous. It is true that they are both indispensable pillars of human progress and rose intertwined to preeminence in the middle of the 18th century.
Enlightenment traces its origins to Descartes' Discourse on the Method, published in 1637, while John Locke’s Two Treatises (1690) established the liberal idea that government acquires consent to rule from the governed, not from supernatural authorities. However, they can develop separately and do not need to tag along, in the way the scientific method and the enlightened virtues do.
Besides, there are two distinct schools of enlightenment, the French Enlightenment focused on the power of reason and the members of the British Enlightenment emphasizing its limits. For an excellent summary contrasting the role of these views on reform and gradualism read this post by David Brooks on two theories of change.
Saturday, 5 June 2010
Sunday, 16 May 2010
Why constitutional liberalism is consistent with progressive taxation and inheritance taxes
Constitutional liberalism does not require the state to provide exclusively pure public goods like defense, policing and justice or to act only as a neutral referee. All it requires is that the state strives to act exclusively in a subsidiary manner and to be minimalist in its activities, including those of wealth redistribution.
However, many who consider themselves liberals or libertarians often believe that the financing of such activities should be funded only by taxes, and preferably by a flat tax rate. Therefore, they tend to consider any progressive and inheritance taxes as unfair and inefficient redistribution of wealth that discourages the hard-working members of society.
But, in contrast to classical liberalism (or laissez faire), constitutional liberalism has no problems in relation to fair inheritance taxes and a progressive tax system. Indeed, both are even indispensable in a system based on constitutional liberalism for two simple reasons: to prevent an unfair free-riding redistribution of wealth in favor of the rich and to preserve market capitalism. We shall demonstrate the first in the case of progressive taxation and the second with reference to inheritance taxes.
The reason why in the absence of progressive taxation wealthy people would enjoy an unfair free ride is easily understood if we use a parallel with insurance cover. Even hard-line laissez-faire adepts accept that the state has a duty to protect people and property against domestic and foreign predators. So paying for that protection with taxes is similar to paying for an insurance premium based on the risks and amount of capital covered. Using a flat tax rate based on wealth would apparently achieve a fair result since everyone would pay proportionally to the amount of capital they have at risk. But this would be misleading.
Just as insurers charge premiums on the basis of both capital and risk (e.g. a one-million dollar house in a quake-prone area pays more insurance) so should the state tax differently citizens that add more risk to the community. Since greater wealth attracts more predators and consequently adds more risk, it follows that those with higher wealth should pay more than proportionally to their capital. On the contrary, since crime often breeds on poverty it also follows that it pays to reduce poverty to fight crime. So, without any social concerns in mind, on pure economic grounds we can see that to be fair taxation must be progressive.
The case for inheritance taxes is not so straightforward. These taxes work as a brake to the accumulation of wealth and since saving and accumulation are necessary to promote growth it seems that such brakes would be counterproductive. Moreover, while we can justify limiting the size of corporate wealth to prevent oligopolies and to preserve the competitive markets needed for market capitalism there are no similar argument to limit private wealth. So, the argument for inheritance taxes has to be found elsewhere.
Such argument can be found by considering the importance of credit in a capitalist system and the availability of quasi risk-free investment opportunities in debt financing. Unfortunately, after a sufficiently long period, if unchecked, debt financing together with the power of compound interest would lead to the concentration of all earthly wealth into a single family or institution. To check this out consider the case of a long lasting institution like a religious congregation and calculate the real rate of interest required for it to acquire all of today’s world wealth.
For instance, we can carry out such calculation for the priests at the Temple of Jerusalem who paid 30 pieces of silver (about USD 15,000 in today’s money) for Judas betrayal of Jesus. If instead they had invested that sum in risk-free debt, and ignoring the practical impossibility of lending at a risk-free rate after a certain level of capital accumulation, we can calculate that an interest rate of 1.28% per year would be enough for them to own now the entire world wealth estimated at almost 2000 trillion US Dollars.
However, if they were charged an inheritance tax of 20% every 50 years they would need to wait another 1000 years to own the same amount of wealth. This would not eradicate the problem of wealth concentration. But, it clearly demonstrates that inheritance taxes act as a powerful restraint on wealth concentration, without the negative consequences of the usual alternatives of war and confiscation.
For today we limit our case merely under the assumption of tax neutrality, but we shall return later to discuss if the use of taxation as a social and economic tool is compatible with a system of constitutional liberalism. Note also that, regardless of the fundamental principles that interest us, in the field of taxation the disputes over the tax pie and the practicalities of the various tax options are of vital importance. That is, we should never forget the old say that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.
However, many who consider themselves liberals or libertarians often believe that the financing of such activities should be funded only by taxes, and preferably by a flat tax rate. Therefore, they tend to consider any progressive and inheritance taxes as unfair and inefficient redistribution of wealth that discourages the hard-working members of society.
But, in contrast to classical liberalism (or laissez faire), constitutional liberalism has no problems in relation to fair inheritance taxes and a progressive tax system. Indeed, both are even indispensable in a system based on constitutional liberalism for two simple reasons: to prevent an unfair free-riding redistribution of wealth in favor of the rich and to preserve market capitalism. We shall demonstrate the first in the case of progressive taxation and the second with reference to inheritance taxes.
The reason why in the absence of progressive taxation wealthy people would enjoy an unfair free ride is easily understood if we use a parallel with insurance cover. Even hard-line laissez-faire adepts accept that the state has a duty to protect people and property against domestic and foreign predators. So paying for that protection with taxes is similar to paying for an insurance premium based on the risks and amount of capital covered. Using a flat tax rate based on wealth would apparently achieve a fair result since everyone would pay proportionally to the amount of capital they have at risk. But this would be misleading.
Just as insurers charge premiums on the basis of both capital and risk (e.g. a one-million dollar house in a quake-prone area pays more insurance) so should the state tax differently citizens that add more risk to the community. Since greater wealth attracts more predators and consequently adds more risk, it follows that those with higher wealth should pay more than proportionally to their capital. On the contrary, since crime often breeds on poverty it also follows that it pays to reduce poverty to fight crime. So, without any social concerns in mind, on pure economic grounds we can see that to be fair taxation must be progressive.
The case for inheritance taxes is not so straightforward. These taxes work as a brake to the accumulation of wealth and since saving and accumulation are necessary to promote growth it seems that such brakes would be counterproductive. Moreover, while we can justify limiting the size of corporate wealth to prevent oligopolies and to preserve the competitive markets needed for market capitalism there are no similar argument to limit private wealth. So, the argument for inheritance taxes has to be found elsewhere.
Such argument can be found by considering the importance of credit in a capitalist system and the availability of quasi risk-free investment opportunities in debt financing. Unfortunately, after a sufficiently long period, if unchecked, debt financing together with the power of compound interest would lead to the concentration of all earthly wealth into a single family or institution. To check this out consider the case of a long lasting institution like a religious congregation and calculate the real rate of interest required for it to acquire all of today’s world wealth.
For instance, we can carry out such calculation for the priests at the Temple of Jerusalem who paid 30 pieces of silver (about USD 15,000 in today’s money) for Judas betrayal of Jesus. If instead they had invested that sum in risk-free debt, and ignoring the practical impossibility of lending at a risk-free rate after a certain level of capital accumulation, we can calculate that an interest rate of 1.28% per year would be enough for them to own now the entire world wealth estimated at almost 2000 trillion US Dollars.
However, if they were charged an inheritance tax of 20% every 50 years they would need to wait another 1000 years to own the same amount of wealth. This would not eradicate the problem of wealth concentration. But, it clearly demonstrates that inheritance taxes act as a powerful restraint on wealth concentration, without the negative consequences of the usual alternatives of war and confiscation.
For today we limit our case merely under the assumption of tax neutrality, but we shall return later to discuss if the use of taxation as a social and economic tool is compatible with a system of constitutional liberalism. Note also that, regardless of the fundamental principles that interest us, in the field of taxation the disputes over the tax pie and the practicalities of the various tax options are of vital importance. That is, we should never forget the old say that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.
Sunday, 9 May 2010
Fátima e o TGV: o método científico e os investimentos de proximidade
Esta semana a televisão portuguesa deu grande destaque aos Peregrinos de Fátima e às polémicas em torno da adjudicação da construção do TGV entre Lisboa e Madrid. Esse destaque não pode ser explicado apenas pela novidade da visita do Papa e de um novo meio de transporte. Várias dessas notícias revelaram aspectos chocantes que põem em causa a racionalidade dos homens e dos seus dirigentes políticos.
A ciência tem tido dificuldade em explicar os chamados movimentos de massas, quer no seu despoletar quer no seu desenvolvimento e duração. Por exemplo, o que faz caminhar milhares de pessoas por estradas feias e sem segurança, onde só nesta semana morreram atropeladas várias pessoas? Ou, o que leva alguns desses caminheiros a cozer as bolhas nos pés com agulha e linha de costura, não esterilizadas, dizendo que usam linha preta porque os antigos acreditavam que a linha preta curava mais depressa. Hoje é inquestionável o crescente número de Caminheiros de Fátima, bem como a sua heterogeneidade em termos sociais, educacionais e etários. As imagens mostram-nos cenas dramáticas que não podem ser explicados apenas por obscurantismo e superstição pois revelam também uma contagiante alegria, energia e solidariedade que os caminhantes não têm no seu dia-a-dia.
Todas as grandes ilusões, sejam relativas aos cosméticos ou à religião, podem contribuir para o bem-estar da humanidade desde que limitadas nos excessos e encaminhadas para o bem. Será mesmo tolerável que alguns se aproveitem para lucrar com essas ilusões colectivas. Por exemplo, os lucros das multinacionais da indústria de cosméticos poderão ser justificados pelo grau de auto-estima que dão às suas clientes, mas já não serão aceitáveis se as mulheres na procura de uma beleza imaginária prejudicarem a sua saúde com tratamentos e dietas perigosas. De igual modo, a opulência das hierarquias religiosas pode ser aceite como o preço a pagar pela preservação de uma fé capaz de mover montanhas, desde que essas montanhas dêem lugar a virtudes iluministas e repudiem a exclusão e o fanatismo.
Em síntese, todos os fenómenos de massas tanto podem ser aproveitados para o bem como para o mal. É por isso que, enquanto pilar da felicidade humana, o verdadeiro método científico não se pode limitar a estudar a racionalidade dos comportamentos. Deve também estudar como encaminhar esses comportamentos para o bem da humanidade. É isso que nos leva a relacionar os Caminheiros de Fátima e o TGV – duas realidades aparentemente contraditórias – mas na verdade relacionadas. Porquê?
Com mentiras e fantasias tentou encontrar-se uma racionalidade económica para o TGV. Por exemplo, como alguém alertava esta semana na televisão, o TGV prevê um tráfego de 9 milhões de passageiros quando o já existente no sul de Espanha atrai menos de 3 milhões. Foram também usados os argumentos da modernidade e das novas tecnologias quando é sabido que estas terão de ser importadas da França ou da Alemanha. Igualmente, relevou-se a sua importância para o turismo, quando se ignora o risco do TGV gerar uma balança turística desequilibrada a favor de Espanha.
Ora, no domínio das infra-estruturas de apoio ao turismo, podemos interrogar-nos sobre se uma Rede Nacional de Caminhos Pedestres para Fátima, cujos custos de construção e manutenção seriam uma pequena fracção dos do TGV, não traria mais benefícios para o turismo nacional. Melhor ainda, num período de dificuldades financeiras, o seu financiamento podia ser totalmente nacional e repartido entre o estado, as autarquias e os fiéis/paróquias (por exemplo um terço cada).
Ao estado caberia apenas o estímulo inicial e a atribuição de prémios às freguesias com os melhores e mais bonitos percursos pedestres, de forma a embelezar o país para proveito de todos e estímulo do turismo religioso e da natureza que hoje têm cada vez mais adeptos.
Aqui fica a nossa sugestão para um investimento simples de proximidade, rentável e com a vantagem acrescida de mobilizar a fé dos Portugueses para um empreendimento que não põe em causa o espírito científico.
A ciência tem tido dificuldade em explicar os chamados movimentos de massas, quer no seu despoletar quer no seu desenvolvimento e duração. Por exemplo, o que faz caminhar milhares de pessoas por estradas feias e sem segurança, onde só nesta semana morreram atropeladas várias pessoas? Ou, o que leva alguns desses caminheiros a cozer as bolhas nos pés com agulha e linha de costura, não esterilizadas, dizendo que usam linha preta porque os antigos acreditavam que a linha preta curava mais depressa. Hoje é inquestionável o crescente número de Caminheiros de Fátima, bem como a sua heterogeneidade em termos sociais, educacionais e etários. As imagens mostram-nos cenas dramáticas que não podem ser explicados apenas por obscurantismo e superstição pois revelam também uma contagiante alegria, energia e solidariedade que os caminhantes não têm no seu dia-a-dia.
Todas as grandes ilusões, sejam relativas aos cosméticos ou à religião, podem contribuir para o bem-estar da humanidade desde que limitadas nos excessos e encaminhadas para o bem. Será mesmo tolerável que alguns se aproveitem para lucrar com essas ilusões colectivas. Por exemplo, os lucros das multinacionais da indústria de cosméticos poderão ser justificados pelo grau de auto-estima que dão às suas clientes, mas já não serão aceitáveis se as mulheres na procura de uma beleza imaginária prejudicarem a sua saúde com tratamentos e dietas perigosas. De igual modo, a opulência das hierarquias religiosas pode ser aceite como o preço a pagar pela preservação de uma fé capaz de mover montanhas, desde que essas montanhas dêem lugar a virtudes iluministas e repudiem a exclusão e o fanatismo.
Em síntese, todos os fenómenos de massas tanto podem ser aproveitados para o bem como para o mal. É por isso que, enquanto pilar da felicidade humana, o verdadeiro método científico não se pode limitar a estudar a racionalidade dos comportamentos. Deve também estudar como encaminhar esses comportamentos para o bem da humanidade. É isso que nos leva a relacionar os Caminheiros de Fátima e o TGV – duas realidades aparentemente contraditórias – mas na verdade relacionadas. Porquê?
Com mentiras e fantasias tentou encontrar-se uma racionalidade económica para o TGV. Por exemplo, como alguém alertava esta semana na televisão, o TGV prevê um tráfego de 9 milhões de passageiros quando o já existente no sul de Espanha atrai menos de 3 milhões. Foram também usados os argumentos da modernidade e das novas tecnologias quando é sabido que estas terão de ser importadas da França ou da Alemanha. Igualmente, relevou-se a sua importância para o turismo, quando se ignora o risco do TGV gerar uma balança turística desequilibrada a favor de Espanha.
Ora, no domínio das infra-estruturas de apoio ao turismo, podemos interrogar-nos sobre se uma Rede Nacional de Caminhos Pedestres para Fátima, cujos custos de construção e manutenção seriam uma pequena fracção dos do TGV, não traria mais benefícios para o turismo nacional. Melhor ainda, num período de dificuldades financeiras, o seu financiamento podia ser totalmente nacional e repartido entre o estado, as autarquias e os fiéis/paróquias (por exemplo um terço cada).
Ao estado caberia apenas o estímulo inicial e a atribuição de prémios às freguesias com os melhores e mais bonitos percursos pedestres, de forma a embelezar o país para proveito de todos e estímulo do turismo religioso e da natureza que hoje têm cada vez mais adeptos.
Aqui fica a nossa sugestão para um investimento simples de proximidade, rentável e com a vantagem acrescida de mobilizar a fé dos Portugueses para um empreendimento que não põe em causa o espírito científico.
Thursday, 29 April 2010
Should Warren Buffett look for a successor or return the money to his investors?
This weekend takes place the annual Woodstock for Capitalists (officially called the Annual Meeting of Berkshire Hathaway Inc). Warren Buffett expects that attendance will exceed 35,000. What will be in the mind of all these investors? I guess that a popular topic will be: Has Warren chosen a successor?
Finding a successor is normal for most companies when their founder chooses to retire. But, Berkshire is not a normal company. Berkshire is a bit like Cerberus, the three-headed dog of Greek mythology. To simplify we may say that it is one-third insurance group (a typical corporation), one-third private equity firm and one-third investment fund. A typical corporation requires a complex bureaucratic organization which takes many years to assemble and will become self-perpetuating. This is not the case with investment funds.
You may see collective investment vehicles (funds) as a pool of money looking for a manager to invest the funds pooled together by many independent investors. Or the other way around, you may see fund managers as promoters trying to persuade investors to trust them with their pool of money. Whatever way people see collective investment schemes, most investors never see the pooling of money as a perpetual commitment. Indeed, many funds even have a mandatory termination date.
So, should the independent co-owners of a diversified portfolio part their way or try to find another fund manager? Fund managers are a bit like artists, each one with his unique style. In that sense they are irreplaceable. For instance, when Pavarotti died his admirers did not try to find another Pavarotti. They simply turned their loyalty to another artist. He could be an opera singer, a rock star or even a painter.
At 86, Warren Buffett is the unquestionable master of value investing. Should his co-investors be in the look-out for a new master of value investing (which may not turn up for many years) or should they simply search for today’s masters of various other investment styles? Warren has always advocated the need to look for talented and honest people to run his operations, while stressing that he must not delegate risk control.
In the end, will the master investor surprise us on which Cerberus head leads Berkshire?
Finding a successor is normal for most companies when their founder chooses to retire. But, Berkshire is not a normal company. Berkshire is a bit like Cerberus, the three-headed dog of Greek mythology. To simplify we may say that it is one-third insurance group (a typical corporation), one-third private equity firm and one-third investment fund. A typical corporation requires a complex bureaucratic organization which takes many years to assemble and will become self-perpetuating. This is not the case with investment funds.
You may see collective investment vehicles (funds) as a pool of money looking for a manager to invest the funds pooled together by many independent investors. Or the other way around, you may see fund managers as promoters trying to persuade investors to trust them with their pool of money. Whatever way people see collective investment schemes, most investors never see the pooling of money as a perpetual commitment. Indeed, many funds even have a mandatory termination date.
So, should the independent co-owners of a diversified portfolio part their way or try to find another fund manager? Fund managers are a bit like artists, each one with his unique style. In that sense they are irreplaceable. For instance, when Pavarotti died his admirers did not try to find another Pavarotti. They simply turned their loyalty to another artist. He could be an opera singer, a rock star or even a painter.
At 86, Warren Buffett is the unquestionable master of value investing. Should his co-investors be in the look-out for a new master of value investing (which may not turn up for many years) or should they simply search for today’s masters of various other investment styles? Warren has always advocated the need to look for talented and honest people to run his operations, while stressing that he must not delegate risk control.
In the end, will the master investor surprise us on which Cerberus head leads Berkshire?
Sunday, 25 April 2010
Why trade investors collude with managers to vote for star-like compensation
The star-like compensation of CEOs and other senior managers is undermining the trust of people in the fairness of capitalism. The spiraling of shocking compensation packages continues because the market system does not have built-in self-interest incentives that prevent collusive behavior between trade investors and managers. The problem is more acute in listed companies with high levels of float and with significant shareholdings by trade investors that do not compete to supply or finance the company.
A simple numeric example is enough to illustrate the problem. Consider the case of an investor who is contemplating investing in two almost identical companies—Companies A and B—trading at the same multiple of earnings, with the same expected risk and a rate of return on equity of 20%. Company B is a potential major supplier or financier of A, but is not currently trading with Company A. Both companies have the same asset turnover and leverage. After paying the current market rate of 1% of profits as management compensation, they each generate a net profit of 10%.
Prudence dictates that the investor should diversify by investing in both companies. However, given that A and B have the same expected return and risk, regardless of how the investor chooses to split his investment (whether 50/50, 10/90, or any other way), his expected return will be always 20%.
Imagine now that the CEO of Company A only needs 10% to control the board of directors and approve a pay raise that triples his compensation to 3% of profits. Management approaches the trade investor and asks him to invest 10% in company A and vote for the proposed pay rise in exchange for A giving B 10% in new business, provided that B matches the price of the suppliers replaced.
As long as the investor is able to lead a majority of shareholders in Company B, they will keep the Company B managers’ pay at 1%, so that his total return from both companies will now increase by 8.81% to an average return of 21.76%. Since there is no new value creation, the gains obtained by management and the new insider investor are made partly at the expense of the remaining shareholders in Company A, but mostly at the expense of the replaced vendor. The reduction in return incurred by the shareholders in A would be just 0.39 percentage points (i.e. 1.94%). This small loss could be either concealed or compensated if the other 40% of insiders supporting management protest.
It remains to be shown if there are any self-interest market mechanisms to prevent this predatory behavior. There are three candidates to oppose the insider investor’s actions in the above example: the managers of company B, the suppliers displaced, and the other investors in Company A—but none will be able to prevent such behavior. Here’s why:
The managers of B could try to get a similar pay raise by threatening to leave and bid for the job of A’s managers. If they were to get a similar raise, this would offset a large share of the investor’s gain. However, as a controlling shareholder, the investor can easily collude with A’s managers and other insider shareholders to stop such a bid. Thus, the managers of Company B can only threaten to shirk on their increased workload and ask for a modest raise. For instance, if they manage to get a 20% raise, this would only reduce the trade investor’s return to 21.72%.
The suppliers replaced may or may not be among the current group of insider shareholders. In the first case, they would try to fight the managers, but unless they can attract other shareholders to their cause, the only way they can retaliate is to sell their position to hurt the stock price. However, this would mean the supplier’s adding a self-inflicted capital loss on top of his business loss as a supplier, while simultaneously lowering the entry price for the new rival investor.
Next, imagine that the non-insider investors of Company A wished to retaliate against the managers’ pay raise by selling their stock. This would result in a self-inflicted loss for the late sellers. This loss could only be prevented if the insiders stepped in to buy the shares, or if management acted to offset a possible decline in the stock’s price by promising to pay an increased dividend or by introducing a share buy-back program. Forced to choose between certain loss and a promise, they will be more inclined to bet on the manager’s ability to avoid a decline in the stock price.
Finally, if the replaced suppliers were not yet shareholders, they might try to keep the business by outbidding the investor and invest the same amount while supporting A’s management in a bid to get an even higher pay raise. However, they could not outbid the rival investor. The pay incentive would only work if they could compensate the other insider investors, and their investment in A would have a lower return than that of the new investor since they would not gain from increased sales to their business.
The numeric example given above can be replaced by a model to work out the optimal investment allocation between A and B, including the more common situation where Companies A and B are different, but it is easy to see that the optimal outcome will also depend on the possibilities to switch suppliers and the greed of Company A’s management. It is nevertheless unquestionable that there is a large incentive for collusion between management and trade investors against other investors in A and its current suppliers.
Are the costs of this market failure large enough to damage the working of market capitalism? If so, then the question now is to assess if it is possible to correct this inefficiency through regulation.
The simplest way to regulate is to impose limits on the ownership of major suppliers, to limit their rights, or a combination of both. The first could be easily defined, but it can be easily evaded. In particular, in the case of shareholdings by suppliers of financial services, such limits could be easily circumvented by investing through investment funds managed by those financial institutions.
Limiting the voting rights of trade investors who are major suppliers of Company A is probably the best solution. It does not disrupt arms’-length trading relations, and it is more easily enforced. The only debatable issues would be about the qualification of trade investors and the voting restrictions. These should cover voting for the election of management and their remuneration, but they could also extend to voting in the Governance and Auditing Committees.
Regulation always has its own costs, which should not be disregarded lightly in a full assessment of this proposition. In particular, the possibility of discouraging trade investing may have its costs in terms of business intelligence and synergies. However, overall, limiting the voting rights of trade investors would be a market-perfecting policy that would contribute to achieving the ideal of true market capitalism.
A simple numeric example is enough to illustrate the problem. Consider the case of an investor who is contemplating investing in two almost identical companies—Companies A and B—trading at the same multiple of earnings, with the same expected risk and a rate of return on equity of 20%. Company B is a potential major supplier or financier of A, but is not currently trading with Company A. Both companies have the same asset turnover and leverage. After paying the current market rate of 1% of profits as management compensation, they each generate a net profit of 10%.
Prudence dictates that the investor should diversify by investing in both companies. However, given that A and B have the same expected return and risk, regardless of how the investor chooses to split his investment (whether 50/50, 10/90, or any other way), his expected return will be always 20%.
Imagine now that the CEO of Company A only needs 10% to control the board of directors and approve a pay raise that triples his compensation to 3% of profits. Management approaches the trade investor and asks him to invest 10% in company A and vote for the proposed pay rise in exchange for A giving B 10% in new business, provided that B matches the price of the suppliers replaced.
As long as the investor is able to lead a majority of shareholders in Company B, they will keep the Company B managers’ pay at 1%, so that his total return from both companies will now increase by 8.81% to an average return of 21.76%. Since there is no new value creation, the gains obtained by management and the new insider investor are made partly at the expense of the remaining shareholders in Company A, but mostly at the expense of the replaced vendor. The reduction in return incurred by the shareholders in A would be just 0.39 percentage points (i.e. 1.94%). This small loss could be either concealed or compensated if the other 40% of insiders supporting management protest.
It remains to be shown if there are any self-interest market mechanisms to prevent this predatory behavior. There are three candidates to oppose the insider investor’s actions in the above example: the managers of company B, the suppliers displaced, and the other investors in Company A—but none will be able to prevent such behavior. Here’s why:
The managers of B could try to get a similar pay raise by threatening to leave and bid for the job of A’s managers. If they were to get a similar raise, this would offset a large share of the investor’s gain. However, as a controlling shareholder, the investor can easily collude with A’s managers and other insider shareholders to stop such a bid. Thus, the managers of Company B can only threaten to shirk on their increased workload and ask for a modest raise. For instance, if they manage to get a 20% raise, this would only reduce the trade investor’s return to 21.72%.
The suppliers replaced may or may not be among the current group of insider shareholders. In the first case, they would try to fight the managers, but unless they can attract other shareholders to their cause, the only way they can retaliate is to sell their position to hurt the stock price. However, this would mean the supplier’s adding a self-inflicted capital loss on top of his business loss as a supplier, while simultaneously lowering the entry price for the new rival investor.
Next, imagine that the non-insider investors of Company A wished to retaliate against the managers’ pay raise by selling their stock. This would result in a self-inflicted loss for the late sellers. This loss could only be prevented if the insiders stepped in to buy the shares, or if management acted to offset a possible decline in the stock’s price by promising to pay an increased dividend or by introducing a share buy-back program. Forced to choose between certain loss and a promise, they will be more inclined to bet on the manager’s ability to avoid a decline in the stock price.
Finally, if the replaced suppliers were not yet shareholders, they might try to keep the business by outbidding the investor and invest the same amount while supporting A’s management in a bid to get an even higher pay raise. However, they could not outbid the rival investor. The pay incentive would only work if they could compensate the other insider investors, and their investment in A would have a lower return than that of the new investor since they would not gain from increased sales to their business.
The numeric example given above can be replaced by a model to work out the optimal investment allocation between A and B, including the more common situation where Companies A and B are different, but it is easy to see that the optimal outcome will also depend on the possibilities to switch suppliers and the greed of Company A’s management. It is nevertheless unquestionable that there is a large incentive for collusion between management and trade investors against other investors in A and its current suppliers.
Are the costs of this market failure large enough to damage the working of market capitalism? If so, then the question now is to assess if it is possible to correct this inefficiency through regulation.
The simplest way to regulate is to impose limits on the ownership of major suppliers, to limit their rights, or a combination of both. The first could be easily defined, but it can be easily evaded. In particular, in the case of shareholdings by suppliers of financial services, such limits could be easily circumvented by investing through investment funds managed by those financial institutions.
Limiting the voting rights of trade investors who are major suppliers of Company A is probably the best solution. It does not disrupt arms’-length trading relations, and it is more easily enforced. The only debatable issues would be about the qualification of trade investors and the voting restrictions. These should cover voting for the election of management and their remuneration, but they could also extend to voting in the Governance and Auditing Committees.
Regulation always has its own costs, which should not be disregarded lightly in a full assessment of this proposition. In particular, the possibility of discouraging trade investing may have its costs in terms of business intelligence and synergies. However, overall, limiting the voting rights of trade investors would be a market-perfecting policy that would contribute to achieving the ideal of true market capitalism.
Sunday, 18 April 2010
The misuse of the words liberalism and capitalism
Capitalism and liberalism are among the most misused words in the English language. Some writers often conclude that it is better to replace them with other synonymous. For instance, the late Nobel Laureate John Hicks suggested that we use market economy instead of capitalism. In the case of liberalism, the misuse is even more serious. While in Europe, most people associate liberalism with policies to curb the intrusion of the state in personal lives and the economy, in the US liberalism means exactly the opposite - advocacy for government spending. So let us pick up a dictionary and check both definitions.
Let us start with capitalism. The Webster defines Capitalism as: an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth. While the Oxford Dictionary on Capitalism defines it as a noun - an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state. Both definitions leave unanswered the questions concerning the degree of control and the relevance of competitive markets as important qualifiers.
On liberalism, the Webster Dictionary says: suitable for a freeman; not restricted: now only in liberal arts, liberal education, etc. giving freely; generous large or plentiful; ample; abundant a liberal reward not restricted to the literal meaning; not strict a liberal interpretation of the Bible tolerant of views differing from one's own; broad-minded; specif., not orthodox of democratic or republican forms of government, as distinguished from monarchies, aristocracies, etc. favoring reform or progress, as in religion, education, etc.; specif., favoring political reforms tending toward democracy and personal freedom for the individual; progressive designating or of a political party upholding liberal principles, esp. such a party in England or Canada Obsolete excessively free or indecorous in behavior; licentious. And in the Oxford Dictionary: liberal adjective 1 willing to respect and accept behaviour or opinions different from one’s own. 2 (of a society, law, etc.) favourable to individual rights and freedoms. 3 (in a political context) favouring individual liberty, free trade, and moderate reform. 4 (Liberal) (in the UK) relating to the Liberal Democrat party. 5 (especially of an interpretation of a law) not strictly literal. 6 given, used, or giving in generous amounts. 7 (of education) concerned with broadening general knowledge and experience.
Identifying liberalism with left or right wing policies or parties is also misleading. For instance, Marxists and Trotskyites of diverse types try to vilify liberalism by using the pre-fix neo, but they are not clear about to what type of liberalism they are referring. They may be referring to classical liberalism, or just hoping that the neo-prefix will make it look as evil or backward. American classical-liberals are often conservative. Their classical-liberal (or, if you prefer, libertarian) political values are no more than the application to society at large, and to government, of some of the most fundamental and indispensable rules that every decent person learns early in life and adheres to until death. Civil society is possible because almost everyone abides by these obvious rules against theft, cheating, and initiating violence. For classical-liberals, libertarians abhor the notion of reconstructing the world according to academic notions of how society ought to operate. The reason is that such reconstruction inevitably means that some people—those with state power—are exempted from following the basic rules of decency that we teach to our children and that all the rest of us must follow.
Trying to find new words for capitalism and liberalism will not serve clarification. For example, liberalism is better defined within a broad spectrum, ranging from anarchism, libertarian and classical-liberalism (laissez-faire) to forms of liberal socialism (of the new labor type). The later, ultimately advocates forms of crony capitalism through so-called public-private partnerships and similar policies to blur the state and private sectors for the benefit of organized lobbies and partisan friends.
On the contrary, adding a qualifier to clarify the meaning of capitalism and liberalism as applied in a particular country or by specific authors helps to identify the various shades and forms that they have. In relation to capitalism, we may use qualifications such as market, big business, state, Scandinavian, South European, crony, theocratic, and partisan. Similarly, for liberalism, we may use qualifications such as constitutional, classical, new-Austrian, socialist, American, or individualistic.
We believe that only two forms of liberalism and capitalism are key pillars for the good of humankind – constitutional liberalism and market capitalism. These do not need to have a left or right wing connotation and, in fact, both types of parties may support them. However, it is important that they are well defined to avoid being espoused opportunistically by both and be dismissed immediately when the times change.
By market capitalism, we mean an economic system where most economic interchanges are carried out in competitive atomistic markets. Under normal circumstances, this means keeping to a minimum the share of government, the grey sectors and big corporations in the economy. In addition, independent entities (and not self-preserving bodies) should regulate and prevent them from erecting entry barriers.
We define constitutional liberalism, as a political system based on rules granting a maximum of individual freedom and a minimum of social coercion. This must include the rule of law, separation of powers and the protection of individual liberties from the prying of government, religion, race, or any other special interest groups.
Let us start with capitalism. The Webster defines Capitalism as: an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth. While the Oxford Dictionary on Capitalism defines it as a noun - an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state. Both definitions leave unanswered the questions concerning the degree of control and the relevance of competitive markets as important qualifiers.
On liberalism, the Webster Dictionary says: suitable for a freeman; not restricted: now only in liberal arts, liberal education, etc. giving freely; generous large or plentiful; ample; abundant a liberal reward not restricted to the literal meaning; not strict a liberal interpretation of the Bible tolerant of views differing from one's own; broad-minded; specif., not orthodox of democratic or republican forms of government, as distinguished from monarchies, aristocracies, etc. favoring reform or progress, as in religion, education, etc.; specif., favoring political reforms tending toward democracy and personal freedom for the individual; progressive designating or of a political party upholding liberal principles, esp. such a party in England or Canada Obsolete excessively free or indecorous in behavior; licentious. And in the Oxford Dictionary: liberal adjective 1 willing to respect and accept behaviour or opinions different from one’s own. 2 (of a society, law, etc.) favourable to individual rights and freedoms. 3 (in a political context) favouring individual liberty, free trade, and moderate reform. 4 (Liberal) (in the UK) relating to the Liberal Democrat party. 5 (especially of an interpretation of a law) not strictly literal. 6 given, used, or giving in generous amounts. 7 (of education) concerned with broadening general knowledge and experience.
Identifying liberalism with left or right wing policies or parties is also misleading. For instance, Marxists and Trotskyites of diverse types try to vilify liberalism by using the pre-fix neo, but they are not clear about to what type of liberalism they are referring. They may be referring to classical liberalism, or just hoping that the neo-prefix will make it look as evil or backward. American classical-liberals are often conservative. Their classical-liberal (or, if you prefer, libertarian) political values are no more than the application to society at large, and to government, of some of the most fundamental and indispensable rules that every decent person learns early in life and adheres to until death. Civil society is possible because almost everyone abides by these obvious rules against theft, cheating, and initiating violence. For classical-liberals, libertarians abhor the notion of reconstructing the world according to academic notions of how society ought to operate. The reason is that such reconstruction inevitably means that some people—those with state power—are exempted from following the basic rules of decency that we teach to our children and that all the rest of us must follow.
Trying to find new words for capitalism and liberalism will not serve clarification. For example, liberalism is better defined within a broad spectrum, ranging from anarchism, libertarian and classical-liberalism (laissez-faire) to forms of liberal socialism (of the new labor type). The later, ultimately advocates forms of crony capitalism through so-called public-private partnerships and similar policies to blur the state and private sectors for the benefit of organized lobbies and partisan friends.
On the contrary, adding a qualifier to clarify the meaning of capitalism and liberalism as applied in a particular country or by specific authors helps to identify the various shades and forms that they have. In relation to capitalism, we may use qualifications such as market, big business, state, Scandinavian, South European, crony, theocratic, and partisan. Similarly, for liberalism, we may use qualifications such as constitutional, classical, new-Austrian, socialist, American, or individualistic.
We believe that only two forms of liberalism and capitalism are key pillars for the good of humankind – constitutional liberalism and market capitalism. These do not need to have a left or right wing connotation and, in fact, both types of parties may support them. However, it is important that they are well defined to avoid being espoused opportunistically by both and be dismissed immediately when the times change.
By market capitalism, we mean an economic system where most economic interchanges are carried out in competitive atomistic markets. Under normal circumstances, this means keeping to a minimum the share of government, the grey sectors and big corporations in the economy. In addition, independent entities (and not self-preserving bodies) should regulate and prevent them from erecting entry barriers.
We define constitutional liberalism, as a political system based on rules granting a maximum of individual freedom and a minimum of social coercion. This must include the rule of law, separation of powers and the protection of individual liberties from the prying of government, religion, race, or any other special interest groups.
Sunday, 11 April 2010
Mais duas machadadas no futuro de Portugal
Na semana passada a comunicação social noticiou mais duas grandes machadadas nas perspectivas de um futuro melhor para Portugal. Dois acontecimentos negligenciados, senão mesmo apoiados, por muitos Portugueses.
Na segunda-feira noticiou-se: a Segurança Social penhora sete mil contas bancárias e no conjunto do ano, o Governo espera avançar com penhoras de vários tipos sobre 60 mil devedores. Realizado por via electrónica, tem eficácia prática imediata. "A regularização posterior de cada situação dependerá da resposta do devedor", explica o Ministério liderado por Helena André. Caso o contribuinte faltoso não avance qualquer resposta, "os saldos cativos serão transferidos para o IGFSS [Instituto de Gestão Financeira da Segurança Social] em prazo não superior a 60 dias". Esta prática típica dos salteadores - “disparar primeiro e perguntar depois” – retoma uma prática semelhante usada recentemente pela administração Fiscal em Portugal.
Na sexta-feira os jornais diziam: o Estado quer Luís Palha como CEO da Cimpor. Numa reunião ontem à tarde entre Fernando Faria de Oliveira, presidente da CGD, e o ministro das Finanças ficou definido que a Caixa vai indicar Luís Palha para presidente-executivo (CEO) da cimenteira, apurou o Diário Económico. Assim, deixar-se-ia cair o nome de Francisco Lacerda, já acordado entre todos os accionistas para o lugar de CEO. A notícia surpreendeu os accionistas privados que revelaram não caber à Caixa a escolha do CEO de uma empresa privada. O mérito relativo dos gestores em causa não é relevante para o problema. A questão essencial está em saber como é que a CGD, um banco público com uma participação questionável inferior a 10%, pode controlar as decisões de uma empresa privada cotada em bolsa.
A concretizarem-se, estas decisões constituem uma violação flagrante dos princípios do liberalismo constitucional e do capitalismo de mercado indispensáveis ao progresso do país. Porquê?
Não contestamos que a Segurança Social siga uma política de cobranças agressiva. Porém, a cobrança coerciva de dívidas, mesmo que reconhecidas pelo devedor, só pode ser decidida pelos tribunais. Não é preciso ser constitucionalista para se perceber isso. Imagine que qualquer credor era livre para ir a casa dos seus devedores e levar o que entende-se para saldar as suas dívidas. Por exemplo, um construtor a quem uma câmara municipal não paga há meses ou anos, dirigia-se à CGD e pedia-lhe para congelar as contas da Câmara até esta liquidar a sua dívida. Sendo todos iguais perante a lei, este construtor teria toda a legitimidade para fazer isso. Se todos fizessem isso cair-se-ia rapidamente na lei da selva.
Por isso, um dos fundamentos do liberalismo constitucional é precisamente o respeito do princípio de um estado de direito que garante que todos, incluindo o Estado, são iguais perante a lei. É por isso que num estado de direito os governos não poderão fazer leis que lhes garantem privilégios que são negados aos restantes credores.
No caso da Cimpor também não se contesta que a CGD, enquanto accionista, possa aliar-se a outros accionistas para fazer eleger um CEO do seu agrado. Aquilo que está em causa é o facto de a CGD ter adquirido a sua posição accionista de forma no mínimo questionável, senão mesmo ilegal, sob o ponto de vista da boa regulamentação dos mercados. Como se sabe os bancos não podem usar os títulos que lhes são confiados como garantia de empréstimos para exercer os respectivos direitos de voto. Estes continuam a pertencer aos seus legítimos titulares.
Dois dos fundamentos básicos do capitalismo de mercado são precisamente a protecção da propriedade privada e da distinção entre os direitos de um accionista e de um credor. Sem essa protecção não se pode avaliar os riscos respectivos e o investimento será seriamente afectado. O facto de a CGD ter aparentemente usado o expediente de um equity swap ou de um acordo de recompra para esconder a natureza do crédito que concedeu ao grupo Investifino, não a iliba da suspeição de falta de transparência ou manipulação das normas bancárias sobre provisionamento. Se esses subterfúgios podem ser tolerados num banco privado, num banco público terão de ser repudiados.
Porém, estas duas operações não são apenas questionáveis ao nível dos princípios e da legalidade. Elas também têm custos directos e indirectos muito significativos para o país.
Desde logo, num momento crítico para o crédito internacional do país, o desrespeito pelas regras de um estado de direito e a interferência do Governo nas empresas fazem aumentar o risco do nosso país. Consequentemente aumentarão também os spreads que temos de pagar quando recorremos ao crédito.
Recorrendo a expedientes para ultrapassar a ineficácia dos tribunais estamos a contribuir para que estes jamais se reformem. Criamos enormes injustiças entre os Portugueses e tornamos as nossas empresas cada vez menos competitivas.
De igual modo, a violação das contas bancárias leva à fuga de capitais para o estrangeiro e ao aumento da economia paralela. Recorde-se que este ano o Governo, de forma questionável, vai conceder um perdão fiscal para tentar repatriar os capitais fugidos para o estrangeiro. Sem protecção das contas bancárias dentro do país e com a previsível repetição periódica destes perdões, só não colocará as suas poupanças no estrangeiro quem não souber ou não puder. Como consequência temos de pedir mais e cada vez mais caro ao estrangeiro. Teremos também de nos contentar em atrair os piores investidores estrangeiros que exigirão cada vez mais subsídios.
Finalmente, num período em que a bolsa de Lisboa teve umas das recuperações mais fracas depois do crash de 2008, o caso da Cimpor alarga ainda mais o leque de queixas que os investidores fazem sobre o mercado Português. Como se já não bastassem a tradicional acusação do nosso mercado ser muito permeável à manipulação por insiders, as nossas empresas terem estruturas accionistas pouco transparentes, com gestores que são mais políticos do que profissionais e modelos de governo societário pouco eficazes, nós vamos acrescentar-lhe as práticas de intromissão governamental na escolha dos seus gestores. Como consequência, o nosso mercado será cada vez menos líquido e mais especulativo, alternando entre períodos de estagnação e momentos breves de grande volatilidade que afastam os investidores de longo prazo.
Perante estes golpes no nosso sistema financeiro, é pertinente perguntar: o que andam a fazer as nossas entidades de regulação? Quanto à violação dos princípios de um estado de direito o Tribunal Constitucional parece desconhecer esses princípios, ou então, de tão ocupado com o casamento entre pessoas do mesmo sexo, não tem tempo para mais nada. A entidade reguladora dos mercados – CMVM - que já tinha sido bastante ausente na recente tentativa de OPA sobre a Cimpor (segundo alguns terá mesmo colocado alguns grãos de areia no processo), ainda não se pronunciou sobre a legalidade da posição detida pela CGD. Quanto ao Banco de Portugal, entidade responsável pela supervisão bancária em Portugal, continua sobranceiramente a ignorar os riscos resultantes da participação excessiva dos bancos nas empresas não financeiras e a reconhecer formas de capital que de capital têm muito pouco, mas desconhece-se que tenha feito alguma coisa para prevenir as consequências de operações como aquelas a que a CGD recorreu.
Perante esta passividade das entidades responsáveis por prevenir este tipo de problemas, não é de estranhar que a opinião pública em geral tenha um défice de conhecimentos sobre a gravidade destas questões. Resta-nos a comunicação social para ter um papel mais activo na eliminação desse défice, discutindo estas violações de forma mais esclarecida, sem dogmas, tibiezas ou medo de ferir as susceptibilidades do poder político ou económico. Porém, nos últimos tempos, alguns responsáveis políticos pela má governação em Portugal têm vindo a tentar instalar o medo com o argumento falacioso de que a discussão pública de tais práticas contribui para denegrir a imagem do país e afastar os investidores estrangeiros. Ora, desde quando o encobrir dos erros contribui para a sua correcção? Antes pelo contrário, o dever cívico de todos quantos se preocupam com o futuro do país é apurar os porquês do que está mal no nosso regime político-económico e avançar com alternativas, não se limitando a carpir repetidamente sobre os nossos males.
Na segunda-feira noticiou-se: a Segurança Social penhora sete mil contas bancárias e no conjunto do ano, o Governo espera avançar com penhoras de vários tipos sobre 60 mil devedores. Realizado por via electrónica, tem eficácia prática imediata. "A regularização posterior de cada situação dependerá da resposta do devedor", explica o Ministério liderado por Helena André. Caso o contribuinte faltoso não avance qualquer resposta, "os saldos cativos serão transferidos para o IGFSS [Instituto de Gestão Financeira da Segurança Social] em prazo não superior a 60 dias". Esta prática típica dos salteadores - “disparar primeiro e perguntar depois” – retoma uma prática semelhante usada recentemente pela administração Fiscal em Portugal.
Na sexta-feira os jornais diziam: o Estado quer Luís Palha como CEO da Cimpor. Numa reunião ontem à tarde entre Fernando Faria de Oliveira, presidente da CGD, e o ministro das Finanças ficou definido que a Caixa vai indicar Luís Palha para presidente-executivo (CEO) da cimenteira, apurou o Diário Económico. Assim, deixar-se-ia cair o nome de Francisco Lacerda, já acordado entre todos os accionistas para o lugar de CEO. A notícia surpreendeu os accionistas privados que revelaram não caber à Caixa a escolha do CEO de uma empresa privada. O mérito relativo dos gestores em causa não é relevante para o problema. A questão essencial está em saber como é que a CGD, um banco público com uma participação questionável inferior a 10%, pode controlar as decisões de uma empresa privada cotada em bolsa.
A concretizarem-se, estas decisões constituem uma violação flagrante dos princípios do liberalismo constitucional e do capitalismo de mercado indispensáveis ao progresso do país. Porquê?
Não contestamos que a Segurança Social siga uma política de cobranças agressiva. Porém, a cobrança coerciva de dívidas, mesmo que reconhecidas pelo devedor, só pode ser decidida pelos tribunais. Não é preciso ser constitucionalista para se perceber isso. Imagine que qualquer credor era livre para ir a casa dos seus devedores e levar o que entende-se para saldar as suas dívidas. Por exemplo, um construtor a quem uma câmara municipal não paga há meses ou anos, dirigia-se à CGD e pedia-lhe para congelar as contas da Câmara até esta liquidar a sua dívida. Sendo todos iguais perante a lei, este construtor teria toda a legitimidade para fazer isso. Se todos fizessem isso cair-se-ia rapidamente na lei da selva.
Por isso, um dos fundamentos do liberalismo constitucional é precisamente o respeito do princípio de um estado de direito que garante que todos, incluindo o Estado, são iguais perante a lei. É por isso que num estado de direito os governos não poderão fazer leis que lhes garantem privilégios que são negados aos restantes credores.
No caso da Cimpor também não se contesta que a CGD, enquanto accionista, possa aliar-se a outros accionistas para fazer eleger um CEO do seu agrado. Aquilo que está em causa é o facto de a CGD ter adquirido a sua posição accionista de forma no mínimo questionável, senão mesmo ilegal, sob o ponto de vista da boa regulamentação dos mercados. Como se sabe os bancos não podem usar os títulos que lhes são confiados como garantia de empréstimos para exercer os respectivos direitos de voto. Estes continuam a pertencer aos seus legítimos titulares.
Dois dos fundamentos básicos do capitalismo de mercado são precisamente a protecção da propriedade privada e da distinção entre os direitos de um accionista e de um credor. Sem essa protecção não se pode avaliar os riscos respectivos e o investimento será seriamente afectado. O facto de a CGD ter aparentemente usado o expediente de um equity swap ou de um acordo de recompra para esconder a natureza do crédito que concedeu ao grupo Investifino, não a iliba da suspeição de falta de transparência ou manipulação das normas bancárias sobre provisionamento. Se esses subterfúgios podem ser tolerados num banco privado, num banco público terão de ser repudiados.
Porém, estas duas operações não são apenas questionáveis ao nível dos princípios e da legalidade. Elas também têm custos directos e indirectos muito significativos para o país.
Desde logo, num momento crítico para o crédito internacional do país, o desrespeito pelas regras de um estado de direito e a interferência do Governo nas empresas fazem aumentar o risco do nosso país. Consequentemente aumentarão também os spreads que temos de pagar quando recorremos ao crédito.
Recorrendo a expedientes para ultrapassar a ineficácia dos tribunais estamos a contribuir para que estes jamais se reformem. Criamos enormes injustiças entre os Portugueses e tornamos as nossas empresas cada vez menos competitivas.
De igual modo, a violação das contas bancárias leva à fuga de capitais para o estrangeiro e ao aumento da economia paralela. Recorde-se que este ano o Governo, de forma questionável, vai conceder um perdão fiscal para tentar repatriar os capitais fugidos para o estrangeiro. Sem protecção das contas bancárias dentro do país e com a previsível repetição periódica destes perdões, só não colocará as suas poupanças no estrangeiro quem não souber ou não puder. Como consequência temos de pedir mais e cada vez mais caro ao estrangeiro. Teremos também de nos contentar em atrair os piores investidores estrangeiros que exigirão cada vez mais subsídios.
Finalmente, num período em que a bolsa de Lisboa teve umas das recuperações mais fracas depois do crash de 2008, o caso da Cimpor alarga ainda mais o leque de queixas que os investidores fazem sobre o mercado Português. Como se já não bastassem a tradicional acusação do nosso mercado ser muito permeável à manipulação por insiders, as nossas empresas terem estruturas accionistas pouco transparentes, com gestores que são mais políticos do que profissionais e modelos de governo societário pouco eficazes, nós vamos acrescentar-lhe as práticas de intromissão governamental na escolha dos seus gestores. Como consequência, o nosso mercado será cada vez menos líquido e mais especulativo, alternando entre períodos de estagnação e momentos breves de grande volatilidade que afastam os investidores de longo prazo.
Perante estes golpes no nosso sistema financeiro, é pertinente perguntar: o que andam a fazer as nossas entidades de regulação? Quanto à violação dos princípios de um estado de direito o Tribunal Constitucional parece desconhecer esses princípios, ou então, de tão ocupado com o casamento entre pessoas do mesmo sexo, não tem tempo para mais nada. A entidade reguladora dos mercados – CMVM - que já tinha sido bastante ausente na recente tentativa de OPA sobre a Cimpor (segundo alguns terá mesmo colocado alguns grãos de areia no processo), ainda não se pronunciou sobre a legalidade da posição detida pela CGD. Quanto ao Banco de Portugal, entidade responsável pela supervisão bancária em Portugal, continua sobranceiramente a ignorar os riscos resultantes da participação excessiva dos bancos nas empresas não financeiras e a reconhecer formas de capital que de capital têm muito pouco, mas desconhece-se que tenha feito alguma coisa para prevenir as consequências de operações como aquelas a que a CGD recorreu.
Perante esta passividade das entidades responsáveis por prevenir este tipo de problemas, não é de estranhar que a opinião pública em geral tenha um défice de conhecimentos sobre a gravidade destas questões. Resta-nos a comunicação social para ter um papel mais activo na eliminação desse défice, discutindo estas violações de forma mais esclarecida, sem dogmas, tibiezas ou medo de ferir as susceptibilidades do poder político ou económico. Porém, nos últimos tempos, alguns responsáveis políticos pela má governação em Portugal têm vindo a tentar instalar o medo com o argumento falacioso de que a discussão pública de tais práticas contribui para denegrir a imagem do país e afastar os investidores estrangeiros. Ora, desde quando o encobrir dos erros contribui para a sua correcção? Antes pelo contrário, o dever cívico de todos quantos se preocupam com o futuro do país é apurar os porquês do que está mal no nosso regime político-económico e avançar com alternativas, não se limitando a carpir repetidamente sobre os nossos males.
Monday, 5 April 2010
Mankiw's proposal for contingent convertible debt
In the ongoing debate on financial regulation, most reform proponents seem to be under the illusion that it is possible to prevent future financial crisis. Therefore, Mankiw’s article on Trying to Tame the Unknowable is a welcome alert.
Proposals to prevent future taxpayer bailouts for financial institutions revolve around three key ideas:
1) Limiting the type of activities that banks can do (e.g. the Volcker rule on proprietary trading);
2) Capping the size of banks considered too big to fail; and
3) Requiring banks to have more capital to cope with the higher levels of leverage used today (e.g. Greenspan’s proposal to go beyond the current Basle II).
Mankiw’s favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance.
This is an interesting idea on how to increase bank capitalization while privatizing the risk of reckless lending. However, its fundamental weakness is that rating agencies and regulators can hardly be trusted to decree such debt conversion before losses are too big to be absorbed by this share of capital alone.
The one thing that the history of speculation teaches us is that nobody is willing to remove the bowl of punch while the party is still going on. For instance, this last year alone, with inflation below 3%, the stock market has risen more than 40%. Would anyone be willing to classify this as a bubble and to force banks to stop lending to finance stock purchases? I doubt.
The only way the regulation could work would be to set up pre-defined conversion rules based on asset inflation targets. But, which assets classes? Shall we use rules based on price indexes for stocks, real estate, fixed-income, or commodities? And what should be considered a speculative price run over, say three months? 20%, 40% or 60%? These questions as well as the size of this quasi-capital buffer would raise many interesting debates.
However, the rules would only work if we could agree on a simple set of pre-defined conversion rules. If we are sufficiently naïve or optimistic to believe that such agreement is possible, let us advocate the Mankiw’s rule as a good policy.
Proposals to prevent future taxpayer bailouts for financial institutions revolve around three key ideas:
1) Limiting the type of activities that banks can do (e.g. the Volcker rule on proprietary trading);
2) Capping the size of banks considered too big to fail; and
3) Requiring banks to have more capital to cope with the higher levels of leverage used today (e.g. Greenspan’s proposal to go beyond the current Basle II).
Mankiw’s favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance.
This is an interesting idea on how to increase bank capitalization while privatizing the risk of reckless lending. However, its fundamental weakness is that rating agencies and regulators can hardly be trusted to decree such debt conversion before losses are too big to be absorbed by this share of capital alone.
The one thing that the history of speculation teaches us is that nobody is willing to remove the bowl of punch while the party is still going on. For instance, this last year alone, with inflation below 3%, the stock market has risen more than 40%. Would anyone be willing to classify this as a bubble and to force banks to stop lending to finance stock purchases? I doubt.
The only way the regulation could work would be to set up pre-defined conversion rules based on asset inflation targets. But, which assets classes? Shall we use rules based on price indexes for stocks, real estate, fixed-income, or commodities? And what should be considered a speculative price run over, say three months? 20%, 40% or 60%? These questions as well as the size of this quasi-capital buffer would raise many interesting debates.
However, the rules would only work if we could agree on a simple set of pre-defined conversion rules. If we are sufficiently naïve or optimistic to believe that such agreement is possible, let us advocate the Mankiw’s rule as a good policy.
Friday, 26 February 2010
Comparação dos ciclos político-económicos do capitalismo de estado Português durante a II e III Repúblicas
O primeiro ciclo do Estado Novo, de 1928 a 1938, foi dominado pela ascensão e consolidação do poder pessoal de Salazar. Através da criação de um estado corporativo, Salazar acabou com o caos vigente durante a primeira república e reequilibrou as finanças públicas, num contexto de grandes dificuldades resultantes da crise mundial de 1929. O crescimento económico neste período foi muito lento (apenas 1.18% ao ano) o que exigiu um esforço extraordinário de poupança por parte de uma população pobre e impossibilitada de emigrar.
O período seguinte de 1938 a 1952, que podemos designar como o ciclo das grandes obras públicas, inspirado nas experiências Alemã e Italiana dos anos 30, acabou por ter resultados também modestos. Tal ficou a dever-se à morte prematura em 1943 do seu grande impulsionador Duarte Pacheco, e às dificuldades decorrentes da II Guerra Mundial. Assim este ciclo acabou por ter uma modesta taxa de crescimento anual de apenas 1.88%. No seu final assistiu-se mesmo ao regresso de fluxos emigratórios ao nível dos anos 20 (cerca de 30 mil pessoas por ano).
O ciclo final do Estado Novo, entre 1953 e 1973, iniciou-se já sob a influência do Plano Marshall, e da introdução dos Planos de Fomento. Para estes contribuiu uma nova geração de brilhantes e dedicados funcionários públicos (entre eles alguns, como Jacinto Nunes e Silva Lopes, que ainda hoje são a referência moral do verdadeiro espírito de serviço público). Apesar deste ciclo se concluir com o declínio do regime político, sob o ponto de vista económico foi provavelmente o ciclo de maior crescimento na história de Portugal, com uma média anual superior a 6%. Este resultado foi ainda mais extraordinário se tivermos em conta que as guerras coloniais começaram em 1961 e que a emigração massiva para a Europa atingiu o seu auge em 1970, quando mais de 180 mil portugueses emigraram.
Quando comparamos o crescimento económico anual dos ciclos do Estado Novo com o crescimento verificado nos ciclos do pós-25 de Abril (2.27% no ciclo de consolidação da democracia entre 1974 e 1985, 3.81% no segundo ciclo de grandes obras públicas entre 1985 e 1999, por vezes designado de Cavaquismo, e 1.53% no ciclo pós-Euro entre 1999 e 2008) não podemos deixar de constatar que Portugal é uma clara demonstração da regra que diz “trade is better than aid”. Na verdade, apesar das transferências financeiras recebidas da União Europeia durante os “roaring nineties” o crescimento neste período mal chegou a metade do verificado durante o período dos “golden sixties” quando ocorreu a liberalização da nossa economia após a adesão à EFTA.
Globalmente, ambos os regimes de capitalismo de estado em Portugal – autoritário de direita e democrático de esquerda – experimentaram exactamente a mesma taxa de crescimento nos seus primeiros 34 anos (2.6% ao ano). Este desempenho económico não pode ser considerado despiciendo, mas não foi certamente suficiente para assegurar uma recuperação significativa do atraso económico de Portugal quer em relação aos nossos vizinhos Espanhóis quer em relação aos países mais desenvolvidos da Europa.
A nosso ver, se não houvesse mais razões, esta seria suficiente para dizer que 80 anos de capitalismo de estado em Portugal já chegam. Agora chegou a altura de mudar de rumo em direcção a um novo sistema económico baseado no capitalismo de mercado. Contribuir para essa mudança é um dos principais objectivos do nosso blog.
O período seguinte de 1938 a 1952, que podemos designar como o ciclo das grandes obras públicas, inspirado nas experiências Alemã e Italiana dos anos 30, acabou por ter resultados também modestos. Tal ficou a dever-se à morte prematura em 1943 do seu grande impulsionador Duarte Pacheco, e às dificuldades decorrentes da II Guerra Mundial. Assim este ciclo acabou por ter uma modesta taxa de crescimento anual de apenas 1.88%. No seu final assistiu-se mesmo ao regresso de fluxos emigratórios ao nível dos anos 20 (cerca de 30 mil pessoas por ano).
O ciclo final do Estado Novo, entre 1953 e 1973, iniciou-se já sob a influência do Plano Marshall, e da introdução dos Planos de Fomento. Para estes contribuiu uma nova geração de brilhantes e dedicados funcionários públicos (entre eles alguns, como Jacinto Nunes e Silva Lopes, que ainda hoje são a referência moral do verdadeiro espírito de serviço público). Apesar deste ciclo se concluir com o declínio do regime político, sob o ponto de vista económico foi provavelmente o ciclo de maior crescimento na história de Portugal, com uma média anual superior a 6%. Este resultado foi ainda mais extraordinário se tivermos em conta que as guerras coloniais começaram em 1961 e que a emigração massiva para a Europa atingiu o seu auge em 1970, quando mais de 180 mil portugueses emigraram.
Quando comparamos o crescimento económico anual dos ciclos do Estado Novo com o crescimento verificado nos ciclos do pós-25 de Abril (2.27% no ciclo de consolidação da democracia entre 1974 e 1985, 3.81% no segundo ciclo de grandes obras públicas entre 1985 e 1999, por vezes designado de Cavaquismo, e 1.53% no ciclo pós-Euro entre 1999 e 2008) não podemos deixar de constatar que Portugal é uma clara demonstração da regra que diz “trade is better than aid”. Na verdade, apesar das transferências financeiras recebidas da União Europeia durante os “roaring nineties” o crescimento neste período mal chegou a metade do verificado durante o período dos “golden sixties” quando ocorreu a liberalização da nossa economia após a adesão à EFTA.
Globalmente, ambos os regimes de capitalismo de estado em Portugal – autoritário de direita e democrático de esquerda – experimentaram exactamente a mesma taxa de crescimento nos seus primeiros 34 anos (2.6% ao ano). Este desempenho económico não pode ser considerado despiciendo, mas não foi certamente suficiente para assegurar uma recuperação significativa do atraso económico de Portugal quer em relação aos nossos vizinhos Espanhóis quer em relação aos países mais desenvolvidos da Europa.
A nosso ver, se não houvesse mais razões, esta seria suficiente para dizer que 80 anos de capitalismo de estado em Portugal já chegam. Agora chegou a altura de mudar de rumo em direcção a um novo sistema económico baseado no capitalismo de mercado. Contribuir para essa mudança é um dos principais objectivos do nosso blog.
Saturday, 13 February 2010
Um novo ciclo ou um novo regime político-económico para Portugal?
A recente tentativa falhada dos apoiantes do Primeiro Ministro Sócrates para controlar a comunicação social em Portugal tem tanto de grotesco que não pode deixar de ser equiparada às paranóias típicas dos regimes em fim de vida. Por exemplo o facto de ter podido nomear dois dos seus "muchachos" para administradores executivos de uma grande empresa onde o Estado apenas tem uns centavos investidos lembra-nos o império Romano quando o imperador Calígula nomeou para cônsul o seu cavalo favorito. Para nós a questão não está em saber se Sócrates sai amanhã, daqui a três ou a sete anos.
O que nos interessa é analisar se o novo ciclo será mais um, na sequência dos três ciclos pós-25 de Abril a que assisti pessoalmente, ou trará uma profunda transformação na sociedade portuguesa. Infelizmente o pessimismo e falta de ideias reinante entre nós faz com que as minhas expectativas não sejam muito elevadas. Porém, isso não significa necessariamente que uma mudança para melhor não possa acontecer nos tempos mais próximos.
Por exemplo, lembro-me de em Março de 1974 ao sair do ISE (hoje ISEG) pelo portão da Miguel Lupi ouvir um militar (general?) que aí vivia comentar que o golpe das Caldas tinha falhado. Como na antevéspera tinha assistido na TV à demonstração de vassalagem ao primeiro-ministro Professor Marcelo Caetano por parte da chamada brigada do reumático, senti-me pessimista e não imaginava que em breve estaria a caminhar livremente em direcção ao Estádio Primeiro de Maio, cheio de alegria e utopia sobre o futuro brilhante de Portugal no pós-25 de Abril.
No entanto, após alguns meses a trabalhar no movimento sindical, aprendi rápidamente que a natureza humana quando movida apenas pelo desejo de vingar os atropelos do regime deposto rapidamente volta a praticar as mesmas tropelias. As vitimas do passado transformam-se nos carrascos do presente. Sómente sistemas genuinos de democracia representativa e liberalismo constitucional conseguem evitar tais comportamentos.
Também no Outono de 1985, enquanto aguardava no hotel Solneve da Covilhã os resultados da votação no PRD e eles chegavam melhor do que esperavamos, reinava uma nova esperança em torno do novo partido. Um partido que não iria apenas encerrar o PREC mas também inroduzir uma nova ética política. Porém o tempo cedo se encarregaria de rápidamente me dar uma segunda lição sobre a natureza humana. Não basta criticar a ausência de valores éticos se não tivermos valores alternativos para promover. Valores baseados na igualdade de oportunidades e na liberdade humana de acordo com os ideais do iluminismo. Nessa altura também não antecipei que em breve se iniciaria um novo ciclo de crescimento económico baseado na promoção de obras públicas - habitualmente designado por Cavaquismo.
De igual modo, em 1995, quando ainda vivia em Londres, acompanhei à distância o ínicio do ciclo socialista que eu tomei como uma mera pausa no ciclo Cavaquista. De facto, quando regressei em 1998, mais velho e conservador, ainda fiz uma pequena diligência para voltar à política activa. Tentativa que imediatamente abandonei quando Marcelo Rebelo de Sousa se demitiu de lider do PSD e foi substituido por uma geração de ex-Jotas sem ideias próprias nem profissão. Jotas para quem a política fora apenas um trampolim usado pelos cábulas para obterem uma carreira profissional que nunca tentaram nem coseguiriam construir através do método tradicional de estudar e trabalhar afincadmente para ter sucesso na vida.
Quer o ciclo actual seja o último ou o penúltimo do regime de capitalismo de estado socialista e social democrata implantado com a III República, o que é importante é que o actual ciclo não venha a ser substituido por novo tipo de capitalismo de estado, seja ele de direita, esquerda, oligárquico, mafioso ou de qualquer outro tipo.
Após um século de instabilidade política e social que se seguiu às invasões Francesas e dos mais de 80 anos de capitalismo de estado que se seguiram à Primeira República o país precisa de virar esssa página menos feliz da sua história recente. Um futuro diferente só pode construir-se verdadeiramente na base de um novo regime assente no capitalismo de mercado, um dos seis pilares da felicidade humana que constituem o tema deste blog.
O que nos interessa é analisar se o novo ciclo será mais um, na sequência dos três ciclos pós-25 de Abril a que assisti pessoalmente, ou trará uma profunda transformação na sociedade portuguesa. Infelizmente o pessimismo e falta de ideias reinante entre nós faz com que as minhas expectativas não sejam muito elevadas. Porém, isso não significa necessariamente que uma mudança para melhor não possa acontecer nos tempos mais próximos.
Por exemplo, lembro-me de em Março de 1974 ao sair do ISE (hoje ISEG) pelo portão da Miguel Lupi ouvir um militar (general?) que aí vivia comentar que o golpe das Caldas tinha falhado. Como na antevéspera tinha assistido na TV à demonstração de vassalagem ao primeiro-ministro Professor Marcelo Caetano por parte da chamada brigada do reumático, senti-me pessimista e não imaginava que em breve estaria a caminhar livremente em direcção ao Estádio Primeiro de Maio, cheio de alegria e utopia sobre o futuro brilhante de Portugal no pós-25 de Abril.
No entanto, após alguns meses a trabalhar no movimento sindical, aprendi rápidamente que a natureza humana quando movida apenas pelo desejo de vingar os atropelos do regime deposto rapidamente volta a praticar as mesmas tropelias. As vitimas do passado transformam-se nos carrascos do presente. Sómente sistemas genuinos de democracia representativa e liberalismo constitucional conseguem evitar tais comportamentos.
Também no Outono de 1985, enquanto aguardava no hotel Solneve da Covilhã os resultados da votação no PRD e eles chegavam melhor do que esperavamos, reinava uma nova esperança em torno do novo partido. Um partido que não iria apenas encerrar o PREC mas também inroduzir uma nova ética política. Porém o tempo cedo se encarregaria de rápidamente me dar uma segunda lição sobre a natureza humana. Não basta criticar a ausência de valores éticos se não tivermos valores alternativos para promover. Valores baseados na igualdade de oportunidades e na liberdade humana de acordo com os ideais do iluminismo. Nessa altura também não antecipei que em breve se iniciaria um novo ciclo de crescimento económico baseado na promoção de obras públicas - habitualmente designado por Cavaquismo.
De igual modo, em 1995, quando ainda vivia em Londres, acompanhei à distância o ínicio do ciclo socialista que eu tomei como uma mera pausa no ciclo Cavaquista. De facto, quando regressei em 1998, mais velho e conservador, ainda fiz uma pequena diligência para voltar à política activa. Tentativa que imediatamente abandonei quando Marcelo Rebelo de Sousa se demitiu de lider do PSD e foi substituido por uma geração de ex-Jotas sem ideias próprias nem profissão. Jotas para quem a política fora apenas um trampolim usado pelos cábulas para obterem uma carreira profissional que nunca tentaram nem coseguiriam construir através do método tradicional de estudar e trabalhar afincadmente para ter sucesso na vida.
Quer o ciclo actual seja o último ou o penúltimo do regime de capitalismo de estado socialista e social democrata implantado com a III República, o que é importante é que o actual ciclo não venha a ser substituido por novo tipo de capitalismo de estado, seja ele de direita, esquerda, oligárquico, mafioso ou de qualquer outro tipo.
Após um século de instabilidade política e social que se seguiu às invasões Francesas e dos mais de 80 anos de capitalismo de estado que se seguiram à Primeira República o país precisa de virar esssa página menos feliz da sua história recente. Um futuro diferente só pode construir-se verdadeiramente na base de um novo regime assente no capitalismo de mercado, um dos seis pilares da felicidade humana que constituem o tema deste blog.
Friday, 12 February 2010
Is the Volcker rule enough to revamp the financial regulatory system?
Well-regulated financial markets are an essential part of market capitalism. Contrary to what people often think, efficient regulation means light regulation and not tight regulation. If proof were needed, we can look at the failure of Fannie Mae and Freddie Mac, despite being regulated by a dedicated team of more than 100 regulators which saw nothing coming. This clearly shows that heavy and complex regulation only adds bureaucracy - not efficiency. So, simple rules as the Volcker rule aimed at separating proprietary trading from commercial banking are most welcome.
However, as Volcker himself recognizes the rule is just one piece of a broader set of legal rules needed. So how far do we need to go? The answer to this question depends on how many of these problems we wish to tackle: 1) the moral hazard associated with the too big to fail issue, 2) the risks associated with the growth of the shadow banking system (made up of investment banks, private equity and hedge funds), and 3) the rise of casino-like financial markets. We have not included the bankers’ rock star-like compensation packages. This problem is part of a broader issue on compensation practices in corporate America that is undermining American capitalism and needs a separate treatment.
If we only want to tackle the first problem, then the Volcker rule together with similarly simple-minded competition and anti-trust rules aimed at breaking mammoth conglomerates such as Citigroup will be enough. For instance, such rules should limit deposit taking institutions from owning some types of businesses (in particular those belonging to the shadow banking system). Tighter limits on the use of leverage (well above the current BIS ratio) and restrictions on securitization should also be imposed so that banks return to their basic role in credit screening.
In relation to the shadow banking system, a first step could be the separation of investment banking from asset management so that investment banks can go back to their traditional business of underwriting and advisory work. That is, we should go beyond the old Glass-Steagall Act and separate commercial banking, investment banking and asset management. As a rule, it also seems to us that the potential for systemic risks originating in primary brokerage activities, private equity or hedge funds is better done through limits on leverage than through an increased level of disclosure about their portfolios.
Finally, the casino-like markets can be regulated in the same spirit we use to regulate conventional gambling casinos. We need rules to make sure that people do not bet money they cannot afford to lose. For instance, company treasurers willing to bet on exotic derivatives and structured products could be required to demonstrate that they have enough solvability and liquidity rather than knowledge about such complex products.
Overall, we only need a few basic rules to enforce an effective regulatory system.
However, as Volcker himself recognizes the rule is just one piece of a broader set of legal rules needed. So how far do we need to go? The answer to this question depends on how many of these problems we wish to tackle: 1) the moral hazard associated with the too big to fail issue, 2) the risks associated with the growth of the shadow banking system (made up of investment banks, private equity and hedge funds), and 3) the rise of casino-like financial markets. We have not included the bankers’ rock star-like compensation packages. This problem is part of a broader issue on compensation practices in corporate America that is undermining American capitalism and needs a separate treatment.
If we only want to tackle the first problem, then the Volcker rule together with similarly simple-minded competition and anti-trust rules aimed at breaking mammoth conglomerates such as Citigroup will be enough. For instance, such rules should limit deposit taking institutions from owning some types of businesses (in particular those belonging to the shadow banking system). Tighter limits on the use of leverage (well above the current BIS ratio) and restrictions on securitization should also be imposed so that banks return to their basic role in credit screening.
In relation to the shadow banking system, a first step could be the separation of investment banking from asset management so that investment banks can go back to their traditional business of underwriting and advisory work. That is, we should go beyond the old Glass-Steagall Act and separate commercial banking, investment banking and asset management. As a rule, it also seems to us that the potential for systemic risks originating in primary brokerage activities, private equity or hedge funds is better done through limits on leverage than through an increased level of disclosure about their portfolios.
Finally, the casino-like markets can be regulated in the same spirit we use to regulate conventional gambling casinos. We need rules to make sure that people do not bet money they cannot afford to lose. For instance, company treasurers willing to bet on exotic derivatives and structured products could be required to demonstrate that they have enough solvability and liquidity rather than knowledge about such complex products.
Overall, we only need a few basic rules to enforce an effective regulatory system.
Wednesday, 10 February 2010
How close are we getting to a market capitalism ideal?
The ideal of market capitalism is necessarily vague, but can be broadly defined as an economic system where individuals execute most of their economic transactions in competitive markets. It requires a reasonably atomistic distribution of economic resources and well-regulated markets. A few indicators come to mind on how to rank countries in accordance on how close they are to this ideal system. Among such indicators, we must include the share of large corporations and governments in GDP and some index of economic freedom. Traditionally we tend to identify the OECD member countries as representative of what we would call capitalist markets. However, when we scrutinize its members we find that only a few countries come near to the market capitalism ideal.
Take the case of the USA for instance. The USA would normally qualify under the share of government in GDP criteria (around 35%) and in terms of economic freedom (among the top ten in the Fraser Institute list). Nevertheless, its share of big business in GDP remained at around 50% throughout 1998 to 2004 as estimated by the SBA. Another interesting case is South Korea, which has the smallest weight of government in its economy (about 26% of GDP) but ranks very low in terms of economic liberty (32 in the Fraser list). Disregarding the share of big business criteria, which is difficult to obtain for most countries, we end up with just a handful of nations (Australia, Switzerland, Luxembourg and Ireland) that qualify for the status of close to the ideal of market capitalism.
Among the Western countries with a mixed economy system in the sense defined by the late Paul Samuelson we have two models of state capitalism that are worth considering - the Scandinavian and the Southern European types of state capitalism. There are many other types of state capitalism, ranging from democratic systems of big-business capitalism in Europe and North America to crony/oligarchic systems in Russia or dictatorial systems like in China, but these are of no concern to us in this post. We need to compare the performance of those two sets of countries against those closer to the market capitalism ideal to verify if there are substantial differences. Note that the Southern European system would be more interesting because it went through two distinct periods of about forty years each – an authoritarian right wing and another period of democratic socialism. However, we only have comparative data for the recent period where both groups had generally socialist governments.
Over the last 37 years, the real annual GDP growth in the market capitalism group ranged from 1.43% (Switzerland) to 4.71% (Ireland) against a range between 2.00% (Sweden) and 3.76% (Norway) for the Scandinavian state capitalism, and from 2.66% (Italy) to 3.61% (Portugal) for the Southern European system. Overall, with the exception of Switzerland, the growth of the market capitalism economies was faster than that of all economies under state capitalism. These growth rates were achieved by 80% of the Swiss working an average of 1702 hours per year and 55% of the Irish working 1966 hours, while among the Scandinavians 78% of the Swedes had to work 1570 hours and 74% of the Norwegians worked 1599 hours. In Southern Europe it took 53% of the Italians working 1870 hours, while 68% of the Portuguese worked 1917 hours. In terms of productivity growth, Switzerland is the odd case lagging substantially behind all the state capitalism countries. In terms of ranking, Ireland tops the league, followed by Luxembourg, Norway, Spain, Australia and Portugal. In terms of purchasing power relative to the OECD average, Ireland again improved the most (89.4%) between 1971 and 2008, followed by Norway (80.2%), Luxembourg (57.0%) and Portugal (23.2%). During the same period, Switzerland was the country that declined the most (30.1%), followed by Sweden with a decline of 14%.
Despite the exceptions of Switzerland and Norway, overall, the countries with a system closer to market capitalism outperformed both groups with a system of state capitalism. Nevertheless, definitive proof will require a more detailed study taking into account the fact that during this period, some of the countries have gone through several changes in relation to their pro-market stance. Equally, we have a few countries that benefited from exceptional shocks like the North Sea oil and gas in the case of Norway and the process of decolonization in the case of Portugal. For instance, if we look for periods where a major roll back on the weight of the state in the economy occurred we find that they took place in Ireland, Finland, Norway and Sweden during 1994-2000, in Australia during 1986-1988 and again in Norway during 2004-2006. Conversely, there were episodes of state build-up in Switzerland and Finland during 1990-1993.
Take the case of the USA for instance. The USA would normally qualify under the share of government in GDP criteria (around 35%) and in terms of economic freedom (among the top ten in the Fraser Institute list). Nevertheless, its share of big business in GDP remained at around 50% throughout 1998 to 2004 as estimated by the SBA. Another interesting case is South Korea, which has the smallest weight of government in its economy (about 26% of GDP) but ranks very low in terms of economic liberty (32 in the Fraser list). Disregarding the share of big business criteria, which is difficult to obtain for most countries, we end up with just a handful of nations (Australia, Switzerland, Luxembourg and Ireland) that qualify for the status of close to the ideal of market capitalism.
Among the Western countries with a mixed economy system in the sense defined by the late Paul Samuelson we have two models of state capitalism that are worth considering - the Scandinavian and the Southern European types of state capitalism. There are many other types of state capitalism, ranging from democratic systems of big-business capitalism in Europe and North America to crony/oligarchic systems in Russia or dictatorial systems like in China, but these are of no concern to us in this post. We need to compare the performance of those two sets of countries against those closer to the market capitalism ideal to verify if there are substantial differences. Note that the Southern European system would be more interesting because it went through two distinct periods of about forty years each – an authoritarian right wing and another period of democratic socialism. However, we only have comparative data for the recent period where both groups had generally socialist governments.
Over the last 37 years, the real annual GDP growth in the market capitalism group ranged from 1.43% (Switzerland) to 4.71% (Ireland) against a range between 2.00% (Sweden) and 3.76% (Norway) for the Scandinavian state capitalism, and from 2.66% (Italy) to 3.61% (Portugal) for the Southern European system. Overall, with the exception of Switzerland, the growth of the market capitalism economies was faster than that of all economies under state capitalism. These growth rates were achieved by 80% of the Swiss working an average of 1702 hours per year and 55% of the Irish working 1966 hours, while among the Scandinavians 78% of the Swedes had to work 1570 hours and 74% of the Norwegians worked 1599 hours. In Southern Europe it took 53% of the Italians working 1870 hours, while 68% of the Portuguese worked 1917 hours. In terms of productivity growth, Switzerland is the odd case lagging substantially behind all the state capitalism countries. In terms of ranking, Ireland tops the league, followed by Luxembourg, Norway, Spain, Australia and Portugal. In terms of purchasing power relative to the OECD average, Ireland again improved the most (89.4%) between 1971 and 2008, followed by Norway (80.2%), Luxembourg (57.0%) and Portugal (23.2%). During the same period, Switzerland was the country that declined the most (30.1%), followed by Sweden with a decline of 14%.
Despite the exceptions of Switzerland and Norway, overall, the countries with a system closer to market capitalism outperformed both groups with a system of state capitalism. Nevertheless, definitive proof will require a more detailed study taking into account the fact that during this period, some of the countries have gone through several changes in relation to their pro-market stance. Equally, we have a few countries that benefited from exceptional shocks like the North Sea oil and gas in the case of Norway and the process of decolonization in the case of Portugal. For instance, if we look for periods where a major roll back on the weight of the state in the economy occurred we find that they took place in Ireland, Finland, Norway and Sweden during 1994-2000, in Australia during 1986-1988 and again in Norway during 2004-2006. Conversely, there were episodes of state build-up in Switzerland and Finland during 1990-1993.
Friday, 5 February 2010
Why only six pillars?
No doubt, the happiness of humanity cannot depend only on six pillars. However, at the dawn of a new millennium, we selected only those that strike us as the most important means to promote human happiness. By focusing on the means rather than the ends, we left out some important values like peace, friendship, family bonds and a healthy body and soul, as these are simultaneously means and ends in the pursuit of joy by humankind.
The most controversial pillar that we have left out is religion. Because of its crucial role to secure compliance with moral values and to help us face death, it should have a prominent role. Yet, since religion is at variance with the scientific method and it is often used to fuel hate and extremism we cannot consider religion as an unequivocal pillar of human betterment.
We see the six pillars as sustaining an equal number of columns in the gate of human progress. We looked for such beautiful gates with an historical significance but all we could find to illustrate our approach were the stone archway at Yuling, in China, and Hadrian’s Gate in the Ancient City of Ephesus in Turkey. Neither is particularly well suited to show the many sides supported by each pillar (so, if you are keen on art and may help us find a more beautiful gate we will be obliged). We are looking to add to each column the many ratings appropriate to monitor the multi-faced nature of the columns supported by each pillar.
Each pillar will be the subject of future posts. For now we close this post with a simply note on their role. The first two – representative democracy and constitutional liberalism are essential to understand how to manage power for the benefit of all. The next pair – market capitalism and productive work – is the key to a prosperous economy. The last two – scientific method and enlightened virtues provide the foundation for a gratifying life that goes beyond the satisfaction of our material needs.
The most controversial pillar that we have left out is religion. Because of its crucial role to secure compliance with moral values and to help us face death, it should have a prominent role. Yet, since religion is at variance with the scientific method and it is often used to fuel hate and extremism we cannot consider religion as an unequivocal pillar of human betterment.
We see the six pillars as sustaining an equal number of columns in the gate of human progress. We looked for such beautiful gates with an historical significance but all we could find to illustrate our approach were the stone archway at Yuling, in China, and Hadrian’s Gate in the Ancient City of Ephesus in Turkey. Neither is particularly well suited to show the many sides supported by each pillar (so, if you are keen on art and may help us find a more beautiful gate we will be obliged). We are looking to add to each column the many ratings appropriate to monitor the multi-faced nature of the columns supported by each pillar.
Each pillar will be the subject of future posts. For now we close this post with a simply note on their role. The first two – representative democracy and constitutional liberalism are essential to understand how to manage power for the benefit of all. The next pair – market capitalism and productive work – is the key to a prosperous economy. The last two – scientific method and enlightened virtues provide the foundation for a gratifying life that goes beyond the satisfaction of our material needs.
Subscribe to:
Posts (Atom)
Posts
