Remarks by Angel Gurría, OECD Secretary-General
Lisbon, 25 June 2008
It is a pleasure to be here today to present to you the OECD Economic Survey of Portugal. I would like first of all to thank the Government for the invitation and for organising this Workshop.
I will not dwell on the current international economic situation, which as we know is particularly unsettled -and I also hope temporary. These are difficult times for many countries and it is precisely in these times of turbulence when political leaders have to keep their sight on the broad perspective; on the long term evolution of policies and outcomes.
The OECD Survey offers this longer-term vision, and this is what I want to share with you.
The main message of this Survey is a positive one. We highlight, for example, the remarkable progress on the fiscal front and other important achievements like the recent improvement in the structure of Portugal’s exports.
However, there are still important challenges ahead and this is no time to slacken efforts. Portugal’s growth remains below expectations, delaying the process of convergence with other OECD countries. And there are important areas that need deeper reform.
Let’s take a closer look.
Portugal has made enormous progress in fiscal consolidation
The fiscal consolidation programme introduced in 2005 has produced impressive results; bringing the deficit down from 6.1% in 2005 to 2.6% of GDP in 2007 (based on the Stability and Growth Pact definition). This is outstanding!
The consolidation strategy has included both short-term measures (with an immediate impact) and in-depth reforms to tackle the unsustainable current expenditure growth (the cause of large deficits in the past).
An important pillar of this fiscal consolidation has been the public administration reform. The State Administration is being reorganised. The number of services and public servants is being reduced. A new legal framework for greater mobility within the public administration has also been introduced. These measures are bound to improve efficiency at all levels of government.
Work is also in progress to bring labour rules for civil servants in line with those for the private sector. The reform of the retirement scheme has been done, and this should increase flexibility and mobility between public and private sectors.
These moves represent important progress. The challenge now is to secure the results of these efforts and further reduce the deficit.
But at the same time Portugal will have to ready itself for long term and sustainable growth.
The challenge of growth: a central concern
Even though pace of Portugal’s economic growth has recently improved, we estimate mid-term potential growth at around 1½ per cent, which is too low to improve living standards substantially and promptly. It is also low considering the speed at which other economies are moving.
The unemployment rate - another disappointing indicator - has gone up since the beginning of the decade. Recently, there are signs that this rate is stabilising, but this is perhaps a fragile improvement. We believe that major reforms are needed to bring unemployment down sustainably.
Removing the obstacles to raising productivity is fundamental to achieve a stronger and sustainable economic expansion, to increase growth and to reduce unemployment. This is a key policy challenge that can be accomplished by building on reforms already implemented.
The government has defined a clear strategy to modernize the economy; measures are being taken to make the business environment more dynamic and foster innovative activities. However, Portugal is still not taking full advantage of globalisation.
Let me expand on these issues…
Making the most of globalisation
Clearly, Portugal is a pioneer of globalisation. The discoveries in the 15th century were instrumental in connecting peoples and establishing a worldwide trading network.
Just like 500 years ago, globalisation today represents both a challenge and an opportunity for the Portuguese economy, which must now adjust to accelerated changes in world trade flows.
This is not an easy challenge. Portugal’s export performance has been disappointing over the past decade. Recently, however, there are encouraging signs about the economy’s capacity to make more of the opportunities of globalisation: growing product and market diversification; rising high-technology exports; and a notable increase in foreign direct investment projects in Portugal.
Portugal is open to the rest of the world, with low formal barriers to trade and investment. This is a solid foundation for making more of these opportunities. However, measured as a proportion of GDP, trade and investment flows are still relatively low, and Portugal remains little integrated into the world economy. Especially in comparison with other European countries of comparable size. This means there is still significant unexploited potential.
To make the most out of globalisation Portugal requires a more favourable business environment. This would help firms adapt more quickly to the challenges of producing and competing in a globalised world. It could also be a key factor in attracting greater foreign direct investment inflows.
The government has already made significant progress in enhancing the business environment through a wide range of reforms; including the SIMPLEX programme that has helped to reduce the administrative and regulatory costs that firms face. Yet more should be done to modernise the regulatory framework for the product market. It is important, for instance, to complete implementation of the program to streamline legal procedures for licenses. These reforms are especially important for Portugal’s many SMEs.
More also needs to be done to encourage greater competition; including in infrastructure sectors that provide services to the whole Portuguese economy. For example, prices remain high for telecommunications, electricity and port services and competition is extremely limited in rail transport.
The government has a key role to play, providing the appropriate regulatory environment and encouraging competition through its own procurement processes. Raising competition is a powerful tool that would help lower prices, increase innovation and quality, and improve the cost-competitiveness of Portuguese firms and the attractiveness of the country as an investment platform.
Portugal also has to improve its capacity to innovate. It is still one of the OECD countries with the lowest R&D rate, at less than 2% of GDP, and the private component moreover is very low. It also lags behind in terms of patents. As a result it pays more for the use of foreign technologies every year than Portuguese firms spend on research and development.
The link between innovation and economic performance is becoming more widely appreciated in public policy. This reminds me of a quote in one of Michael Mandel’s last books: “Politicians and economists that don’t talk about technology when explaining economic expansion are “enemies of growth””. This could be put in more diplomatic terms, but it certainly touches on an important issue.
Let me now highlight one more challenge that we consider crucial for improving Portugal’s economic performance:
Making the labour market more flexible
In a highly competitive global economy human capital is a strategic comparative advantage. Portugal needs to make significant progress in this area. Educational attainment is relatively low among the working age population and inter-generational improvement has been slow by international comparison.
Recent labour market outcomes have been disappointing. The unemployment rate has doubled over the past 5 years, reaching 8% in 2007 - with a growing share of long-term unemployment (close to 50%). The labour market has not been able to get job-seekers back into work as effectively as it once did.
Building on measures already taken, additional reforms are needed to develop human capital and facilitate labour market adjustment in the constantly changing environment. To encourage hiring of workers under regular contracts and reduce long-term unemployment, measures are needed to make the labour market more flexible.
A better balance must be struck between flexibility and workers’ protection. This is difficult, and each country has to have its own recipe. The proposed amendments to the Labour Code now being discussed with the social partners will help to tackle these problems. If enacted, they would represent a significant step forward.
Regarding human capital development, interesting reforms are under way in the education area. The well designed Novas Oportunidades programme is being implemented; providing new learning opportunities for youth and adults. The initial results are promising. As the scale of the programme is increased - and in order to maximise the benefits of the action taken -, great attention will have to be paid to the implementation process and to evaluating the results.
This is just a little taste of what can be found in the Survey.
Of course, I have not covered all the critical elements in this study – I have merely presented some of its main conclusions. Our lead experts and I are at your disposal to answer any questions.
Thank you very much.
Economic survey of Portugal 2008
to be changed
Presentation of the 2008 Economic Survey of Portugal