0. INTRODUCTION







0.1. Welcome to the blog of our institute.



0.2. As reading the material below remember that:
“The opinions expressed in the Institute for Economic Freedom (Institute) project are those of the author(s) and do not necessarily reflect the views of any financial supporters of the Institute or the website and project”.

0.3. The objective of the Institute is to promote economic freedom, economic democracy. That is, marketing (of goods, services, labor) characterized by:


0.3.1. private property;
0.3.2. competition; and
0.3.3. based on merit (quality; price; delivery).

0.4 Thus we oppose:

0.4.1. the ever growing state and taxes;
0.4.2. trusts, oligopolies and the several barriers to competition; and
0.4.3. corruption.

 
0.5. We are also in favor of:

0.5.1. personal responsibility (since that is the price of freedom); and
0.5.2. A culture of excellency (to lift markets upward).

0.6. In short: we aim at complementing the political freedom (obtained with the April 1974 revolution), with greater economic freedom (a field where - as shown below - there is a long way for Portugal to go).

0.7. And thus solving the present paradox that:

0.7.1 The Portuguese (2% of the working population every year), emigrate to countries with greater economic freedom than Portugal (including the Scandinavian countries) - with the exceptions of Angola, whose exports are 98,2% raw materials, Mozambique, Brazil, Italy, South Africa and France.








0.8. So, let us now turn to the content of our blog, which, for the pleasure of your reading is divided into five parts:

First: the need for greater economic freedom;

Second: Some data on the Portuguese economy;

Third: The uncomplete revolution;

Fourth: The Institute newsletter;

Fifth: Articles on economic freedom related issues; and

Sixth: Some information of the activities of the Institute.


0.9. We hope that you enjoy our blog:

0.9.1. And please remember:
0.9.1.1. If you wish to see the diagrams and figures of our blog in a larger size, please click on top of each figure/diagram;

0.9.1.2. If you use any of our material, do not forget to mention our institute; and

0.9.1.3. If you wish to receive our newsletter, or if you have any suggestion or enquiry, we can be contacted at economicfreedom@mail.telepac.pt.

0.9.2. Thank you for visiting us and remember:







I. THE NEED FOR ECONOMIC FREEDOM



1.1. First: there is a strong correlation between economic freedom and development, be it evaluated in small samples and countries (diagram 1.1.1 below) or large samples and all types of countries (diagram 1.1.2 and 1.1.3 below):












1.2. Second: Portugal has been decreasing in the ranking of economic freedom:


1.2.1 Portugal lost eighteen places from 2004 to 2016;



1.2.2 and Portugal lost 26 places since 1995.





1.3. And (third) as a consequence:

1.3.1. Portugal is at the European bottom in terms of economic freedom:



        1.3.2. Has also been losing ranking in competitiveness:



                     1.3.2.1 Since 2004 lost four places;





                  1.3.2.2 And since 1997 Portugal lost also four places.






     1.3.3. Finally on transparency Portugal has also been losing ranking:




1.3.4. Indeed there is a strong correlation among all three variables: economic freedom; competitiveness; and transparency.





1.3.5. As well as, between economic freedom, and Gross Domestic Product per capita (in top of competitiveness).






1.3.6. Thus, it should come as no surprise the sluggish economic situation of Portugal (on this see next section, please).
II. SOME DATA ON THE PORTUGUESE ECONOMY OVER THREE DECADES AFTER APRIL 1974












III. THE UNCOMPLETE REVOLUTION


3.1 In 1974 the Portuguese revolution brought political freedom to the country.

3.2 But, that freedom was not extended to the economic sector.

3.3 Consequently:



3.3.1 In the 41 years since the revolution, Portuguese convergence towards the European Union has been very slow (only 14,9%).



3.3.2 and pessimism prevails: when asked if their economic situation will be better in the next twelve months, only 16% of the Portuguese answer positively.


IV. INSTITUTE NEWSLETTERS

4.1. Until now our institute has published eighteen newsletters, one in October and another in December 2008, a third in March 2009, a fourth in June 2009, a fifth in November 2009, a sixth in June 2010, a seventh in December 2010, an eighth  in July 2011, ninth in January 2012, a tenth in June 2012, a eleventh in January 2013, a twelfth in August 2013, a thirteenth in February 2014, a fourteenth in September 2014, a fifteenth in February 2015, a sixteenth in July 2015, a seventeen in January 2016  and our most recent in June 2016 (see all covers below).




Newsletter - October 2008






Newsletter - December 2008




Newsletter - March 2009






Newsletter - June 2009






Newsletter - November 2009






Newsletter - June 2010





Newsletter - Fall/Winter 2010



Newsletter - Spring/Summer 2011




Newsletter - Autumn/Winter 2011/12



Newsletter - Spring/Summer 2012



Newsletter - Autumn/Winter 2012/13



Newsletter - Summer 2013





Newsletter - Winter 2013/14





Newsletter - Summer 2014




Newsletter - Winter 2015





Newsletter - Summer 2015



Newsletter - Winter 2015/2016




                         Newsletter - Summer 2016


4.2. If you wish to receive the newsletter periodically, please contact us at



economicfreedom@mail.telepac.pt





V. ARTICLES ON ECONOMIC FREEDOM RELATED ISSUES

In this section we introduce you to the seven themes (whose data we continuously update):

5.1. The non competitiveness of the European Union;
5.2. Lessons from the USA for the European economic convergence;
5.3. Comparing different pharmaceutical models within Europe; 5.4. The second revolution in need in Portugal: the revolution work. Not more, but better, work: thus Delivering the Letter to Garcia (fourth article below);
5.5. Socialism (in american politics), the meaning of economic freedom and the empirical evidence of its power from Europe;
5.6. Interview about the Portuguese Institute of Economic Freedom, published in the newspaper Vida Económica in September 2008; 

5.7 Portugal has lack of economic freedom, interview published in the newspaper Vida Económica, May 2011; and
5.8 Lack of economic freedom is the main problem of Greece, published in the newspaper Vida Económica em Fevereiro, 2015














5.1. THE NON COMPETITIVENESS OF THE EUROPEAN UNION


Introduction

Today, one mentions frequently the failure of the Lisbon Agenda, that is the European Union Prime Ministers meeting in Lisbon (2000), which “decided” to make of Europe the most competitive world region, within ten years.

We shall divide the numbers of such failure into three categories:
- the result (gross domestic product per capita)
- the immediate causes; and
- the initial/original causes (the causes of the causes).


 The result

Figure one presents the Gross Domestic Product (GDP) per capita of the three major economic blocks: U.S.A.; E.U.; and Japan.

While the world average is 14364 dollars, the Japan average is almost 2 times (196%) that value; EU-15 is 217% and the USA is 294% (2,9 times).






Thus, as figure two shows, the EU per capita is 26,4% below the USA level and Japan is 33,6% below. So Europe is per capita 5,8% better off than Japan.

There are further bad news for Europe: at the rates of growth of the last 36 years (1980-2016), they will never reach the USA average.




So, not only are Europe and Japan poorer than the USA, but also they are not converging and will never catch up USA.

Why? To find the causes, let’s first look into the immediate causes.

The (immediate) causes


The Gross Domestic Product (GDP) per capita is the product of four variables:

1 – The GDP per hour (productivity per hour); multiplied by
2 – The number of hours worked; multiplied by
3 – How many people are in the labour market (either working or looking for a job: the active population); and multiplied by
4 – The rate of employment (100% minus the rate of unemployment).

What happens is that the USA are better off than Europe, regarding three variables. Indeed, Americans:
1 – Produce more per hour;
2 – Work longer hours; and enjoy
3 - Lower rates of unemployment.

And so, it is the joint effect of the variables that make americans enjoy a standard of life 36% superior to europeans.

Indeed, in terms of productivity per hour (figure three), europeans are 15% less productive than americans and Japanese are 39% below.




Then, not only do americans produce more per hour, but also they work longer hours (figure four): 1743 per year against 1571 in the EU, less 10% in average.






But, then the USA presents a smaller % of working force: 49,6% against 49,9% in Europe. The champion here is Japan (53,2%): figure five.




And finally (figure six) the rate of unemployment is lower in the USA (5,3%=100%-94,7%), than in Europe (9,8%=100%-90,2%). Again, it is minimal in Japan: 3,4%.





So, when we ask ourselves: why are the USA so much better off than Europe, the answer must be: because America
1st – Is more productive per hour;
2nd – Works more hours; and
3rd – Has more people working (due to a lower % of unemployment).

Here arises a new question. Why is it so? Does this happen by accident, or are there some root (initial) causes? And in such a case, which are they? The answer respects to the initial causes.

The initial (original) causes

No, it is no accident that the USA works better and more than Europeans. The reasons are immersed in US society and can be found in the fabrics of its population and culture.

Let us concentrate in just a few.

First: Americans are younger than Europeans. The median average is 37,8 years against 41,9 years in Europe and 46,5 years in Japan.

Second: a larger % of women are in the active (working) population in the USA than in Europe or Japan (46,9% against 46,2% and 43,3%). That is important. It happens that women are different (not better, not worse) from men. So they bring to the working place different attitudes and qualities. And diversity is a source of wealth.

Third: then, the American mind is… different. That is what Alexis de Tocqueville in the 19th century called: the American excepcionalism.

Americans are more motivated. When asked (by the Pew Research Centre): are you very proud of your nationality? 56,1% of Americans answer yes.

The Dutch? Only 20,7%. Japanese? 25,1%. Germans? 23,7% (approximately one in five). This is obviously important. It is harder to be motivated, when you believe you were born in the wrong place.

Fourth: Americans believe in themselves. They have self-confidence. When asked (again, by the Pew Research Centre): does your success depend upon yourself?, 57% of Americans answer yes. But in Europe only 42% agree (57% say it all has to do with forces “outside” their control). So, Americans are inner directed. Europeans are outer directed.

Fifth: the USA enjoys more freedom. Commercial freedom. Fiscal freedom (lower taxes). Investment freedom (openness to foreign investment). Market freedom (lower regulation and lower black market). Property freedom (stronger property laws). Banking and prices freedom.

And freedom is at the root of economic development. The Heritage Foundation (in Washington) prepares a ranking of the countries with more and less economic freedom.

The IMD (in Switzerland) has another ranking, this time of the more and less economically competitive countries.

How both rankings compare? Not surprisingly the countries which top one list, also top the other: Singapore; Hong Kong and of course the USA; also countries at the bottom in the both the economic freedom list and the competitiveness list tend to be the same. The statistical correlation is +0,67 (significant at a 0% level), indicating that beyond any doubt: freedom works.

As it happens, some European Union countries are well placed in both lists (Luxembourg; Denmark; Holland. But then others destroy the average: France, Italy, and of course, Greece and Portugal).

Also Europe is worse off in yearly migration (% of immigration minus emigration in the total population): 2,2% in Europe, against 3,9% in the USA and 0% in Japan.

In short, it is (among other variables) the conjunction of A) youth; B) diversity (higher in women but lower in migration); C) motivation; D) self-reliance; and E) freedom, which explains that Americans are nearly 20% more productive than Europeans (the GDP per capita is 36% above – figures two and three before).

Conclusion

The creation of the Euro currency raised the expectations regarding the Competitiveness of the European Union. That was further enhanced by the Lisbon Summit in 2000 when the Prime Ministers of all EU-15 countries announced their aim of making of Europe, within 10 years, the world most competitive region.

Reality however is far different from, either the citizens expectations, or the governments announcements.

Indeed, not only is Europe far from the USA, in terms of competitiveness, but also (what is far more serious for Europe), it is not closing the gap (figure two).

And so, if the past (1980-2015) is prologue, EU 15 will never reach the GDP per capita of the USA.

What that means? Basically that more of the same is not the solution for Europe. And so, structural reforms are necessary. Even because, the best guarantee of a strong social protection system, are high levels of productivity
5.2. LESSONS FROM THE USA FOR THE EUROPEAN ECONOMIC CONVERGENCE



I. INTRODUCTION

One of the great economic objectives of the European Union is to achieve real convergence among its member states. By that it is meant to bring poorer countries (measured in terms of gross domestic product per capita) into the European average.

For such a purpose the European Commission in Brussels (the equivalent to the federal government in the USA) has for the last two decades invested year after year considerable amounts into the economy of four poorer European countries: Spain, Ireland, Greece and Portugal.

These investments have come under different forms: costs sharing of major public work programs; financing of education; subsidising private companies under special programs.

Also, the values of these transfers into poorer countries have been significant. Both for the European budget where they represent 33% of the total budget and in terms of each country’s economy: at 2004 prices (between 2000-2006) what Portugal, Greece, Spain and Ireland (the four poorer European countries when they joined) received in transfers represent respectively 2,2%, 1,6%, 1,3% and 0,33% of their gross domestic product.


II. THE PROBLEM

 

Nevertheless, progress among poorest European countries has been relatively slow.

Portugal joined the European Union in 1986. At that time its GDP per capita was 53,7% of Europe’s average. In 2015 it is 72%. Thus a progress of (72% - 53,7%) 18,3% in 29 years, for an annual convergence rate of 1%. At this trend Portugal will reach European GDP average only after 33 years; in 2048 (see figure one). And the European Union will need to keep on pumping funds at the present rate (2,2% of Portugal’s GDP).

Greece has been diverging. Greece joined the European club in 1981. At that time its GDP per capita was 89,2% of Europe’s average. Thirty four years later it is at 65,8%. A decrease of 23,4% in 34 years: -1% per year. At this rhythm Greece will never reach the European GDP average (see figure one).

Spain joined in 1986. At that time its GDP per capita was 72,7% of Europe’s. Twenty–nine years later, in 2015, it is at 85,3%. A progress of 12,6% in 29 years, that is 0,6% per year. If the trend is kept, another 27 years, will pass by before Spain reaches the European average (figure one).

Ireland is the only previously poor country (when it joined the European Union) that has achieved fast convergence. It joined in 1973 with GDP per capita of 63,1%. In 1998, twenty-five years later its GDP per capita reached Europe’s average. In 2015 it is 30% above that average.

So what is the outcome of the European Union process of economic convergence? At best, a mixed outcome. Ireland achieved a fast convergence. But for Portugal and Spain convergence was slow: another 33 years will be needed before Portugal reach the European average. In spite of the fact that all countries received in central transfers over one per cent of their GDP, year after year (except Ireland).


Should this come as a surprise? In part. We knew from economic theory that there are forces in favour and against economic convergence (figure two).
 







In general, in favour of convergence of a poor region there are three variables:


1. transfers from the central government
2. lower salaries; and
3. it is not necessary to innovate, only to imitate (the so called Krugman effect).


Then, against convergence, that is in favour of more developed regions, there are two factors:


1. More money, therefore a larger market making possible greater specialization and company scale economies, without the onus of transport costs; and
2. greater dynamism, thus more opportunities (the rhythm of a chain, is the rhythm of its slowest link).





So, we knew from economic theory that there were factors for and against economic convergence.

However, it was thought that in the long run, forces in favour would outweigh those against. That this is not the case, comes somewhat as a surprise. But that should not be so if one had looked at the example of the United States.


III. THE EXAMPLE FROM THE UNITED STATES



The U.S.A. is an economic union (no internal trade tariffs) for more than 200 years (Europe started, slowly in 1957). It has been a monetary union for long, too (single currency). And has a federal budget over sixteen times larger than Europe’s. And what is the result? What economic convergence has been achieved by the U.S.A.?

The answer is: much lower than could be expected. There are two ways of seeing this. The first is by looking at the difference in the standard of living among the fifty-one U.S.A. states. The other is by comparing the level of that difference with the difference among the fifteen countries of the European Union.
Indeed, among the fifty-one U.S.A. states there are great differences. The average GDP per capital (PPP) (1) in 2013 (2) of the U.S.A. was 44.543 dollars (see figure three). But the state of Mississippi is 23% below (GDP per capita equal to 77% of the average of the U.S.A). Idaho is 21% below. And South Carolina is 20% below.
There are the riches states: District of Columbia is 176% above the average; Connecticut is 37% above; and North Dakota 28%.
Comparing the richer states with the poorer, the differences are enormous. In relation to the average of the three poorest states (South Carolina, Mississippi and Idaho) the GDP per capita of the District of Columbia (capital Washington) is 250% superior, Connecticut is 73% superior and North Dakota 63% superior.
So, there is a large economic divergence. There are a few states very much above the average. And others well below. After two hundred years of an economic and monetary union. This is illustrated in figure three.
This happens despite the existence of a large number of states with a GDP per capita close to the average, forming a solid nucleus of convergence: Texas, Nebraska, Hawaii, Kansas, Iowa, etc. But afterwards there are extreme cases. Of richness. And of poorness. Here, apart from the above mentioned three states (South Carolina, Mississippi and Idaho), there are other poor states: West Virginia (20% below the average of U.S.A.), Arkansas (19% inferior), Kentucky (19% below) and Utah (19% below). Among others.





Then, there is a major surprise. When one compares how similar they are among themselves, all fifty-one U.S.A. states with, how similar are all fifteen European countries, in terms of GDP per capita, one reaches the conclusion that European countries are more similar (have greater convergence) than U.S.A. states!

Two measures indicate that much. The Gini Index and the GDP per capita variance divided by its mean.

As figure 4.1 shows the Gini Index is greater for the U.S.A. (0,22) than for Europe (0,16) (3). Thus the economic divergence is greater in the U.S.A. Convergence is larger in Europe. There is a six per cent difference.

That is represented in figure 4.2 where the U.S.A. Lorenz curve (the geometric representation of the Gini Index) is below that of Europe.

Indeed, the higher the economic divergence is, the flatter over the horizontal axis the curve would be. On the contrary, in the case of no divergence whatsoever (total convergence), the curve would be equal to the straight line linking the southwest and northeast corners.

Another indication that U.S.A. economic divergence is higher than Europe’s is provided by the GDP per capita variance divided by its average. The fifteen European countries rate here far below the fifty-one U.S.A. states: 4,6 against 7,7 (see figure 4.3). Indicating that variability is far greater in the U.S.A. (1,7 times ) than in Europe.





IV. CONCLUSION


The example of the U.S.A. indicates that it should come as no surprise that the economic convergence of some poorer European countries has been slow in some cases (Portugal) and practically non-existent in others (Greece).

Two hundred years of economic, monetary and political union were not able to achieve that convergence in the U.S.A.: South Carolina, Mississippi and West Virginia stand out as the most important non-convergence cases.

However, what is most surprising is that, at present, economic divergence is greater in the U.S.A. than in Europe (figure four).

That indicates that contrary to the wide spread belief, time and transfers of central funds will not do it all.

Thus the conclusion that the sole way of achieving and speeding up the process of economic convergence, is through structural reforms in the economy of each state or country. Without them, all regions may equally benefit from the transfer of central funds, but in the end, some will be more equal than others.

(1) Purchasing Power Parity.
(2) Most recent data available for international comparisons.
(3) The Gini Index ranges from zero (total economic convergence, that is, no difference in GDP per capita) to one (total economic divergence, very large GDP per capita differences among states or countries). So, the higher the value of the index, the greater the difference in GDP per capita.