Remarks by Angel Gurría, OECD Secretary-General
Lisbon, 27 September 2010
Dear Minister Teixeira dos Santos,
Ladies and Gentlemen,
It is a great pleasure to be back in Lisbon and a great honour to present the OECD’s Economic Survey of Portugal in the presence of several Cabinet members and such distinguished audience.
This report comes at a critical juncture for the Portuguese economy. We hope that its recommendations will be helpful to inform your policy discussions.
Let me start by putting Portugal’s economy in the broader world context.
A weaker global recovery than anticipated
In our most recent Economic Outlook, published at the end of May, we projected output in OECD countries to rise by about 2 ¾ percent, both this year and the next. However, recent short-term indicators point to activity being somewhat weaker than anticipated.
Some factors are weighing, such as the removal of policy stimulus and weaknesses in the housing and labour markets in many countries. Moreover, financial market condtions, although greatly improved, have not yet fully stabilised.
In fact, the main policy challenge in many OECD countries is how to reconcile support for a still fragile recovery with the need to move back to a more sustainable fiscal path. This is not an easy balance, and the room for manoeuvre varies from country to country.
A notable feature of the Outlook is the difference across countries and regions. The main area of dynamism is in major emerging-market economies, where growth is set to remain solid. This is providing a much-needed stimulus to OECD economies and should also benefit Portugal, whose exports have increasingly tapped these markets recently.
Portugal has of course been hard hit by the global crisis and sovereign spreads remain high, reflecting investors’ concerns on fiscal sustainability. This is unfair in many ways, especially since Portugal pushed through major economic reforms prior and during the crisis, including of labour markets and pensions.
Nonetheless, I am confident Portugal will weather this crisis. The ambitious fiscal consolidation strategy must be backed by a strong political consensus which the country has in the past been able to achieve.
But beyond numerical targets, there are other important challenges ahead which are more structural in nature. The fact of the matter is that Portugal entered the crisis with a productivity problem, which had been accumulating for several years. If the necessary political consensus could be taken one step further and used to deepen the structural reform process that was already underway, Portugal would not only boost productivity and living standards , but also would become much more resilient to future crisis.
An ambitious structural reform programme holds the promise of restoring competitiveness, which would yield higher growth and job creation. This in turn, will facilitate fiscal consolidation in a mutually-reinforcing dynamic.
This is the main message of the OECD survey.
Portugal’s immediate challenges: restoring confidence
The most immediate challenge is to foster investor confidence, as large spreads not only endanger fiscal sustainability but also put the recovery at risk by raising funding costs throughout the economy. Rapidly consolidating the public finances is the key to restoring investor confidence.
The comprehensive, fiscal consolidation implemented by the government was courageous and appropriate. It signals the commitment over the coming years to bring public finances to a sustainable path. It is essential that the consolidation measures continue to be implemented swiftly. It is also important that they are well communicated to markets.
Adopting a comprehensive medium-term expenditure framework supported by an expenditure rule would enhance the sustainability and the credibility of the fiscal adjustment.
Existing opportunities to make the tax system less distortive and more growth–friendly should also be seized. The Economic Survey devotes a chapter to this crucial challenge. Our analysis argues for more efforts to switch taxes from labour to consumption and property. This would offer a practical avenue to regain lost competitiveness and to achieve employment gains, especially if involved a reduction of social security contributions with particular focus on low-wage workers. It would also help to rebalance the economy and reduce the current account deficit.
There is also room to broaden the tax base, which would also help support fiscal consolidation while reducing economic distortions.
Policies to boost long run growth
But if the recovery is to be durable, Portugal’s structural problems need to be tackled within a broader strategy.
One of the key policy priorities going forward is to avoid the cyclical increase in unemployment from becoming structural, which would further reduce potential output over the medium term. The Survey acknowledges the recently introduced labour code and the new Contributory Code of Social Security as important steps in labour reforms. But it argues that we can go further.
More specifically, Portugal needs to address its two-tier labour market, where flexibility is essentially achieved through the extensive use of temporary contracts. To curb segmentation, there should be a certain convergence between employment protection legislation governing temporary contracts, on the one hand, and regular contracts, on the other.
And to foster labour supply while providing appropriate income support during unemployment spells, Portugal should also revise the architecture of unemployment benefits. For all workers, the generosity of benefits should be inversely linked to the duration of unemployment, rather than to the age of the worker.
Beyond the labour market, other structural reforms can help restore productivity growth.
Portugal needs to get rid of unnecessary red tape. Bottlenecks are preventing the entry of efficient firms and the exit of inefficient ones, hindering productivity, especially in services. The simplification of the tax system is one priority to improve the business environment.
Portugal also needs a strategy to move up the global value chain. This should involve boosting the innovative capacity of the country as a whole. Much can be done on that score. From building infrastructure to improving access to broadband. But nothing will work without a sustained effort to boost education.
Human capital is fundamental to economic growth. And investment in education can also narrow gaps in society, enhancing social cohesion.
Portugal has accomplished much in this area. Reforms to mainstream vocational education are proceeding well. Novas Oportunidades is a promising programme. The government’s focus on vocational offering is also a welcome development. But as the scale of the programme expands, efforts should focus on evaluation tools, especially in the context of tight budget constraints.
More work is also required to reduce school-year repetition and continue strengthening monitoring mechanisms for those students at risk of dropping out. The impact of the recent rise of compulsory education, from the age of 15 to 18 years, an excellent initiative, needs to be closely monitored, especially with regard to performance in school so that quality is preserved.
In Portugal, returns to education are the highest among European OECD countries. At the same time, expenditure per student is below OECD average. There is a huge untapped potential, so Portugal is right to emphasise education as a means to boost productivity.
Dear Prime Minister, Ministers, Ladies and Gentlemen,
Portugal had two decades of growth and convergence of living standards towards EU average. There was a widespread feeling of confidence in a bright future, supported by the expectations of joining the European Union in 1986 and later the euro in 1999. This dynamism seems to have been lost in the last decade. Now at a time of crisis, we should not allow ourselves to be dominated by pessimism. Pessimism breeds paralysis.
Portugal has a number of advantages: a strong entrepreneurial culture, powerful networks built on historical and cultural affinities, a hard-working labour force; an ample supply of well-qualified human resources, including in sciences and engineering and a thriving and welcoming culture. And notice that I didn’t mention the climate and the food! These are the solid foundations on which to build the growth model of tomorrow. A model in which the more creative and open countries, such as Portugal, will be at a clear advantage. But we need to ensure that these strengths translate into prosperity.
With the political savvy to make the most out of this crisis, Portugal can enter a new era of sustained increase in living standards.
You can count on the OECD to be by your side to make that happen.