Portugal’s economic situation calls for investment .jpg

Portugal’s economic situation calls for investment

Portugal’s economic situation calls for investment in education, quality and overseas markets

SEASONED PORTUGUESE economist Dr. José Silva Lopes, currently on the board of directors at Montepio Geral bank, is often criticised as being a pessimist when it comes to the Portuguese economic situation.

Invited by the Portuguese-French Chamber of Commerce to address the German, Dutch and British-Portuguese Chambers of Commerce, Dr. Silva Lopes gave a highly entertaining after-dinner speech last week, beginning by stating that his well known brand of pessimism wasn’t necessary to point out that the overall situation was bad.

The former Lisbon University professor said that Portugal was going through the worst period of economic growth since the end of the Second World War. “When we look at the statistics, we haven’t seen four years – between 2001 and 2005 – in which Portuguese economic growth has been so weak. We were a success story in Europe until then, although we never enjoyed the kind of growth rates enjoyed by countries such as Ireland. Still, we can consider the period between 1950 and 2001 as a time when Portugal recovered from its backwardness and caught up considerably with the rest of Europe.”

The former Bank of Portugal governor added that, in 1950, Portugal’s productivity represented less than one half of the European Union average, standing at 45 per cent. By 2000, Portugal stood at 75 per cent of that average while, on a world scale, it was a country that enjoyed considerable economic growth. Unfortunately, after that year, the situation worsened, with growth and investment beginning to diverge from the rest of Europe.

Also a former Minister of Finance (1974-1978), Dr. Silva Lopes added that Portugal’s economic growth during the years 2001-2005 was 0.2 per cent, which was “practically nothing”. Despite the fact that Europe’s growth had increased little, Portugal grew even less and, for the first time since the 1950s, it was moving away from the rest of its neighbours.

Dr. Silva Lopes, whose career includes a period as administrator of Caixa Geral de Depósitos, went on to add that this had happened because of both internal structural factors and external economic and political world factors.

Lack of manpower and investment is no excuse

The most important of the so-called structural causes had to do with Portugal’s capacity for growth and being productive – what economists call potential productive growth. “We had a productive capacity that was above the European average until recently at around 2.5 per cent per annum on average, until it fell back to 1.4 per cent in the past four years. So, why are we growing at such a negligent rate compared to the rest of the EU25? It’s not because of a lack of manpower expansion. We have an active working population growth that is above the EU average,” he pointed out.

Despite the fall in the birth rate, Portugal has enjoyed a fairly reasonable population growth thanks to immigration and the active working population in Portugal has grown six per cent per annum over the past four years. “After capital investment, investment in manpower stands at half of the total capital investment in quantitative terms. But, even at a rate of six to seven per cent, we cannot say that it is because of a lack of manpower that we’re failing to grow,” he explained.

“As to capital investment, we have been one of the countries in the EU that enjoyed most investment in the last few years. But this investment has fallen back a lot recently. Even so, it’s still around the European average, so we also can’t complain about lack of investment.

“We can, however, complain about the quality of that investment, which, in the past few years, has fallen 30 per cent. The problem also lies in the quality of manpower. We have seen a growth in poor quality manpower and we are attracting immigrants that are even further behind us in terms of skills,” he pointed out. “Portugal needs to pay more attention to attracting people with high technical qualifications in both professional and intellectual terms, instead of attracting illiterate and semi-illiterate workers.”

Investors need to improve performance

When it came to capital, Portugal was investing a lot but badly. In the 70s and 80s, Portuguese productivity was growing because of technological investments from abroad, rising until the year 2000. However, in recent years, productivity has been falling. In the next few years, the economist defends that the answer is not to increase Portuguese internal investment nor increase immigrant manpower, but to improve the quality of what is being produced and the quality of the workforce – better educated and trained employees while using a better form of selection criteria than presently exists.

In the public sector, there have been a number of projects launched, which the economist described as “plain stupid as everyone knows”. As for private investments, investors in Portugal have to improve their performance. Dr. Silva Lopes said Portuguese company owners had been barely literate until recently. The State, for its part, has to be more careful in its investment subsidies to Portuguese investors.

“I am a great supporter of the efforts being carried out by this government because, for the first time, a Portuguese government is having the courage to renovate the economy. Even so, there are still a lot of things that are not being done in Portugal,” he stressed.

Without going into concrete examples, he went on to talk about Portuguese foreign investments. “Some are good but I’ve got some grave doubts about others. Things have improved somewhat in this area and I am a supporter of the measures this government is taking, but I have already had arguments with the Minister of Public Works about some investment measures,” he meant the airport at Ota.

Education, which had been one of the most shameful aspects of Portugal, had seen improvements recently, while the government’s attempts to reform the justice system was also important although not enough.

The measures for tax adhesion were also important, as was the so-called ‘Technological Shock’ policies outlined in 2000 and underlined earlier in the month with the Microsoft protocols. “We don’t yet know whether this will bear fruit, however, they are indispensable initiatives,” he agreed. “The government is carrying out reforms at the present which I believe are positive and can help towards improved productivity in Portugal. However, these structural reforms will only help improve productivity in 10 years from now, not immediately,” he warned.

“I hope that we will see ourselves out of this sad situation. We don’t need to invent new things, it’s enough to imitate, and if we can manage to increase our productivity by around three per cent per annum in the near future that would be something,” he believed.

Government should have been more restrictive

Apart from internal structural problems, Portugal is suffering from a combination of external factors, which makes things even worse. The economist was talking about external demand, which was falling. In periods of recession such as Europe is suffering at present, demand falls and unemployment rises.

“We enjoyed a long period of expansion and increased demand in the 1980s and 1990s, particularly between 1995 and 2001. This happened because of Portugal’s entry into the European Union and the introduction of the single Euro currency,” he explained.

Interest rates fell and the Portuguese were able to enjoy the benefits of this by buying houses, cars and consumer items, while families got into debt, as happened in many other countries, not just Portugal.

However, the government should have applied restrictive policies when Portugal entered the Euro currency. It should have either increased taxes or put a break on spending via interest rates. “Instead, the PS Guterres government used the entry into the Euro as an excuse to increase expenses and spending. It became less worried about consumer spending and even less about public spending,” he lamented.

Between 1995 and 2000, Portugal was an “oasis”: credit was cheap, consumers and company bosses were spending more and more on cars and houses. Then, in 2001, families already heavily in debt, began to have budgetary problems at the same time that demand fell. This created a serious crisis that has continued ever since.

“In the next three years, we cannot think about increases in private consumption beyond 1.2-1.8 per cent. Families are in debt and unemployment is rising, so we cannot expect a return to the days when consumption was four per cent or more,” he warned.

More quality and external investment could be solution

The construction and housing sectors, too, had fallen 30 per cent since 2001, so not much growth could be expected there. Therefore, the economist believed that Portugal’s alternative was to improve the quality of existing production and invest overseas since internal investment was unlikely to increase much in the next few years, or at least until 2010.

“The only salvation is for the country’s businessmen to increase its external investments in terms of exports or homegrown goods to substitute imported goods,” he argued. He talked about substituting imported energy sources, since Portugal was far too dependent on importing oil and other energy sources. Above all, Portugal needed to find ways of producing products and services that could be exported. Portuguese exports had not been brilliant in recent years. Portugal had relied on the EU rather than looking for markets in China or India for example.

China was a “threat” in terms of competition for all the European countries and Portugal was one of the first victims of this Chinese and Indian expansion, as these countries entered into the same markets that Portugal had enjoyed as exporters and began to compete and destroy the country’s market in textiles and footwear.

Finally, there was the problem of costs. In Portugal, production and labour costs have risen more than in other countries. Inflation had increased more than the EU average, so salaries also increased at a faster rate than other EU countries.

Therefore, Portugal was losing the competitive edge that it once had. Many foreign and Portuguese companies moved out of Portugal to cheaper countries and many Portuguese companies closed.

However, it wasn’t all bad news: the World Economic Forum placed Portugal 15th in potential for future success and growth, ahead of Spain and France. Although Portugal’s public administration and justice system was bad, its banking and external political sectors were good, better than those of the Eastern European countries. Corruption exists but it isn’t as bad as in Italy or Greece and not far behind France.

“With good foreign investment, emphasis on high technology, I’m convinced we have all the capabilities for growth in the future,” Dr. Silva Lopes concluded.