The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Portugal 2006 published on 20 April 2006.
Following nearly two decades of strong economic growth, Portugal's performance
deteriorated after 2000, and prospects remain subdued
Following a period of convergence to EU average living standards, the catching-up process has stalled since 2000. Real GDP growth averaged less than 1% between 2000 and 2005 and the on-going recovery remains fragile, with annual growth expected to remain below 2% in 2006 07. Slow growth in this decade reflects both cyclical and structural weaknesses which are mutually reinforcing. The accumulated output gap since the beginning of the slowdown is among the largest in the euro area and potential output growth is estimated to be currently about half what it was in the second half of the 1990s. Trend productivity growth in the business sector which, at 3% per year, was above average until the late 1990s has fallen to around 1% in 2004 05, constrained by the protracted period of low productive investment. Portugal’s export performance has deteriorated in a global environment where competition has become harsher. Major new players in world trade with lower labour costs are competing in Portugal's traditional product markets, while new EU members are increasingly specializing in the medium- and higher-technology products, where Portugal is also developing. Thus, Portugal did not take full advantage of the opportunities created by membership in the EU and the euro area to enhance growth on a sustainable basis. Losses in export market shares have been aggravated by the appreciation of the real exchange rate (as measured by Portuguese unit labour costs relative to those in its trading partners), while a real depreciation through greater wage restraint could have been expected (and would have been desirable) in a period of large slack in demand. As a result of economic weakness and lax policies in the past, the fiscal deficit reached close to 6% of GDP in 2005, an unsustainably high level.
Portugal's growth performance in comparison
The key policy objective is to regain a higher growth path, which requires
addressing a variety of multi-faceted issues…
In view of the large output gap, some support from macroeconomic policies would in principle be appropriate. However, given the other macroeconomic imbalances, there is no room to stimulate demand. The high fiscal deficit does not allow expansionary fiscal policy, or even letting automatic stabilisers fully operate; and short-term interest rates are set by the ECB according to conditions prevailing in the entire euro area. The only macroeconomic tool left to underpin the recovery (on which the government has, however, only limited influence as it is in the hands of social partners) is reversing the appreciation of the real exchange rate by additional wage restraint, thereby helping to crowd-in net exports, and preventing a further rise in unemployment. Experience in other countries has shown that a clear understanding of the seriousness of the situation and consensus among social partners can significantly accelerate the process of restoring competitiveness. At this critical juncture for the Portuguese economy, structural reforms to revive growth are all the more important. Consolidation of public finances is another requirement. It is not only urgent to satisfy European fiscal rules but is also desirable for its own sake, as the effects on growth should be positive over the medium and longer term, at least compared with the alternative of running high deficits which undermine confidence, lead to recurrent fiscal crises, and thereby induce instability. Consolidation would create room for automatic stabilisers to operate fully during future downturns, which would enhance resilience. Consolidation is also required to prepare for the ageing of the population. Finally, if consolidation is associated with improving cost-efficiency and the quality of public services, it would also enhance growth by contributing to a friendlier business environment.
… by acting forcefully on a broad front
Given its low level of productivity Portugal has a large potential for catching-up. Low human capital, heavy administrative burdens on firms, weak innovative performance of the business sector, restrictive labour market regulations and lack of competition in some sectors have become major impediments to productivity growth in the new international environment. Overall, Portugal must address four main challenges:
Putting public finances on a sustainable path.
Improving the performance of the education system, at the primary and secondary levels and in vocational training.
Modernizing the economy to face global competition by enhancing tertiary education, training and innovation, and by continuing to give high priority to science and technology development.
Creating a more dynamic business environment, strengthening competition and improving the functioning of the labour market.
Continuity and effective implementation of the required reform strategy are key to ensure sizeable and durable results.
How to obtain this publication
The Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Portugal 2006 is available from:
For further information please contact the Portugal Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Bénédicte Larre, Stéphanie Guichard and David Haugh under the supervision of Wilhelm Leibfritz.