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The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Portugal published on 25 June 2008.
Over the past two decades, spurred by EU membership, Portugal has undertaken a wide range of reforms to liberalise the economy and open it to foreign trade and investment. These reforms paid off in terms of GDP growth and Portugal managed a significant catch up towards the living standards of more affluent OECD economies until the early 2000s. Thereafter, growth stalled, unemployment increased substantially, and the convergence process suffered a reversal, and it was not until 2005 that economic growth picked up again, thanks in part to a renewed effort at macroeconomic and structural reforms. A forceful fiscal consolidation brought the deficit down from more than 6% of GDP in 2005 to 2.6% in 2007, and inflation moderated to about 2½ per cent, just above the euro average. The on going structural reforms, if fully implemented, will contribute to raising potential growth in the future; but the short-term outlook remains worrisome, as the external environment is not expected to be as benign as in recent years. The downturn in the United States, tighter credit market conditions internationally and risks of negative spillover effects in Europe imply that Portugal will face weaker foreign demand in 2008. This is likely to slow its exports and overall expansion. Looking ahead, potential growth, estimated at around 1½ per cent, is too low to narrow the income gap with richer OECD countries. Securing fiscal consolidation provides a solid base for deepening and broadening structural reforms and encourages the necessary adjustments to put the economy on a higher growth path.
Slow potential growth in the 2000s mostly reflects weak productivity gains. In order to achieve a stronger and more sustainable economic expansion, the policy challenge is to remove remaining bottlenecks to productivity enhancements, building on reforms already implemented. The international environment has changed and Portuguese firms face an urgent need to adapt to new patterns of consumption and production across the world. The way forward is to embrace globalisation and to facilitate the structural transformation of the productive sector. Portugal can count on several assets that will support its growth-enhancing strategy: i) a sound fiscal policy that is bringing the deficit down to a more sustainable level and strengthening public finances; ii) membership in the EU, with the benefits arising from trade integration and the substantial financial support for human and capital development; iii) an ongoing process of transformation in manufacturing with the diversification of products and markets, which is delivering encouraging results in terms of export performance; and iv) substantial foreign direct investment (FDI) over the years, which has strengthened the country’s export capacity and generated positive spillovers in the domestic economy. Building on these assets, Portugal needs to pursue structural reforms to raise its growth potential; and the current downside risks to the external outlook should not undermine fiscal consolidation. In fact, sound fiscal policy is an asset for facing the international economic and financial uncertainties.
Taking advantage of globalisation to allow sustained improvements in standards of living requires both macroeconomic stability and structural reforms. The government has made advances in its comprehensive strategy to achieve sustainable public finances and boost growth, with action in several interrelated areas: strengthening the fiscal situation, including a broad public administration reform that is expected to improve public sector efficiency; modernizing the economy with a focus on improving the business environment; and fostering job creation and enhancing human capital. Following such a broad approach is sound, owing to complementarities across these reforms. Many of the programmes implemented are starting to deliver positive results. The reduction of the fiscal deficit is the most tangible one, and it is important to maintain the prudent policy stance and deliver further progress in reducing the deficit. This report focuses on three main challenges that Portugal must address:
Securing progress in fiscal consolidation.
Embracing the new global environment and maximising the gains from integration in the world economy, by enhancing the business environment, strengthening competition and upgrading infrastructure.
Increasing the adaptability of the labour market, while protecting workers at risk, and upgrading competences.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Portugal 2008 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, David Haugh and Claudia Cardoso under the supervision of Stefano Scarpetta. Research assistance was provided by Roselyn Jamin.