Portugal-Chapter 3 - The Economy

Tending wine casks

PORTUGAL'S POLITICAL ECONOMY holds our interest for a number of reasons. First, Portugal, a founding member both of the North Atlantic Treaty Organization (NATO) and the European Free Trade Association (EFTA--see Glossary), one of the newest members (along with Spain) of the European Community (EC--see Glossary). Second, scholars interested in revolutionary change and the associated economic consequences can compare the Portuguese experience with that of other nations that have undergone rapid systemic transformation. Third, Portugal's recent experiment with nationalization of the means of production will be of particular interest to students of industrial organization and public enterprise economics.

As a fledgling member of the EC, Portugal was required to adopt the EC's Common External Tariff on imports from nonmember countries and the Common Agricultural Policy (CAP). Portugal also was pledged to eliminate all barriers to the movement of goods, services, and capital between itself and the other members of the European Economic Community (EEC--see Glossary), as well as to phase out fiscal subsidies that distort competition. During a transition period ending in 1993, Portugal was a net recipient of EC funds to assist in the restructuring of its relatively backward economy.

At the beginning of the 1990s, Portugal's economy was classified by the World Bank (see Glossary) as an upper-middle-income economy. Its 1990 gross domestic product (GDP--see Glossary) on a purchasing power parity basis was US$82 billion, and its per capita GDP was estimated at US$8,364. With a per capita GDP growth rate of 5.4 percent in 1989, Portugal moved ahead of Greece to eleventh place among the twelve members of the EC.

Several distinctive features characterized Portugal's economy at the time of its accession to the EC; one of the most striking was its dependence on foreign "invisible" income. This income, consisting of tourism receipts and emigrant worker remittances, financed the country's large merchandise trade deficit. The growth and magnitude of tourism together with the explosive rise of government services largely explain the expansion of the services sector to nearly 56 percent of GDP in 1990 from 39 percent of GDP in 1973. One of every three Portuguese workers in the active labor force was engaged in temporary work in highincome countries, mainly France. These emigrant workers, numbering about 2 million, contributed significantly to Portugal's foreign exchange income, as well as to the country's household savings. Although less educated and technically less proficient than their EC counterparts, Portuguese workers were recognized for their strong work ethic and frugality.

Another distinguishing feature was Portugal's anachronistic agricultural sector, whose overall performance was unfavorable when considered in the context of the country's natural resources and climatic conditions. In the mid-1980s, agricultural productivity was half that of the levels in Greece and Spain and a quarter of the EC average. The land tenure system was polarized between two extremes: small and fragmented family farms in the north and large collective farms in the south that proved incapable of modernizing. The decollectivization of agriculture, which began in modest form in the late 1970s and accelerated in the late 1980s, promised to increase the efficiency of human and land resources in the south during the 1990s.

A third economic distinction was the scale and sectoral spread of Portugal's public enterprises. Before the Revolution of 1974, private enterprise ownership dominated the Portuguese economy to a degree unmatched in other West European countries; in 1982 the relative size of Portugal's public enterprise sector (based on an average of value added, employment, and gross capital formation) substantially exceeded that of the other West European economies.

The dispossession of the family-based financial-industrial groups, together with the "antifascist" purges of the mid-1970s, inflicted a serious "brain drain" on Portugal through the exile of entrepreneurs and professional managers. Recent Portuguese governments have recognized the highly politicized public enterprise sector as a major obstacle to the resolution of macroeconomic problems, such as large fiscal deficits, inflation, and burdensome external debt.

Portugal's commodity trade increasingly has become dominated by the EC, and since the accession of both Iberian countries to the organization in 1986, Spain has suddenly emerged as a significant trading partner for Portugal, whose major commodity exports at the beginning of the 1990s included textiles, clothing, and footwear, machinery and transport equipment, forest products (including pulp and paper and cork products), and agricultural products (mainly wine). With the rising participation of multinational firms, Portugal also was gaining competitive strength in the export of higher technology automotive and electronic components and parts.

Privatization, economic deregulation, debt reduction, and supply-side tax reform became the salient concerns of government as Portugal prepared itself for the challenges and opportunities of full participation in the EC's single market in the 1990s. These market-driven policies deserved much of the credit for Portugal's economic resurgence. Led by surging exports and robust capital formation, Portugal's GDP grew by an annual rate of 4.6 percent from 1986 to 1990. During this five-year period, only Japan among the Organisation for Economic Co-operation and Development (OECD--see Glossary) countries exceeded Portugal's economic performance.

Data as of January 1993