Nova workboard

a blog from young economists at Nova SBE

Anonymous Job Applications

Employment is one of the main causes influencing poverty and the escape of it. Being employed does not guarantee to avoid becoming poor or to get out of poverty automatically but it is an aspect that offers, to a greater extent, to lower the probability of being poor. However as it is recognized not everybody has equal access to labor markets, making it harder to achieve a state that could lessen the probability of becoming poor. Studies showed that these inequalities stem in parts from conscious or subconscious discrimination in the application phase due to personal data, such as the name[1].

                Dealing with the issue of trying to balance the access to national labor markets and with the fact of human capital becoming a scarce resource in some sectors some attempts were started to analyze if a change in the application process could tackle matters such as ethnic discrimination due to personal data[2]. The pilot project conducted in Germany was a 12 month project having as participants five companies and the German Federal Anti-Discrimination Agency (ADS). The procedure of the anonymous application implied that no data such as photos, names, age, gender and other personal data were revealed in the initial application such that just in the second phase, the interview, the employers got to know these data. The initiative was aiming at the goal that the applicant would only be invited based on his/hers qualifications[3]. Another study undertaken in Sweden was structured similarly to the pilot project, however, it was just conducted in one city and only for the public sector but having in common the “depersonalization”[4] of job applications.  Both studies showed as results that chances for minority groups, including ethnic groups, women and seniors, increased to be invited to the interview based on the anonymous application. However it did not show any significant increased chances to pass the second phase, the interview, for ethnic groups[5] whereas for women, following the Swedish study, chances to get a job offer increased by 7%[6].  Another side effect could be that previously preferred minority groups, due to diversity rules, are no disadvantaged in the application phase as they cannot be identified as these.

                These studies show that even applying this approach a job offer is not guaranteed but it lessens the effect which discrimination has on the access to labor markets. It is an interesting approach, which obviously cannot be applied to every job position and is far from being legally required but it shows that there are possible and viable approaches to reduce discriminatory effects which broadens the possibilities for some to escape poverty or at least to lower the level of it by having a higher chance of obtaining a job. However there are some challenges left to be solved such that diversity strategies can “reduce the disadvantages of particular groups at a critical stage and help create more equality in the application process, but they cannot offset structural discrimination over the course of a working life […]”[7]. Friederike Strate

[1] Carlsson, M.; Rooth, D-O.; (2006). Evidence of Ethnic Discrimination in the Swedish Labour Market Using Experimental Data. Institute for the Study of Labor (IZA). Bonn.2012.

[2] IZA (2012). Pilot Project for “Anonymized Job Applications” Completed. Retrieved:

[3] Donath, J. (2010). German Pilot Project Aims to Reduce Discrimination. Spiegel Online International. 2010. Retrieved:

[4] Andersson, P. (2008). Positive effects of anonymous job applications. Oxford Research. March 2010. Retrieved:

[5] IZA (2012). Pilot Project for “Anonymized Job Applications” Completed. Retrieved:

[6] Andersson, P. (2008). Positive effects of anonymous job applications. Oxford Research. March 2010. Retrieved:

[7] IZA (2012). Pilot Project for “Anonymized Job Applications” Completed. Retrieved:



Positive Discrimination: Pros and Cons

Positive discrimination is usually the answer to correct long lasting discrimination against a certain group or minority. Generally, these groups are discriminated both at the legal and social level and it is usually understood that the social dimension of the problem cannot be reversed solely by “legal equality”.

This was certainly the case in the US until the sixties in particular in the southern states under the Jim Crow laws. At the time, it was believed that the repeal of the discriminatory legislation could not end the widespread segregation on its own at least on the medium run. The resolution of the social discrimination demanded a stronger solution which would oblige people to overcome their pre-existing prejudice. The solution was Affirmative Action, moving the discriminated minorities from one extreme to the other, negative discrimination to positive discrimination. 

The solution to the problem of gender inequality in the Middle-East and North Africa necessarily passes by such a solution. No one expects that once these countries move to a legal system that recognizes man and women as equals, problems such as the inclusion of women in the labor market suddenly disappear. In such a scenario, the rights of the discriminated party need to be enforced and positive discrimination is most likely the only solution.

The downside of this type of policy is a consequence of its discriminatory nature. These measures may undermine the opportunities of the most qualified to enhance the chances of the elements of the discriminated group, generating economic inefficiencies and, at the very least, situations of clear injustice.

The decision to put these programs in place should be made on the basis of a careful comparison of their costs and benefits. I do not doubt that the “net present value” of such an initiative in extreme situations, such as the ones mentioned in this text, is clearly positive. However, in less extreme cases some skepticism is, at least in my opinion, acceptable. To be more precise, one might wonder if gender quotas make sense in countries where equal access to education and the labor market is ensured and no significant level of prejudice against women exist.

No less important, is the question of when to pull off these programs and how to do it. A study on the elimination of Affirmative Action in two important states of the US[1] may point out that provided that sufficient time elapsed no major costs come from the elimination of these measures. Anyhow, the answer to this question probably depends on the case we are dealing with.

João Morgado nº 510


Card and Krueger (2004) – “Would the Elimination of affirmative action affect highly qualified minority applicants?”

Holzer and Neumark (1999) – “Assessing Affirmative Action.”

Cavalcanti and Tavares (2008) – “Assessing the “Engines of Liberation”: Home Appliances And Female Labor Force Participation.”

Júlio and Tavares (2010) – “The Good, the Bad and the Different: Can Gender Quotas Raise the Quality of Politicians.”

Carla Power – “The Price of Sexism”, Time Magazine, June 4, 2012

[1] Card and Krueger (2004) – “Would the Elimination of affir mative action affect highly qualified minority applicants?”

Poverty in New Zealand: How disparities between Maori and Non-Maori continue to rise

By Charlotte Dyer

Being brought up in New Zealand where equality and fairness are prevalent ideologies demonstrated and up-held by members of society, recent reports regarding increasing poverty rates amongst the nations native people (Maoris’), provides concerning statistics. In particular, Maori children are those being affected the greatest, with evidence painting a comprehensive picture of disability and chronic conditions in Maori young.  The Ministry of Health recently published a report, highlighting that as in statistics for educational achievement and employment rates, the disparities between Maori and the rest of the population are unacceptably wide, with Maori at the bottom of the heap (Otago Daily Times, 2012). Alarming figures also report that just over half of the 200,000 New Zealand children living below the poverty line are Maori and have hardship rates two or three times higher than other groups. They are more likely to live in over-crowded households and are more likely to be admitted to hospital as a result of assault, neglect or maltreatment (Salmond, 2012). As a citizen, it is often hard for me to comprehend that other New Zealander’s are living in such shocking and debilitating circumstances. Several questions must be answered regarding how and why Maori people are facing such a bleak outlook. What has led this particular cohort to be affected so significantly by poverty, and in particular why is Maori are Maori unemployment rates so high? It is an extremely controversial and topical discussion, and particularly reinforces the importance of prevention, primary care and disability support services specifically for Maori children and young people.

Firstly, it is important to take a look at the history of the Maori people to gain a broader understanding and scope of potential factors that have lead this ethnic group to be facing such poverty. The Maori originated with settlers from Eastern Polynesia, arriving in several waves at some time before the 1300 CE. The settlers were isolated for several centuries, thus developing a unique culture with their own language, a rich mythology, distinctive crafts and performing arts. Europeans began arriving in New Zealand from the beginning of the 17th century, brining significant change to the Maori way of life. While an initial relation between the two cultures was amicable, the ambiguity in the translation of the Treaty of Waitangi between the two languages, lead to conflict particularly over land issues. Social upheaval, decades of conflict and epidemics of introduced disease, took a devastating toll on the Maori population, which as a result went into a dramatic decline. Continued cultural isolation and the disproportionate number of Maori’s in New Zealand have become extremely evident over the past decades. This was also combined with Maori receiving lower wage levels compared to non-Maori’s and not being granted pensions until the end of the 20th century. As a result, some Maori people feel a vain nostalgia for a largely lost Polynesian world, and a deep resentment against what they received in exchange. Thus, this has somewhat created a deep divide between cultures, and can be identified as a contentious issue in regards to race relation within New Zealand society (History Today, 2012).  The disparities between Maori and non-Maori are within the context of the Status of Maori’s as indigenous people, the history of land and other resource alienation from Maori during colonisation and development.  This feeling of abandonment and neglect can therefore be seen as a potential underlying factor that has contributed to the position in which a large proportion of Maori face today.

Firstly, employment levels are an area that must be reviewed. Over the last few decades, Maori unemployment has been consistently higher than New Zealand Europeans. Statistics calculated in 2012 show that the unemployment rates for Maori was 13.8% in, which is 6.0% higher than its level five years ago. Compared with the unemployment rate for all people, which was 6.8% in the year to September 2012, the Maori rate has increased more sharply. Refer to Appendix 1. (Ministry of Business Innovation & Employment, 2012).  It is thus interesting to identify what reasons have led Maori’s to be more likely unemployed compared to their non-Maori counterparts. Firstly, one must look to the past to see how it is that the Maori people face significantly higher unemployment rates. The destruction of classical and post-classical Maori society in the nineteenth century left the Maori as a rural, poor, landless, and marginalized people. From the mid twentieth century the Maori began to move to the cities, sucked there in part by the favourable labour markets. However they were not there long enough to bed in before unemployment began to rise to serious levels in the 1970s. Thus they were trapped with a labour market configuration based on rural experiences migrating into a tight employment labour market, when the labour market deteriorated and no longer needed those workers (Easton, 1994). Education levels are another point of reference, with statistics illustrating that only 47% of Maori school-leavers finish school with qualifications higher than NCEA Level One; compared to 74% European and 87% Asian (Wikpedia, 2012).  Some blame the students themselves or their families for this situation, while others argue that other factors, such a low socio-economic status is to blame. Therefore, Maori young are less attractive to employers based on educational and skill qualifications, both of which are associated with better job prospects. As a result, if employed, Maori people are more likely to work in manufacturing and wholesale jobs (refer to Appendix 2) (Ministry of Business Innovation & Employment, 2012). These jobs offer minimum level wages, which barely allows one to cover their basic needs and cost of living.

Research by Brian Easton (1994) indicates that other factors apart from personal characteristics (e.g. skill and education level) affect the low rate of Maori employment compared to non-Maori. Easton reports that only a third of the difference in employment participation between the two cohorts can be explained by differences in recorded personal characteristics. He raises the question of whether the ‘marioness’ factor has any contribution, based on genetic predisposition, attitude differences, and potential employer discrimination. This again brings forth matters concerning race relations, and whether racism, particularly in the work place exists in 21st century New Zealand. In general, statistics show that Maori are ten times more likely to experience racial discrimination in three or more settings than were European participants. Specifically, there is also evidence that Maori face discrimination in the labour market; in getting a job, in the type of job obtained, and the wages paid for a particular type of work (Robson, Cormack, & Cram, 2010).  Take a particular example recently published in a national newspaper; Julia Eru, 20, a part Maori/English student studying hospitality management, put forth several applications for part-time work. She used her original name on the application forms. However, much to her disgust, she received several racial comments from some employers, with one stating “sorry we don’t hire blacks, no offence meant” (Willis, 2009). While this is an extreme case, it highlights that issues surrounding racism are still evident in New Zealand, and must be addressed in accordance to Maori and the labour market.

While employment is only one the tip of the iceberg in relation to issues facing Maori poverty rates, it is an issue that be raised. It can be identified that this is a deadly cycle, where parents or solo-parents, are unable to provide sufficiently for their children if they are un-employed or receiving minimum wages. As a result, these children are more likely to be malnourished, live in worse off conditions, have significant health issues, therefore meaning they are less productive and thus continue to live within the poverty cycle. The New Zealand Government does provide welfare assistance through benefits, however is this enough to ‘break the cycle’? There is evidence to suggest that welfare payments disrupt the natural order of social structure and human incentives, where the greater the level of welfare, the greater the disruption (Mitchell, 2009). In terms of welfare policy, many stand at a crossroad regarding whether they are actually beneficial or not. If the government does not provide welfare, Maori individuals in trouble could be driven into further addiction and dysfunctional behaviour. However, on the other hand others argue that providing more benefits and higher payments will only provide incentives for individuals to put in no effort through accessing easy money.  This is something that the New Zealand Government has taken into consideration, and there is an on-going debate as to what is the right method. Personally, I believe that benefits should still be accessible for all. However, these benefits I feel should be run in accordance with some form of skill training that will eventually allow these individuals to gain some form of employment. Implementing the correct policy is critical in this situation, thus the New Zealand Government must take everything into consideration when making these important decisions.



Easton, B. (1994, November 13). The Maori in the Labour Force. Retrieved November 29, 2012, from Labour Employment Work in NZ:

History Today. (2012). The Maoris in New Zealand History. Retrieved November 29, 2012, from History Today:

Ministry of Business Innovation & Employment. (2012, September). Maori Labour Market Factsheet. Retrieved November 29, 2012, from Labour & Immigration Research Centre:…/lmr-fs-maori-sep12.pdf

Mitchell, L. (2009). Maori Welfare: A Study of Maori Economic and Social Progress. Working Paper, New Zealand Business Rountable.

Otago Daily Times. (2012, March 23). Maori Health and poverty. Retrieved November 28, 2012, from Otago Daily Times:

Robson, B., Cormack, D., & Cram, F. (2010). Social and Economic Indicators. Maori Standards of Health.

Salmond, A. (2012). New report reveals brown social underclass in New Zealand. Retrieved November 28, 2012, from Every Child Counts:

Wikpedia. (2012). Maori People. Retrieved November 29, 2012, from Wikipedia:

Willis, L. (2009, July 24). Job seeker shocked by racist email. Retrieved November 20, 2012, from


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From Dutch Disease to Intergenerational Wealth Transfer – The Case of Norway

In 2011, Norway was the second largest exporter of gas and the seventh largest exporter of oil worldwide, generating revenues that accounted for roughly 21% of the country’s GDP  and 26% of the total government revenues (2010).[1] Ever since the North Sea oil reserves were discovered in 1961 economists raised concerns about the potential negative impact of oil and gas exports on other export industries. Referring to the Dutch Disease theory, they argued that the large resource exports would lead to an appreciation of the Norwegian Krone, which would eventually compromise the competitiveness of, for instance, the manufacturing sector.

ImageImageHowever, the Norwegian Krone constantly floated around seven NOK per USD since the 1980s and manufacturing exports remained fairly stable as well.[2] But the issue that I want to address is not so much concerned with the economic reason why Norway did not really suffer from a Dutch Disease, I rather want to present how Norway prepared for the time after the natural resource exports and how this mechanism seems to perfectly combine economic and social goals. Hence, this blog entry choses a more political perspective and avoids profound economic theory.    

ImageIn fact, Norway addressed this issue by establishing a Petroleum Fund (1990) which since back then collected the export royalties and recently – after the merger with the Norwegian National Insurance Scheme Fund – became the largest sovereign wealth fund worldwide with assets of about $ 664.4 billion, holding one percent of global equity markets.


This fund should however not be confused with a pension fund, since it is not tied to any specific legal liabilities, its objective is rather to “ensure that both present and future generations can benefit from Norway’s petroleum wealth”. According to the 2011 annual report the fund’s management is free to invest into any kind of economically, environmentally and socially sustainable projects in order to prepare for a smooth transition away from a resource dependent economy. Hence, from being a sole investment vehicle to balance out fluctuating income streams from oil and gas exports the fund turned into driver of social development and intergenerational transfer of wealth. Since the fund is entirely managed by the independent Norwegian Central Bank it is not at the government’s disposal and the investment strategy is nowadays monitored by an ethical council which ensures especially the social integrity of the fund.  More than 45 companies have been excluded from the fund’s portfolio due to the violation of ethical standards, including big names such as EADS and Wal-Mart.[3]

The importance of intergenerational “fairness” and sustainable public spending has recently become a hot political and economic issue, especially in the presence of the European sovereign-debt crisis. Of course the situation of Norway is a very specific one, only few countries have comparable export revenues and even less can afford to extensively save capital for future generations. However, it is impressing to see how the management of the fund always resisted – even throughout the recent crisis – to any attempts of the Norwegian political system to allocate more royalties to the state budget instead of to the fund. The recent moves of the Euro Area Group, the European Union and the ECB have shown how “credible” some declarations of independence and sustainability really are and how social interests are ignored in favor of economic ones. Let us all learn a bit more from Norway …


Jan Schöne


[1] U.S. Energy Information Administration 2012

[2] Norwegian Ministry of Trade and Industry 2011; Norges Bank 2012

[3] GPFG Annual Report 2011; Negative Screening and Exclusion List 2012

Trickle Up

There is an estimated 1.4 billion people in the world living in extreme poverty.. One of the organizations who try to help this people who are living with less than $1.25 per day is Trickle Up. Trickle Up tries to provide extreme poor with resources to build sustainable livelihoods and exit poverty. Their goal is to empower poor people to develop their potential and strengthen communities by providing training and seed capital grants for launching or expanding microenterprises in partnership with local agencies.

Trickle Up was founded in 1979. The name came from the theory of “trickle down” economics. “Trickle down” theory stated that investing in business at the highest level of society, the benefits would eventually come or trickle down to the rest of the population. The founders of Trickle Up, Glen and Mildred Robbins Leet, thought differently. After visiting Dominica and seeing firsthand that this theory does not work, and only makes rich people richer and vice versa, they decided to do something about it. They gave $100 as grants to ten people to launch their own microenterprises and provided them with business plans. Leet’s reckoned that nothing empowers an individual to achieve their dreams more than trust and encouragement. They soon started a non-profit organization which provided dealt with poor individuals directly by providing grants and basic training.

Today, Trickle Up serves around 8000 people yearly. Each grant affects five people on average, which means that Trickle Up affected the lives of over 40.000 people all over the world. The organization targets specifically women and people with disabilities, with 90% of the grants being given to women. The targeted people do not have the reach to other ways of micro financing, and for most women that receive their grants, it was the first time ever that they had that opportunity at all.

Trickle Up partners with local organizations that share the same vision, values and mission. The partners help with adapting the program to fit local communities and also allow the delivery of organization’s programs. The partnership’s network has 30 local organizations in five countries: India, Guatemala, Nicaragua, Mali and Burkina Faso.

Trickle Up program consists of three basic inputs:

  • Spark grants
  • Savings groups
  • Skills training.

Spark grants range from $100 to $250. As the target group is extremely poor, Trickle Up offers smaller amounts but as grants and not loans. Most people targeted cannot even qualify for microloans and most would not take the risk of getting a loan as their income is too low and insecure. The grants usually help people start a small business, such as rearing goats or ducks, which often helps them supplement other work activities they do to survive. The idea behind Spark grants is to help extreme poor to diversify their income and to stabilize it. This stability provides them with a base for building assets and surviving through crisis periods when they are out of other sources of income.

Savings groups are designed to help extreme poor in case of emergencies and to provide them with small credit that can bring more security into their lives (for example, a farmer would not need to pre-sell his crops when the prices are lower). Savings groups are voluntary, community based and self-managing groups of 15-25 individuals. They meet on regular basis to contribute to their savings which are maintained as a loan fund from which members can borrow. The maximum loan amount is set by the group as well as the loan terms. In some regions, the members open a bank account while in others that is not the case due to distances and costs. All Trickle Up participants join this program with less than 15% of them having any kind of savings before joining.

The link between education and poverty is already examined, and shows that people who live in extreme poverty usually have low education and practically no business skills. Trickle Up provides livelihood skills training in a way that is accessible and practical to these people. Training are tailored to meet local needs and connected to the livelihood activities of the people (for example, new farming methods to improve crops, how to improve the quality of the product, how to market it, basic business practices such as balancing accounts or how to be competitive, etc.). Members also receive information about Savings groups and health care services available to them as well as awareness-raising on health and hygiene issues.

Trickle Up model has a big success in addressing the problem of extreme poverty. Keep in mind that most of these people do not have proper clothes, every seventh person is constantly hungry and vast majority has only couple, if any, years of formal education. Yet, over 90% of new micro-enterprises survive past the first year with half of the families increasing their spending on education.

If you would like to help their cause, visit Volunteering and internship positions are available and you can always donate money. Donating the difference between iPhone 4 and iPhone 5 can change the life of some family!

Vuk Stojkovic

A change in trade patterns

                As we can read in Bernanke‘s paper „The Global Saving Glut and the U.S. Current Account Deficit“ [1], there is one issue, which still evokes concern among economists and policymakers, namely the U.S. nation’s large and growing current account deficit and the fact of “global imbalances”. This topic is also discussed in an article by David Backus and Thomas Cooley [2]. The following summary is based on these two articles.

                 In the 1920s the capital started to move from developed countries, like the United States and England, to less developed countries, where the capital has been used more productively. The whole 19th century was characterized by these capital flows. But this is no longer true nowadays.  Now the pattern of capital flows has changed. The U.S. is recently experiencing a trade imbalance, in this case imports exceeding exports. The U.S. has become the most notable importer of capital goods.

                But why the pattern of capital flows changed and imports of capital flooded the U.S. and the current account deficit of the U. S. is growing? Here are some reasons, which are important to mention:

  • The capital inflows to some of the developing countries were not always productively used (banking system failed to allocate the funds to projects with high returns, a financial crises, etc.) and so emerging markets of developing countries were forced into a new strategy, which involved shifting from being net importer to being net exporter of capital.
  • The U. S. Dollar is the international reserve currency. Speculations about replacing the dollar by other currencies are not coming true in the near future.
  • The U. S. has one of the most investor-friendly capital markets on the world and an attractive regulatory environment with a low political risk and strong property rights.
  • Because of the well-known liquidity of the U.S. Treasuries, investors did not increase interests rates on the debt during the crisis, even though the U.S. where the starting point of the financial crisis.
  • Demographic development in the U.S. is also very investor-friendly: the number of young and middle-age workers is high. The capital flows rather to the U. S., where aging is slower than in the EU, Japan or China. There population growth is much faster and so there will be more retired people than economically active people.
  • From a trade perspective, the strong dollar made U.S. imports cheap (in terms of dollars) and exports more expensive (in terms of foreign currencies) which increases the trade imbalance.

               Some people are blaming these capital flows for the financial crisis and call the global imbalance unsustainable. Therefore it is really important to take global imbalances into consideration. As U.S. Treasury Secretary Henry Paulson said: “If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excess, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitally going forward.” [2]


Soňa Dereniková

Nova SBE


[1] Ben S. BERNANKE: ”The Global Saving Glut and the U.S. Current Account Deficit”, March 2005, The Federal Reserve Board,

[2] David BACKUS, Thomas COOLEY: “Global ‘Imbalances’ and the Crisis“, January 2010, The Wall Streeet Journal.

A Spot in the Heart of Europe

The sovereign Debt crisis in Europe is making the headlines almost every day now. It started in the peripheral countries and is now spreading to countries like Spain and Italy. Far from being over, this crisis now approaches L’Hexagone.

Up until now, the debt crisis seemed to be exclusive of some Eurozone countries. In fact, both Germany and France, the two biggest economies in the Eurozone, still finance themselves at low interest rates, Germany’s yield being negative in real terms – considered a secure and risk-free asset – and France’s being very close to zero. Aside the sustainability issue (is the current spread in financing costs in the same monetary union sustainable?), a more pressing question arises: is EU’s core really immune from this debt crisis?

It might not be, considering the recent developments. After Standard & Poor’s, Moody’s downgraded the French sovereign debt rating from its triple A, stating that “persistent structural economic challenges” threaten economic growth and that the “rigidities in labour and services markets” are causing France’s  “sustained loss of competitiveness  and the gradual erosion of its export-oriented industrial base”.

In fact, in modern France, there have been some free-market successes and economic glories alongside many situations of excessive control and important failures.  France is the world fifth-biggest economy, one of the biggest exporters and a primary destiny of foreign direct investment, not to mention that it has a favorable demographic outlook with a 2.0 births per women and a positive net migration. Even though, since 1999, French economy was neither brilliant nor disastrous, which is more obvious after the beginning of the Euro, as the tempting cure of devaluation was no longer available and France was given no other choice but to rely heavily on public spending to support economic growth.

The result is clear: France is one of the most public spending dependent economies in Europe. Currently, it represents almost 57% of GDP, with public debt over 90% of GDP (and rising) and a-persistent budget deficit. Growth has stalled and the economy is heading for its second recession in five years.

The high social charges and the very strict labour-market regulation contribute to unemployment being over 10% (with youth employment close to 25%). Moreover the erosion of competitiveness is undeniable: in 1999 labour costs were below German ones and France had a current account surplus, which is no longer the case. Obviously the excessive taxation on wealth, income and profits and the heavy regulation worsen this scenario, discouraging entrepreneurial efforts.

Mr. Hollande and his government have announced some budget cuts and a reform in the labour market  but fail to realize that these might be too little too late,  probably helding back some pressing reforms due to political reasons.

France economic performance is somehow fragile and if no credible policy changes occur, the markets can start pressing France, as they did with other European countries in the recent past. As The Economist points out, there is “so much to do and so little time”, at any time soon the expectations about France solvency may change and the consequences of a French collapse may be too big to be controlled.


Main Source: The Economist – France: Special Report

Bruno Carvalho

European Sovereign Debt Crisis – Which path to follow next?


With the outburst of the 2008 crisis, also came along the problem of the European countries sovereign debt. Countries like Portugal, Greece or Spain rapidly increased their debt-to GDP ratio and started to have bigger and bigger deficits (following a Keynesian policy), as a way to respond to the beginning of the crisis, but the real problem for those countries arrived by 2010. By that time, creditors started to doubt about the possibilities of those countries repaying their debts. As a consequence, yields on their sovereign debts started to increase, making impossible for some of the European countries to continue paying their debts, especially the “periphery” ones. Confidence was decreasing day by day!

So as sovereign debt bonds interest rates were increasing rapidly, the situation became unsustainable. Countries like Portugal or Greece asked for international help so that they could have enough funds, not only for them to use in their home country but also to pay to their creditors. But with such help also came very harsh austerity measures in order to regain fiscal consolidation and to give them the possibility of returning to the international markets as soon as possible. But the question here is: are these heavy austerity measures the real solution for the European countries?

In the beginning of the euro zone crisis the main response was austerity. The huge debts of these countries (both private and public) needed to be contained with credible austere fiscal and monetary policies adding to the creation of structural measures. These measures were especially regarding the long-run future.

As we already know, such responses also had their negative consequences. Economic growth in euro zone started to decrease abruptly and unemployment reached to record levels in some of these countries. We can see that although the main priority should be containing debt, measures that restore economic growth and create job opportunities should also be taken into account. So we should not only be concerned with the economy’s long-run but also create measures regarding the short-run.

There is no general consensus about which way to follow but a mix of both visions should be considered, an opinion also defended by the IMF manager director Christine Lagarde; “On the Fund’s part, we are favorably considering that this be done in as timely and flexible a manner as possible: slowing the pace of fiscal adjustment where needed; focusing on measures rather than targets; and, above all, keeping the emphasis not just on austerity, but also on growth as we believe that the two can be reconciled and should not be mutually exclusive.”

Independently of the path policy makers choose, we know that the next few years will be long and painful but nevertheless long-run and short-run stability must always be on our minds so that such events like the ones happening nowadays don’t repeat again.


Renato Poirier






The time to be different

The concept of the liquidity trap – first discussed by Keynes, but only named this way in the context of the Great Depression – is defined as a situation in which, because nominal interest rates are at or near zero, investors are indifferent between holding bonds and money and, as a consequence, monetary policy is ineffective at boosting demand[1] Or, putting it differently, a country is in a liquidity trap when conventional open-market operations — purchases of short-term government debt by the central bank — have lost traction, because short-term rates are too low[2]

Despite its major role in the 30s, the liquidity trap has since been forgotten and perceived both as a memory and a subject of economic research. The general feeling was that a liquidity trap could not and would not happen again.

However, according to Krugman, essentially the whole advanced world – which accounts for 70 percent of world GDP at market prices – is in a liquidity trap. And, in fact, recent evidence showed he is probably right. But let’s go back to 1998 first.

A few years after the burst of the Japanese crisis, Krugman wrote a paper recommending a new and provocative solution for this economic situation. After arguing that the conventional remedies wouldn’t work, he suggested that policymakers facing a liquidity trap should engage in sustained monetary expansion, that is, credibly promise to be irresponsible, to seek a higher future price level in order to decrease real interest rates and boost the economy.

Naturally, many voices have raised against his solution and the arguments most frequently used were the fear of depreciation – which could lead to even greater economic turmoil among the Asian countries -, uncontrollable high (and rising) inflation and capital outflows.

When I first read the paper, my first thought was: “here he goes again… Krugman being Krugman”. Despite my still limited macroeconomic knowledge, I also suffer(ed) from that past decade’s mania nurtured by Germany that inflation is bad and Central Banks should try to control it. So a proposal like his sounded completely non sense.

But let’s look at the facts:

It is quite consensual that the United States are in a liquidity trap. Bernanke attempted to face it with the quantitative easing policy, but despite its slight success the problem was not solved. President Obama also attempted one of the biggest Keynesian stimulus programs of the past years, but, again, it only had minimal effect.

Should we then drop our hands and wait for worse times to come? Is accepting the institutions’ inability the only solution?

Given this – also not appealing – alternative, maybe inflation isn’t that bad after all.  When everything else has failed, maybe it is time to let new alternatives come into action and, even though Krugman’s may not be the best one, it is probably the only left.

The ineffectiveness of monetary policy does not invalidate central bank’s action and there is still scope for credible commitments to keep monetary policy easy in the future, when the economy is no longer at the zero lower bound. Creating higher inflation expectations may not be easy for responsible countries like the United States, but it surely is not impossible.

Moreover, we cannot disregard fiscal policy on the basis of the limited impact of Obama’s almost $800bn stimulus package. This does not prove that Keynes was wrong in the first place. According to Krugman, the only problem with this policy was that it was not enough. Almost half went on tax cuts, and most of the remaining went on unemployment and other social benefits. Actual infrastructure spending accounted for less than $100bn and, as Krugman warned in 1998, “by going with a half-baked stimulus, you’re going to discredit the idea of stimulus without saving the economy.” And, unfortunately, that was exactly what happened.

What then should America (and probably Europe) do now, with both fiscal and monetary policy falling short? As Krugman suggested, I increasingly believe that the answer is to campaign on both fronts. On one hand, we have to convince influential players that austerity is not the way and increase fiscal stimulus; on the other hand, the Fed (or the CBE) needs to start signaling its willingness to see more inflation before it raises interest rates.

Clearly, this is the time to be different.

Ana Lemos Gomes

[1] Kathryn M. Dominguez

[2] Paul Krugman

QE? High level of indebtedness? Risk of default? Not for Brazil

Some elements are common to the adverse economic phase experienced by developed economies such as the USA and the Euro Area (EA) in current days. As a consequence of the attempt of a sharp reduction in public deficit – which is indispensable, given the imminent risk of default of some European Countries – both the USA and the EA have been suffering with historically high unemployment rates. In addition, because both economies has fell in the liquidity trap, Central Banks have been considering to implement non-conventional monetary measures which the outcomes are quite doubtful– such as the Quantitative easing (QE), already adopted by the Federal Reserve – in order to provide further stimulus for credit grant.

Brazil’s current economic situation differs greatly from those faced by developed countries. Unemployment rate has reached its lowest level over the past decades. Since the current public deficit is moderated level (see graph 1), Government has been adopting an aggressive fiscal policy through both increase on expenditures (pulled by a huge amount of investments in infrastructure required for hosting the Football World Cup and the Olympic Games in the following years) and reduction in some of it sources of revenue (recently the government announced a plan for reducing the energy tariff in more than 20%). Besides that, companies which intend to perform long run investments related to social, regional and environmental can, more than ever, have access to subsidized interest rates, through BNDES (“Banco Nacional de Desenvolvimento Econômico e Social”). Another outstanding performance of the Brazilians’s economy can be noticed in soundness and efficiency of the banking system: ratio credit/GDP achieved the historical value of 51% last September, which represents a growth of about 100% in the last 12 years[1]. Undeniably, this is one factor which enabled Brazil’s economy to reach the sixth highest GDP in the world last year.

Graph 1 – Public Deficit/GDP – Brazil


Source: Trading Economics


The fact that Brazil is an emerging economy with potential capability of sustaining a persistent growth does not exempt it of facing adversities. Even though Brazilian economy is far beyond the liquidity trap as the USA and EU – and so, it makes no sense to conceive implementation of QE or any unconventional measure – Central Bank has been establishing a monetary policy in the sense to provide liquidity for the economy. The continuous decrease in the interest rate set by the Central Bank is a measure to reverse the low rates of economic growth of the last quarters caused by the worsening of global crisis.

Additionally to the modest level of economic growth, Brazil has to deal with a historical problem, which is absent in the developed economies here analyzed: inflation. Fueled by the historical levels of interest rate and unemployment, inflation rate has been persistently above 4.5 % yearly, which is the core of inflation target set by the Central Bank since 2005. For next year, though, markets are not confident that inflation can reduce substantially. According to Focus Bulletin[1], in 2013 the price level is predicted to increase in 5.35%.



Source: Brazil’s Central Bank


To sum up, even though Brazil, the USA and EU have been struggling to keep positive rates of economic growth in scenario of worldwide crisis, the challenges which Brazil has to deal with in the close future are distinct to those faced by developed economies. However, the possibility of the Brazilian government of promoting fiscal and monetary stimulus more effective places the country in a more comfortable situation for the next years.



(1)    Boletim Foucs, Brazil’s Central Bank

(2)    Trading Economics

Rubens Moura

[1] Index which computes market expectations, held by Brazil’s Central Bank


Poverty of the eldest

We are all moved by child poverty, because children are vulnerable and they are dependent on the adults. It is totally unfair to be born and to grow up in poor conditions. This is especially the case because it has a lot of impacts on the entire child’s life, which is totally unfair and revolting. But let’s also be focused on another part of the population that is vulnerable: the elderly (people aged 65 and above).

For instance, “today,one out of every 6 elderly Americans lives below the federal poverty line”.

This proportion is higher than the proportion of all Americans in poverty, which means that the elders represent a population at risk regarding poverty. Other examples: in France, there are more than one million retirees live below the poverty line, which is almost 10% of the all French retirees.  

Being poor when elder is a significant cause for concern because it has direct impact on life expectancy (logically, being poor, people spend less money for their medicines). Most part of the population cannot afford a retirement home. In the United States, the average annual cost of a nursing home resident is $70,000. In France, the average month cost of retirement home is between 1,800 € and 2,000 € which represents a huge cost for the families, in the extent that the average income per capita is (according to INSEE, French statistic institute) 2082 €. All the more so as, retirees receive less money than the active. Indeed, on average, retirees receive 1,216 € per month. However, 600,000 retirees receive the “minimum old-age pension” which amounts to 777.16 € per month (in France, the poverty line below 60% of the equivalized median family income is 900 €).

What is most worrisome regarding to the elders is that they are also socially isolated out of the society: sometimes they are really lonely and abandoned by their family. A case in point is the 2003 European heat wave which has triggered off a lot of seniors’ deaths. For instance, in France, there were 14,802 heat-related deaths (mostly among the elderly) during the heat wave, according to the French National Institute of Health.

This phenomenon is getting worse because we assist nowadays to the “growing impoverishment” of this part of the population. One of the reason explaining this phenomenon is the impact of ageing of the population (‘Senior population boom’) in parallel with the fact that the Western States are no more able to support and finance the welfare state. Another explanation is that everywhere in Western societies there is an evolution of family structure which leads to more dislocations and to the isolation of the elders.

To conclude, I personally believe that we underestimate the elder poverty issue and the problem of elder poverty is as important as child poverty. Everybody should have a decent end of life. Thus, a more solidarity system should be implemented everywhere it is necessary, and Western governments should be better prepared to deal with the “senior population boom”.







The Balassa-Samuelson effect for China

The Balassa-Samuelson effect was first theorized independently by Bela Balassa and Paul Samuelson in 1964. This theory explains that the real exchange rate appreciates due to an increase in the productivity of the tradable goods sector. The mechanism works as follows: since the price of tradable goods must be equal among countries (Law of One Price), when there is an increase in the productivity in the tradables sector, this will result in an increase in the wage rate of this sector (from the profit maximization condition). Assuming (perfect) mobility between the two sectors, this implies that the wage rate must be equal across sectors, so the wage level will also increase in the non-tradables sector. As a consequence, this will lead to an increase in the price of these goods. Hence, there will be an appreciation of the real exchange rate.

Thus, in this case, the appreciation of the real exchange rate reflects an increase in the productivity. A result from this theory is that inflation is naturally part of the growing process of a country that experiences large productivity gains. What does this imply about China?


China is recognized as a fast-growing economy, so we should observe a real exchange rate appreciation of the Renminbi. However, this phenomenon is not observed, reason why China is accused of artificially undervalue its currency. Therefore, an article of “The Economist” claims that China should “welcome” inflation, because its price level is actually very low for its high economic growth when compared to other fast-growing economies, as the graph shows:


  (Source: The Economist)

However, empirical evidence of the Balassa-Samuelson effect on China is ambiguous. Indeed, according to some studies surveyed by Dunaway and Li (2005), the real exchange rate of the Renminbi has not appreciated in line with what Balassa-Samuelson effect predicts. The undervaluation estimated by these studies varies between 5% and 49%, which is quite a large interval. Indeed, the author points to the fact that the effect may be overstating the undervaluation. First, the assumption of full employment or a very high level of employment is not verified in China. This is a necessary assumption for the theory to hold since it ensures that wages increase when productivity in the tradables sector rises. Second, due to estimation specifications, changes in productivity must be strongly linked with the changes in the CPI/ PPI ratio for the theory to hold. The authors claim that this link might be weak for the Chinese case because several prices considered in the CPI are under the control of the government or are mismeasured. Thus, the link between wages and prices in China does not work as predicted by the Balassa-Samuelson effect.


Therefore, in fact, there is no empirical evidence of a strong Balassa-Samuelson effect for China. Nevertheless, it still seems that Renminbi is undervalued as Paul Krugman puts it:

“(…) you can disregard people who offer calculations suggesting that by some criterion – say, Balassa-Samuelson adjusted purchasing power parity – the renminbi isn’t undervalued. We know that the renminbi is grossly undervalued, not through questionable estimates that can be endlessly debated, but on a PPE (proof of the pudding is in the eating) basis: the current value of the renminbi is consistent with massive artificial capital export, and that’s that.”

Sofia Amaral, #538


Miguel Lebre de Freitas, Notes “Políticas Macroeconómicas”

Dunaway, Steven and Xiangming Li (2005), “Estimating China’s “Equilibrium” Real Exchange Rate”, IMF Working Paper.



Capital flows and the European experience

The last decades have been market with several episodes of large capital inflows to developing and emerging market economies. But what is usually seen as a welcome phenomenon; which can rise investment, consumption and boost growth; it is also a double-edged sword, with several unpleasant side effects. All this cases have been largely documented in the literature for developing and emerging countries. Instead, let’s turn our focus to advanced and middle-income economies, and the Europe experience.

The introduction of the euro made capital flows frictionless, and money began to flow from the core advanced economies of Europe to countries in the periphery (Greece, Ireland, Spain and Portugal). The same way NAFTA helped to spark a surge in capital flows from the US to Mexico in early 1990s.

 In the literature there are usually three main explanations for the capital inflows: push factors, pull factors and financial liberalization. Firstly, the pull idea focuses on the recipient country of the flows, for example, a positive shock specific to a country that help to attract capital from abroad. Secondly, the push factors are originated by lending countries where investors convinced by the risk-return features of the assets pushed money in to the more vibrant economies of the periphery. So if peripheral countries have scope to grow quickly than rich countries, they offer the prospect of higher returns on investment during the process of caching up. Finally, an improvement on the degree of financial liberalization reduces the costs of international borrowing and lending, contributing to capital flows expansions.

It is not always easy to distinguish which factor plays the main role, probably all three may be happening at the same time. This is most likely the case in Europe. However, if we believe that the pull factors have the strongest effect, we would expect an expansion on the demand for external funds and therefore an increase in the interest rate in the country. While on the other hand, if we believe on the pull or degree of financial liberalization superior effect the expected result would be exactly the opposite: an expansion of the supply of external funds and a decrease in the interest rate.  And that was exactly what happened, the nominal interest rate in the periphery declined from 1999 to 2006, suggesting that the pull and financial integration factors as the main explanation.  


Although capital inflows were usually perceived in Europe as a good thing, a catching up of the peripheral countries, we know that this may not be the case. Specially if countries face domestic distortions, investment incentives may not be aligned with social welfare leading to unfortunate choice of investments. On the other hand, such inflows carry the double danger of domestic overheating and a possible outflow of capitals in a case of confidence decline.

For the receiving country, the capital inflows work as an expansionary shock to the aggregate demand, which may lead to the domestic overheating hypothesis. Under a flexible exchange rate scheme, we would expect a nominal appreciation of the exchange rate, which would help to counteract the effects of the overheating economy. However, this is clearly not an option for the Eurozone countries.

For the peripheral countries, not only economies started overheating, but since countries individually were working under fixed exchange rate regime a nominal appreciation was not possible, and inflationary pressures started to kick in. The 2008 financial crisis brought the ultimate unpleasant consequence of capital inflows, due to the dramatic loss of confidence countries experience a reversal of capital flows. (While peripheral countries way have conducted policies that contributed to the crisis, the odds were already against them to begin with.)

As a final remark, Europe’s experience may reflect several unique features of historical and geographical linkages, and a very particular system of financial integration, nevertheless it can provide strong insight on capital inflows effects in developed and middle-income countries.

Rute Caeiro #509



Relaxing Financial Constraints

Joao Firmino and Francisco Abreu, recently discussed in this platform the effects of the current crisis on the state of our financial system. The first one focused on the forecasts for the Portuguese fiscal multiplier and its relation with the financial system ability to provide credit to economic agents. Rather the second discussed the mechanisms behind our current constraint financial system. But both agree on the fact the current situation of the Portuguese financial system; will amplify the negative effects on this painful crisis.

Here I tend to move a step further, and present some measures that could be applied to decrease these credit constraints, which may ultimately help to boost our economy, and therefore decrease our debt burden.

The European Central Bank [ECB] has become impotent to boost the economy. One justification relies on the fact that, since ECB pays interest on the private bank’s excess reserve, its expansionary policies fade away because it became less costly, for banks to hold these huge excess reserves, instead of lending them, which in turn decrease the stock of bank lending. Thus, ECB is increasing its monetary base without a followed increase in money supply[1]

The limitation of the ECB to act has left European countries without many strategies. And we may only depend on measures that can be taken by European governments that focus to ease the access to credit and that in the same way decrease the uncertainty of the financial system. Such measures by allowing individual agents to, again, use the financial system as an instrument to smooth consumption, will allow for individuals to restore their financial situation which may have positive impacts on consumption, investment, employment and therefore increase real GDP. Moreover, these measures may increase money demand, reducing inflationary pressures and ultimately increase aggregate demand. Also, if you restore the confidence in the financial system, and use strategies that change the bank’s incentives to hold huge excess reserves, through its effect on the money multiplier, money supply may also respond positively[2].

Frainçois Hollande is a strong supporter of the revival of the role of the State in reversing the vicious spiral of economic decline. He strongly defends the reliance on banking system to feed the French industry[3], as a way to promote economic growth, specifically on SMES. One of his proposals is to create an industrial savings bank devoted to small and medium enterprises[4][5]. Moreover in this troubled economic environment where French Banks are taking an active role in loan mediation mechanism aimed at finding solutions to cash-flow problems and financing difficulties potentially encountered by companies. Their lack of lending stock has leaded the Government, to use its Strategic Investment Fund, as a way to finance SMEs that have been undermined by the economic crisis[6]. Both measures have been shown to yield positive results.  All in all, these measures by reducing intermediation costs, decrease credit constraints for SMEs and increase lending incentives, which may in turn decrease the excess reserves of private banks, and through its impact on the money multiplier increase money supply, and therefore boost economic growth. 

I also believe that fiscal policy is the obvious anti-depression tool to use. In Portugal, SMEs are the core of our non-financial private sector, accounted to be 99,7% in 2008[7]. Furthermore, in 2012 it was estimated that each day 17 small firms close doors[8]. Therefore, if our Government doesn’t find a way to relax credit constraints, we may be trapped in a long and severe crisis.    

Adriana Ferro, 511


Bernanke, B., (1983). Non-monetary Effects of the Financial Crisis in the Propagation of the Great Depression







[2] Galindo, Arturo, Fabio Schiantarelli (2002). Credit Constraints in Latin America: An overview of the Micro Evidence. Inter-American Development Bank Working paper 472

[7] Instituto Nacional de Estatistica (2010), Estudos sobre Estatísticas Estruturais das Empresas

Natural rate of unemployment versus hysteresis hypothesis on unemployment

In a classical way of thinking the economic term natural rate of unemployment has as underlying assumption that the rate of unemployment have a “constant” equilibrium value that will oscillate much like the output gap.  The natural rate of unemployment is then the equilibrium rate, which would be observable when the economy is at full employment output.

In the early 60’s when this concept was forged, disagreements on the validity of this concepts arise, and then start growing, when with the first oil chock in many OECD countries almost tripled unemployment rate and didn’t managed to decrease it considerably – A equilibrium unemployment rate was not to be found.

In 1986 Blanchard and summers approach an idea of hysteresis first introduced by Phelps in 72, with their insiders – outsiders model. The hysteresis idea contrasts with the natural rate of unemployment – while this second assumes stability over the time, (assuming therefore that the rate of unemployment is a stationary one), the hysteresis hypothesis states that this is a non stationary variable, specifically a unit root, which imply that a momentarily shock will have permanent effects in the unemployment rate, meaning that the unemployment rate is explained by its past values.

As it was said before this hypothesis came with the increasing unemployment rate in most of the European countries since the 70’s. As an example the following chart shows the moving average to 5 years, of the Portuguese unemployment rate since 1960’s until 2011, with the inclusion of perspectives until 2014:hfdoihfdoih

As it is observable there is an increasing tendency on the unemployment rate growth. Also it is observable that the shocks suffered by Portugal in the mid 70’s are quite visible (the end of the war, with the end of the regime and the oil chock all together), but even when they come down in the 80’s the never retracted as much as the increased, and with the crisis a new shock, even greater is observed.

The extended literature that appeared after the Blanchard and Summers paper backed so far the hysteresis hypothesis empirically, although some of the reason for it is maybe due to the lack of strong tests in this part of econometrics. To resolve this, stronger tests that have been developed, have been applied to this particular problem, and showed the same results. Although there is still some “place” for flaws in studies, the hysteresis hypothesis, that came to deny the natural rate of unemployment, is strongly backed up by empirical evidence.

Given this it is of strong importance to adopt contra-cyclical policies, as the unemployment rate, otherwise, may rise forever. This hypothesis highlight the need of careful policymaking – a mistake today has much more impact with hysteresis that without.

Knut Roed – Unemployment hysteresis- Macro evidence from 16 OECD Countries

Ameco data base

Maria Roque Martins nº540