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Universidade Autónoma de Lisboa

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

Notes and Reflections

THE PORTUGUESE CRISIS, INTERNATIONAL RESCUE

AND ECONOMIC GROWTH

Manuel Farto

Associate Professor in the School of Economics and Management Studies (ISEG), Technical

University of Lisbon (UTL). He holds a Degree in Economics from ISEG, UTL, and a Ph.D. in

Economics from UTL, per equivalence awarded to the Ph.D. in Histoire de la Pensée

Économique obtained at the University of Paris X-Nanterre. He is a Visiting Professor at

the University of Orléans (France) and at the Federal University of Paraíba (Brazil), and

Deputy Director of the magazine JANUS (UAL / Público). He has held several public positions,

including that of Chief of Staff of the Minister of Public Works, Transport and Communications,

Deputy Director-General of Higher Education and Academic Affairs, and Vice Chairman of the Board

of ISEG. He participated in several national and international conferences and published

several articles in magazines and books. His main research interests are Macroeconomics,

International Economics, History of Economic Thought, and Economic Policy.

Henrique Morais

Holder of a BA Hons in Economics from the School of Economics and Management Studies (ISEG),

and of a Master in International Economics (ISEG). Lecturer at Universidade Autónoma de Lisboa

(management courses and International Relations) and at the University of Algarve (MBA in

Corporate Finance). Advisor to the Bank of Portugal, Department of Reserves and Markets.

He is currently required by the CP, EPE to perform functions as Member of the Board of

Directors of CP Carga, SA. Contributor to magazines and yearly publications in the area

of economics, namely Janus - Yearbook of Foreign Relations (UAL / Público).

The model on which economic growth was based in recent decades is depleted, and this

depletion can be observed in the stagnation of economic growth over the last decade,

the worsening of the imbalances, and in particular by increasing difficulties in securing

the financing of the economy and of the state in acceptable conditions.

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

120

One must not think that the situation will be easier for Portugal due to the fact we

entered a club of rich countries. In fact, we believe that a less restrictive economic

policy, especially monetary policy, on the part of European entities could facilitate and

alleviate the transition of the Portuguese economy to a new model. However, we must

not have illusions about the limits of solidarity this club we are part of is prepared to

concede.

The crisis we are currently experiencing, which emerged at the convergence of an

international crisis with national foundations, is particularly complex due to the

restrictions imposed on the Portuguese economy. The need for consistent and profound

changes, if implemented with common sense and dialogue, has now become extremely

urgent.

1. Portuguese economy and current restrictions

Monetary policy does not depend on us and may not be the most favourable. Further,

given the weight and influence of Germany, any acceleration of the German economy,

which is anything but unlikely, can lead to changes in monetary policy in a manner

contrary to our interests. If this possible lack of synchronization is joined by some anti-

inflationary orthodoxy, which is particularly disadvantageous in the current context, we

have reasonable grounds to fear the effects of the euro zone monetary policy on our

economy, namely due to the continuation of a strong common currency. Even the

financing of our economy, hitherto heavily dependent on the goodwill of the European

Central Bank, is likely to be faced with additional difficulties soon.

The state budget policy is and will remain limited by the Stability and Growth Pact,

which in future will be even more rigid as a result of the sovereign debt crisis in several

European Union countries and the set of constraints, obligations and penalties it will

Luxembourg

Cyprus

Portugal

Spain

Finland

France

Italy

Netherlands

Ireland

Belgium

Germany

Austria

Greece

Malta

Slovenia

Slovakia

World

Euro Zone

European Union

1986

1989

1990

1999

2000-2010

3º

15th, only Italy features

worse..

6º

Chart

Gross Domestic Product

Annual growth

rate

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

121

bring. The restrictions and resulting consequences will be even greater for the

Portuguese economy.

The lower growth trend of our major partners, notably Spain, is also another factor

hindering the growth of our exports and the improvement of some of the imbalances.

The European Union’s external context is also very difficult for an economy such as

Portugal’s, which is uncompetitive and has a weak export tradition. The development of

globalization and the growing importance of emerging countries have increased

competition on our economy in areas and products where we have some relevance.

Competition from new EU Member States and emerging economies (trade, attracting

foreign direct investment, shared EU aid and business delocalization) is a tremendous

challenge for the competitiveness of our economy and a further difficulty to our

recovery in sustainable conditions.

On the other hand, labour costs rose and, due to globalization, there are many other

alternatives that affect very negatively the attractiveness of the country with regard to

international and even national investment. Moreover, as a result of European

agreements and the difficulties which now Europe is facing, funds will certainly be

reduced soon.

In this context, our peripheral geography, as mentioned above, stands out even more

strongly, hampering the location of new businesses and forcing new relocation

processes. We also believe that the actual systems to support economic activity will

move further away from European standards, thus further hindering incentives to

invest and produce, which will lead to a tendency for balances to adjust at lower levels

in terms of products, wealth and quality of life and welfare. And lest we forget, in this

respect, that, in terms of per capita income, our economy continues to compare poorly

with the rest of Europe.

120

170

220

270

Luxemb

urg

Netherlands

Austria

Belgium

Germany

France

Finland

Spain

Greece

Italy

Cyprus

Slovenia

Malta

Portugal

Slovakia

Chart

GDP

per capita

purchasing power

parities

2009

Euro zone = 100

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

122

The social crisis that tends to deepen, with a whole procession of misery and suffering,

the weakness of the government in the current policy framework and the lack of

tradition of peaceful and fruitful social dialogue, will greatly hamper the possibility of a

social pact, which is of great importance under current conditions, undermine social

cohesion, and lead many Portuguese to resume the uncertain paths of emigration.

2. Future prospects or the labours of Hercules

In addition to this crisis of productivity and competitiveness, expressed in the trend for

widening imbalances, the international crisis has brought about a lack of demand that

has destroyed a significant part of the productive apparatus, as attested by the

numerous company bankruptcies and massive increase in unemployment.

Unfortunately, this was coupled with a sovereign debt crisis that forces pro-cyclical

policies that will continue to destroy productive capacity and generate unemployment.

As a result, recession and stagnation seem to have found ripe conditions to settle in,

leading the Portuguese to general impoverishment.

In such a situation, it is urgent to undertake a programme of structural adjustment and

growth that dramatically reduces more immediate imbalances and pursues a policy that

enables overcoming major obstacles and build a model of sustainable growth to ensure

an annual growth rate of the economy above 2.5%. If we do not fulfil this goal, it will

be very difficult to accommodate the consequences of past imbalances and restore the

fundamental balance in a framework of social cohesion.

Thus, the direction we point to and believe reflects a broad consensus among

economists can only be one of product growth, productivity and competitiveness, which

will confer Portuguese economy a new feature: to become an international producer.

To this effect, the first fundamental guideline is to reorient supply towards tradable

goods, particularly for export to new countries and regions of higher potential growth.

The stimulus to export goods and services becomes a permanent orientation axis using

all tools capable of delivering results in this area, ranging from developing an export

credit and credit insurance policy to the allocation of tax benefits and implementation of

an aggressive economic diplomacy.

This approach requires the development of more sophisticated strategies and business

operations, involving a marked improvement of the country's capacity for innovation

and productivity. This implies increased qualifications and skills on the part of

entrepreneurs and workers and the implementation of active and selective .public

policies.

To solve a problem one must first identify it. And in the case of resources, we should

understand that the weaknesses of businessmen and of Portuguese workers are rooted

not only in organizational issues but also in its intrinsic quality, which can be improved

with more and better training.

Improving the business environment, particularly through the timely operation of the

judiciary system, and the removal of bottlenecks on infrastructure, such as the new

airport or the rail and road links from our ports to the Spanish hinterland, should be

included in the group of correct priorities to be delineated.

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

123

It makes sense to support some specific sectors, particularly where there is some

consensus on the matter, mainly when dealing with sectors still far from maturity and

consolidation, such as renewable energies or the electric car, or that may be associated

with more specific resources, as the sea or the Mediterranean diet, where comparative

and/or competitive advantages may already exist or be created. In this sense,

competitive re-industrialization and the further development of agro-industrial activities

emerge as guidelines to be implemented.

To be competitive and of high quality, supply needs our economy to be better equipped

to attract national and international investment. Better and more investment will

increase economic activity, output, employment, and income. However, one must not

forget that an investment policy is both a policy for growth and for employment, which

has perhaps the most sustained and real effect. Without the creation of job

opportunities, improved qualifications and training alone may not achieve the desired

objectives. Such measures require selective policies aimed not only at national

investment but also at attracting international investment.

Given that public investment is severely limited, in the present context it should be

very selective and focused on overcoming the structural bottlenecks that streamline

existing private investment. Public investment in innovation and technology,

modernization and development, should be strengthened in future as a means to

induce a sustained growth of private investment in this area and more generally in the

economy.

From our point of view, rather than create more favourable expectations of future

cheaper redundancies for companies, action is needed on the factors that can influence

direct investment in Portugal, particularly in terms of costs and taxes.

The restructuring of the tax system may be an indispensable tool to encourage

investment. In a country without its own currency and monetary policy and with

budgetary limits on a lavish management of finances due to existing restrictions

(imposed by excessive debt), tax policy is a key instrument for the management of

resources. Thus, the fact that the country already holds a high tax burden should not

lead us to fiscal drag by simply defending its maintenance.

This means a policy that significantly reduces the costs of doing business and positively

discriminates, in terms of taxation, the businesses and workers who contribute to the

consolidation of our external accounts. This shock could incorporate a change in the

financing system of Social Security, through a significant reduction in company

contributions offset by tax increases or fees in the area of consumption and in sectors

which hitherto have been protected.

At present, the development strategy still requires, from the supply side, wage costs

control, although, of course, with employees having a share in eventual productivity

improvements. A more flexible labour legislation with regard to management of

working time may also contribute to improving business efficiency. However, it should

be noted that wages and employment law have not been major obstacles to economic

growth in Portugal, and their worsening to the detriment of workers will not be a

condition for future development.

It must be stressed that, with regard to earnings, the average growth in nominal wages

in the public sector was 3.4% between 2000 and 2009, whereas the average inflation

in this period was 2.6%. This exposes the weakness of the argument that suggests that

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

124

budget imbalances are responsible for the increase in wages. Furthermore, the average

reduction in public sector wages by 5% in 2011 means that, between 2000 and 2011,

the increase in real wages was 1.9%, i.e. less than 0.2% per year! This cannot be

compared with the 6.6% real growth (annual average) in the 1990s, or 6.8% in the

1980s.

At this point, it should be noted that the development of the traded goods sector that is

necessary to achieve the appropriate level of economic growth, to which we referred

above, may be insufficient if we only insist on the exporting part. Indeed, the urgency

and depth of the adjustment of supply that is required by the current magnitude of the

imbalances, requires a broad process of increasing domestic production to replace

products currently imported. The fact that there are many difficulties in its

implementation and that it is "outmoded" should not hamper the changes in behaviour

and attitudes that will enable it!

With regard to demand, it is therefore necessary to change attitudes and behaviours in

order to reduce imports and stimulate increases in consumption especially aimed for

domestic production. Some import substitution can be made operational immediately,

and this only requires the will to do so. Most developed countries have induced informal

protectionist attitudes and behaviours, as operative and effective as traditional

prescriptions, which are obviously incompatible with the open economies of today.

To this effect, some taxes may have to be increased, penalizing consumption, so that

others can come down significantly to allow companies to reduce costs and leverage

investment. Moreover, it should be pointed out that private consumption has grown

over the past decade well above the GDP, with a strong focus on import.

Chart

Private Consumption

4,4

2,6

3,6

1,6

-4

-2

1961

1967

1973

1979

1985

1991

1997

2003

2009

Decade Average (%)

Private Consumption (tca)

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

125

In the area of institutional reform, it is indisputable that some progress has been made

among which we would highlight two examples: the reduction of bureaucracy, with

several noteworthy measures, and social security reform, removing it from a clearly

unsustainable path. However, in many other areas, reform attempts were unsuccessful,

as in public administration, or produced totally opposite results, as is the case of

justice.

In the short term, it is essential to reduce the size and cost of the state, increasing its

efficiency. Examples of measures that need to be implemented include controlling

public spending and eliminating unnecessary costs. This can be achieved by reducing

the number of institutes and keeping only those of a technical or regulatory nature, and

reducing the number of employees. Streamlining the autonomous public sector,

particularly by promoting the physical and financial control of State-Private

Partnerships (PPPs) in order to reduce the enormous damage they cause to the

country, is certainly a national requirement. To pursue a policy of zero-based budgeting

could also be a disciplinary tool of public spending.

Justice is also a key sector to enable us to pursue a strategy of sustainable

development. In the past, the main defect of justice was its slowness and inefficiency,

particularly in key areas for economic development. At present, one senses and

speculates about more serious anomalies, such as the politicization of justice, which

questions the third pillar of the Rule of Law and discredits the country. Without the

introduction of a clear institutional break in this sector that can be perceived externally,

the attractiveness of the Portuguese economy will hardly be noticed.

Education and training at various levels continue to limit the development of the

country, despite the significant progress made and the much expenditure spent in this

area. In any case, the improvement of their quality and raising the quality of our

human resources should remain as an essential guideline. Simple measures, such as

increasing the number of taught hours per week in subjects like mathematics,

Portuguese and sciences, can significantly alter current results.

3. The need and limits of external assistance

We are not unaware of the high social cost of many such measures, which therefore

tend to be permanently postponed. But we believe that its postponement will have

serious consequences for the country. The risk that our current operating model will

collapse, with the consequent need for more restrictive measures as far as the standard

of living of the population is concerned, is growing each day.

In this regard, when preparing a text for JANUS 2011 in October 2010, we wrote: "It is

for this reason that we stress the urgency, and also on behalf of such urgency, for

external help to address this situation. We believe that such a programme will not run

in an environment of total dependence of the so-called markets, i.e., in permanent

harassment by international speculators pushing up the price of money in usurious

fashion. "

Also in this framework we wrote then: "For all this, resorting to the International

Monetary Fund should be considered without prejudice and in a cost / benefit approach

whose result we regard as positive. This is because it would create a stable framework

for economic policy in, say, three years, as it would increase the credibility of policies

JANUS.NET, e-journal of International Relations

ISSN: 1647-7251

Vol. 2, N.º 1 (Spring 2011), pp. 119-126

The Portuguese crisis, international rescue and economic growth

Manuel Farto and Henrique Morais

126

nationally and internationally, reducing the cost of difficult measures that need to be

implemented, and also because the financial effort would be less costly than continuing

to resort to financial markets. By doing this we would be acknowledging the errors of

our former economic policy, but this fact is not lost on anyone."

The time wasted turned a request for assistance into an international bailout.

Nevertheless, the negotiations currently underway with the "international troika" do not

fundamentally change the direction we have been proposing, quite the opposite. It is

necessary to take into account that the policies proposed by those international bodies

cannot fail to be guided by an orientation of "cosmopolitan”1 " nature that is limited and

insufficient to meet the dual ambition of the national "Political Economy": the

adjustment of national accounts (public and external) and the resumption of sustained

growth in economic activity.

The implementation of such a programme requires a great deal of agreement on the

part of social partners, breaking with tradition and finding new ways of consensus.

However, in its absence and independently of the external support that we have to

request at this stage, it is essential that employers, workers and government officials

understand the basic truth that there is no royal road to sustained economic growth

and improved well-being of the Portuguese, and that they must unite around a

coherent, clear-sighted and pragmatic social agreement. Only then, and if this is done

urgently, we will avoid the dark path that is outlined on the horizon right now.

How to cite this Note

Farto, Manuel; Morais, Henrique (2011). "The Portuguese crisis, international rescue

and economic growth". Notes and Reflections, JANUS.NET e-journal of International

Relations, Vol. 2, No. 1, Spring 2011. Consulted [online] on date of last visit,

observare.ual.pt/janus.net/en_vol2_n1_not2.

1 List, Friedrich (2006). Sistema Nacional de Economia Política. Lisbon: Calouste Gulbenkian Foundation