Economy

Speech delivered to the OECD Council by the Prime Minister of Portugal, HE. Pedro Passos Coelho

 

OECD, Paris, 14th May 2013

 

It is with great pleasure that I am here at the OECD Council, presided by Secretary-General Angel Gurría, and I thank him for his kind welcoming words. Today the OECD is publishing a report on Portugal's challenges as far as structural reform is concerned. Some months ago I told Secretary General Angel Gurría that it would be very helpful if the OECD could provide us with a thorough diagnosis and recommendations as we were preparing a second phase of Reform of the State and drawing our economic growth strategy for the future. The OECD, of course, is an outstanding reference for policy-makers all around the world and I wanted my country to benefit from your skills, experience, and insights, especially on the question of structural reform. When I asked him for the OECD technical advice for such complex a task, he immediately said "yes". Now that the work is done I warmly thank him and the OECD for their cooperation with the Portuguese Government. This report, I am sure, is going to be a valuable source of information and policy recommendations for sustainable growth, and it should be an important element of a serious and open public debate both in Portugal and in Europe as we prepare our collective future.  

Its publication coincides with the final stages of the closing of the 7th review of our Adjustment Program with the European Union and the International Monetary Fund. We have worked very hard to bring the 7th review to a successful conclusion and now I believe that all conditions are met to reach this important milestone.

 

But I would like to take this opportunity to offer my views on the challenges ahead. To a large extent, these challenges are common to other countries in the OECD although we always should keep in mind the vast array of national particularities.

 

History provides us with many examples of societies which withstood, and dealt successfully with, terrible crises. It is important to learn lessons from them. Societies which looked at their crises and saw them as a plea and as an opportunity for change were precisely those which were more successful in overcoming them. By change I mean structural, institutional change. That kind of change that adjusts economies, laws and institutions, to the new challenges brought by wider reality, and allows people to face new events, discoveries, and innovations, not as threats but as tools and opportunities. In a word, the kind of change that makes countries go forward on the path to progress. As you may have guessed by now this is what I have in mind when I use that oft-repeated expression "structural reform". Now, that is the kind of reform, the kind of change that my country needed. And I should add that, in the last couple of years, this is the kind of change that we've finally had.

 

These last 15 years in Portugal have shown beyond any doubt that we needed to change. The status quo was eternalizing a very costly and painful stagnation in the economy. It was deepening social inequalities- as the OECD report states, in 2008 Portugal was the most unequal country in Europe. It was arresting social mobility. It was protecting a privileged few and leaving everyone else behind. It was widening poverty. Together with a very rapid process of population ageing, it was threatening the sustainability of our welfare state, our public education and our public health care. And then came the international financial crisis which made these weaknesses all the more evident. The structural reform that we have advanced has been wide-ranging and should be seen as an articulated whole.

 

- Labour market reform, involving both the private and public sector;

 

- Product market reform, in the way of reducing rents in network and sheltered sectors, liberalization of the energy and gas market, and increasing competition throughout the economy:

- Judicial reform, to make the judicial system more adjusted to the needs of the economy and more open to citizens;

 

- Fiscal reform, with the objective of introducing more discipline, predictability and transparency;

- The privatization program which raised a great amount of foreign investment and has brought the Portuguese economy closer to the most dynamic regions in our contemporary world;

 

And a wide-ranging set of reforms which have improved our business environment;

 

These are just the more widely known aspects of our reformist approach.

 

And I could still add profound changes that we have brought to the public health care system, public education, the urban lease market, the legal framework of insolvencies and corporate recovery, and the reduction of bureaucracy in general.

 

Let me now tell you why we embarked on this process of structural reform.

 

We did it because we needed to close our competitiveness gap. Here I am saying something you already know. This is the recommendation every International organization has been giving Portugal. And it has been one of the most widely commented sides of our story. We are rapidly closing our competitiveness gap and we have all but closed the large external imbalances which have plagued us for too many years. Portugal is now a net lender for the first time in two decades. For the first time in 60 years we had a positive balance of trade in goods and services.

 

Furthermore, since structural reform points towards the future, we did it because we want to boost our growth potential and start a new, sustainable cycle of prosperity. Again, I am not saying anything very surprising to you.

 

But there is a social and political aspect of structural reform that for me is absolutely crucial. Something that is seldom mentioned as one of the main driving purposes at the heart of a general reform strategy. We embraced structural reform because we want a more inclusive kind of economic growth, we want a society of opportunities for all in which no one is left behind. That is why I have called this process of structural reform in my country "the democratization of the economy".

 

We want to bring change, and we already have brought change, to our economic institutions. The economy must not, and should not, be a closed sphere of unjustified privilege. It should be a true level playing field for everyone. Everyone has the right to participate in economic life and everyone should be properly equipped to participate in economic life. Structural reform should therefore be at the service of this great design. This is a key element in the pursuit of social justice. If we think about it, it is also a key element of equality in any decent, modern society. Access to, and participation in, economic life is a necessary condition for the pursuit of personal projects and life plans. It is a general condition for the pursuit of happiness in the modern world. It is the stuff real, sustainable social cohesion is made of.

 

But it is not only a matter of justice. It is not only a matter of bringing home the promises of a social market economy. I believe that, in the final analysis, it is also the best way to increase efficiency and productivity throughout the economy. The democratization of the economy is one of the most effective, most durable, and deepest stimuli that we can bring to Portuguese society.

 

Openness is a key word here. We are increasing our openness to the globalized world, making our economy more export-oriented and more successful in attracting Foreign Direct Investment. But in order to generate real, concrete benefits for everyone we must understand that this kind of openness is not independent of a wider process of openness throughout the society. That is why we are opening up our economy and our institutions. It must be a wide-ranging process of openness, involving higher education and research and development, regulated professions, government institutions and so on. The democratization of the economy goes hand in hand with a genuine open society: open both internally and externally, that is to say, open to the outside world and open to itself.

 

Ladies and Gentlemen,

 

In little more than one year from now we will be closing our Adjustment Program with the EU and the IMF. In the former half of our Adjustment Program we had to attend some very concrete, clear and present dangers. We had before us the urgent task of financially stabilizing our economy. We had to focus on the correction our very large financial imbalances by cutting public spending, reforming State Owned Enterprises, and meeting our national budget targets. I will not bother you with everything we did because our record speaks for itself. I will tell you, though, that we made great progress on that front. Just to give you a very important example: we brought our primary structural balance from a 6 per cent deficit in 2010 to a surplus of 0.2 per cent in 2012. That means that two thirds of our structural budgetary adjustment is already accomplished.

 

Now, preparing our post-troika future is one of our biggest challenges yet. Our strategy of gradually resuming market access has been put in place right from the beginning. And just last week we made a 10-year bond emission which was very well received by investors from all around the world and of all kinds of institutional profiles. The success of this strategy is extremely important. Not only because after June 2014 we will no longer have access to official funding from our European partners. But also because the private sector has faced in these last two years a very severe credit scarcity as a result of our sovereign debt crisis. To resume normal conditions of financial flows is a necessary condition for economic growth.

 

The fragmentation of the European financial markets has hit peripheral countries very hard and it is jeopardizing the whole point of the Single Market. Portuguese, Irish, Greek, Spanish or Italian businesses are now competing with everyone else under adverse conditions regardless of their individual merits, regardless of their business plans, their ideas, their ability to innovate or their quality of customer service. This is not what the Single Market is about. The Single Market is based on the idea of free competition and free trade without geographical discrimination. That is why we strongly supported from day one the project of a Banking Union and a true Financial Union. The road to a true Financial Union, with a common supervision mechanism, a common resolution system and a common deposit insurance scheme, is a necessary one. And we should walk it sooner rather than later.

 

But we have to go beyond financial matters while preparing our future. After a first phase of structural reform we are now entering a second phase of reform for growth and jobs. Last month the Portuguese Government announced its short and medium term strategy for growth based on the industrial renewal of our economy. Soon we will announce our strategy for other sectors such as mineral resources and services.

 

Things such as

- A gradual lowering of business taxes and making the tax system more favorable to investment;

 

- Going an extra step in simplifying requirements and reducing the administrative burden borne by business activity with an ex-post approach for licensing to create a more business-friendly and a more job-friendly environment;

 

- Accelerating the formation of a true apprenticeship and occupational training system in our public education;

 

- And the creation of a financial institution focused on lending to Small and Medium Enterprises.

 

These are among the main pillars of our growth strategy.

 

We want to increase the share of exports in our economy and give a new and sustainable impetus to our tradable sector. We are diversifying the range of exportable goods and services and we are diversifying our destination markets. And we have concrete results to show. In 2013 our exports will reach 40 per cent of GOP, from a low point of just 28 per cent in 2009. Moreover, in 2012 machinery goods accounted for almost a quarter of our export growth, and exports for non-European countries grew by 20 per cent. But we want more because we believe we can compete in the global economy. I reject the view that Portugal, or the remaining Southern European countries for that matter, will not be able to enjoy the benefits that the global economy has brought to many regions in the world. As long as we are properly prepared, Portuguese businesses and Portuguese citizens will successfully bring their creativity and the fruits of their labour to the world and participate more actively in the global economy. That will be the basis of our future prosperity.

 

As you know, we are also about to enter a second phase of structural reform of the State. And, as I said at the beginning, the report published today will give a very positive contribution while we ponder our options and estimate their impact. Many of the choices before us are not easy and we want to make the more reasonable and careful choices. They will all have to be guided by three general principles.

 

First, equality between the public and private sectors. It is a matter of justice that working conditions and retirement requirements should not be different for a private sector worker and a public employee.

 

Second, intergenerational equity. It is a question of fairness that future generations be able to enjoy proper protection in old-age and health care like their parents and grandparents did before them. And it is also a question of fairness that young people be spared the oppressive fiscal burden that would be on their shoulders if structural reform never reached the light of day.

 

Third, sustainability. We have to strengthen the financial structure of all those services and protection devices that our societies have built. lt is the backbone of our Welfare State but it has been weakened by unrealistic promises, institutional failures, and - let us not forget- demographic factors. Ignoring financial sustainability now would be an irresponsible and foolish course to take. We have to act now for the sake of the preservation and improvement of our social protection programs and institutions.

 

Today we face the most terrible cost of crisis which is unemployment. The personal and social pain caused by unemployment should be an alarm bell for all political and civic agents in Portugal and in Europe. The current level of unemployment is obviously unacceptable and we are driving all our efforts to fight it and bring it down as fast as we can.

 

In Portugal everyone is working very hard so that, some years from now, our children and our grandchildren will be able to see far beyond our present difficulties. So that they can look back and see that this was our turning-point, that a new basis for true, long-lasting prosperity was built during these difficult times.

 

A lot is depending on our progress in Portugal. We know that we have the eyes of Europe set upon us. Our success will be Europe's success as well. We count on the support of our European partners. We can count on them because we have given Europe good and solid reasons for their continued trust in us. Unity and responsibility are the bonds that will make Europe stronger and I think that Portugal is increasingly seen by everyone as a country which stands for these values and for putting them into practice in real decisions.

 

Moreover, divisions among European countries have come to the surface in these last 3 years. An invisible divide has grown between North and South. This is a very serious threat to the European project. To underestimate it would be extremely short-sighted. Now is the time to reject those divisions and bring North and South closer together. I believe that Portugal can play a leading role in bridging those differences. We are ready to take that leading role. With our historical experience in bringing peoples and civilizations together, with our accumulated credibility as demonstrated in Portugal's commitment to Europe, we can help restore the unity that the financial crisis has put into question. We can only put the current crisis behind us, both in the South as well as in the North, if we work together. I believe we can do it and Portugal will be there to bring a renewed spirit of compromise, unity and responsibility to the European project.

 

Thank you very much.

 

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