STAFF NEWS & ANALYSIS
Did Small Business Doom Portugal?
By Staff News & Analysis - June 10, 2013

The Mystery of Why Portugal Is So Doomed … Did relying too heavily on mom-and-pop businesses hobble one of Europe's most imperiled countries? It's possible. Every unhappy family might be unhappy in its own way, but the same isn't quite true of every unhappy euro country. The common currency's troubled economies all relied on foreign borrowing during the boom, and all went kaput when that money disappeared during the bust. But, as Michael Lewis put it, not all piles of borrowed money were created equal. Greece got a government bubble; Spain and Ireland got housing bubbles; Italy didn't even get a bubble, just anemic growth — and Portugal got one of the quietest catastrophes in economic memory. And it's not entirely clear why. – The Atlantic

Dominant Social Theme: Small is beautiful when it comes to business, but bigger is much better.

Free-Market Analysis: This article advances the notion that government corruption has kept business small in Portugal and resulted in a lack of manufacturing progress. The article asks us to believe that small is inefficient, large is efficient and that sheer size can force economies to life.

It is indeed a dominant social theme … that large corporations are better than small and that multinationals are best of all. This is an argument for globalism not economics, as anyone who has ever dealt with a large enterprise well understands.

Is GM efficient? How about Kodak? Generally speaking sustainable economies ought to grow at their own pace. In the modern era, unfortunately, they are inevitably force-fed.

And thus we end up with weird conclusions like this one. It is actually an article with a purpose, in our view, to promote a globalist agenda but it is generally acknowledged in the US that "small business" provides the majority of jobs, good and services. How can small business be good in the US and bad abroad?

The article tries to parse the issue this way:

… Between 2000 and 2012, Portugal's economy grew less on a per capita basis than the U.S. during the Great Depression or Japan during its lost decade. This wasn't a case of the bust erasing the boom, because there was no boom … Portuguese real GDP per capita flatlined during the "good years" before falling during the bad. Incredibly, Portugal was richer 12 years ago then it is now. It's an economic whodunit without any clear culprits.

Yes, Portugal has real structural problems (which we'll get to), but so do Spain and Greece, neither of which slumped before the slump. For his part, Reis speculates that Portugal's immature financial sector is to blame: it misallocated the foreign capital that poured in to low productivity, non-tradable sectors like wholesale and retail trade. In other words, it wasted money on things that never had a chance of paying off. Now, Portuguese banks certainly did make a lot of bad bets … but so did German ones in Portugal.

Something else must have been going on. Part of that something else is Portugal's small business culture. As Matt Yglesias of Slate points out, most of southern Europe, Portugal included, suffers from too much corruption and regulation. Businesses choose to stay small, because it makes sense to just deal with people you personally trust when you can't reliably appeal to the authorities sans-kickback. Businesses can stay small, because the laws make it hard to get big and achieve economies-of-scale. It's a mom-and-pop nightmare of low productivity. And it's gotten worse since 2008.

… That's why Europe needs to stop insisting on punishment as the path to prosperity. If they don't, the idea of euro exit might not just be the topic of a popular Portuguese book. It might be the platform of a popular Portuguese party.

There are many issues we have with this explanation. We doubt that an "immature" financial sector is to blame for a lack of Portuguese growth. And we certainly don't see a vibrant "Mom and Pop" economy as a drawback.

The US is known for its multinational corporations but 40 million Americans are on food stamps, unemployment continues to increase and real GDP probably hasn't expanded in half a decade.

As for Portugal's lack of growth and its "mystery" – let us suggest a possibility. There is no doubt that Portugal, as part of Europe is hyper-regulated and hyper-taxed. Instead of trying to explain Portugal's economic "failures" in terms of small business, focus on getting government out of the private sector.

After Thoughts

We truly do live in an era of extreme sophism. Don't blame small business for what ails Portugal. Blame the REAL factors that prevent business from getting done.

Posted in STAFF NEWS & ANALYSIS
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