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The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Portugal published on 25 June 2008.
Portugal needs to seize the opportunities created by rapidly expanding world markets. For a small economy such as Portugal’s, greater integration in the world economy is particularly important because of the opportunities for scale economies, specialisation and access to technology that it brings. The challenge is to take greater advantage of the country’s high level of openness and increase export growth while reinforcing its attractiveness for FDI flows that have the potential to boost productivity. Rapid changes in global trade have been particularly challenging for Portugal, because they have weakened its traditional comparative advantage in labour-intensive manufactures. As a result, overall export performance was disappointing in the decade to 2006. To lift trade performance, the economy must adapt by boosting the productivity of domestic firms, diversifying their market and product orientation and by raising overall product quality. There are encouraging indications that this transformation has already started and that Portugal is again the target of important new FDI inflows that will assist this change. To ensure that this adjustment continues on a durable basis, the ongoing reforms should continue, focusing on strengthening framework conditions, improving the business environment, fostering competition across the economy and facilitating trade and investment through enhanced infrastructure.
Tariff barriers to trade have been reduced in line with the EU internal market and trade policies but there is still room to lower non tariff barriers. The costs of customs controls and document processing have in the past been amongst the highest in the OECD. In this context, the measures implemented by customs to reduce the costs of exporting and importing through extensive improvements in information technology (IT) systems are an important step forward and should be fully implemented. Moving ahead quickly to streamline the customs code by removing non EU penalties and fully recognising tariff classifications of other EU members would also help to encourage trade.
FDI inflows have been significant over time, underpinned by some large investments by European multinationals. However, Portugal’s FDI inflows pale against those observed in other small catch-up European countries, suggesting that there is potential to increase the flows into Portugal. Formal barriers to FDI are comparable to those in other OECD countries. A notable exception is air transport where restrictions are the highest in the OECD; these should be lowered to encourage competition and tourism. But FDI flows are also driven by broader considerations that include corporate taxation, product market regulations, labour market settings and the level of human capital. To encourage FDI and maximise benefits from increased inflows, broad policy measures are required to improve the business environment and upgrade human capital. The Policy Framework for Investment developed by the OECD can assist the ongoing reform process. Advances on this front would attract more technologically advanced FDI, and help linkages between foreign firms and suppliers to develop more widely in the domestic economy, thereby maximising technological spillover effects. Increasing FDI would also help the structural adjustment to changes in global trade, by increasing productivity and developing a more diversified export base.
There has been a significant improvement in the business environment in Portugal. The government has introduced a broad range of measures, in particular the simplification of administrative procedures (SIMPLEX), to improve the effectiveness and efficiency of public services and lower the costs that government administration and regulations impose on citizens and firms. These reforms have already had notable results in areas such as the time to start a business and the scale of document filing obligations. An important part of this process is a notable expansion of e government and IT use, which has allowed significant efficiency gains. There is room to build on this progress and move ahead. The aim should be to achieve the best practice in the OECD. In particular, licensing, which involves all levels of government, remains burdensome across the board as nearly all economic activities require some kind of licence. The central government should fully implement reforms to reduce these licensing costs and collaborate with municipal governments to improve the processes also at the local level. To boost services exports and build on strong growth in business services exports, the government should also work towards harmonisation with, or mutual recognition of, the standards in its larger trading partners: these cover a range of areas, including for instance professional qualifications and technical standards.
Portugal has made progress in enhancing competition domestically; and regulators are taking important steps to further boost competition. By putting pressure on firms to innovate, improve quality and lower prices, greater competition is a powerful catalyst for boosting productivity and growth, as illustrated by the example of Australia. Therefore, the government should give higher priority to competition enhancing reforms. Consideration should be given to doing a comprehensive review across the whole economy for identifying and removing remaining unnecessary regulatory restraints on competition. Such an exercise should also aim at developing regulations and regulatory actions that actively encourage vigorous competition between existing players and facilitate the entry of new firms.
The efficiency, quality and price of infrastructure services (communication, energy and transport) are important factors influencing the cost-competitiveness of firms, the attractiveness of the country to foreign investors, international trade flows and consequently Portugal’s productivity growth. Significant progress has already been made in increasing physical infrastructure assets, especially the highway network, deepwater container port capacity, electricity transmission capacity with Spain and telecommunications networks. Restrictive regulations have been gradually reduced; large strides towards fully liberalized market frameworks have been made; and competition is increasing. Nevertheless, port, electricity and some telecommunications prices remain high; large incumbents still dominate the electricity and telecommunications sectors; and there is substantial scope to increase efficiency and competition across all infrastructure sectors.
In telecommunications, it is important to continue to foster competition between different networks and firms. Action should be taken to increase the ownership independence of the copper wire and cable networks following the cable network spin off by Portugal Telecom. Mobile termination charges remain high and should be lowered, preferably with no discrimination of termination charges between calls within a firm’s own network and calls from other networks, so as to remove network externalities that favour larger firms. A proposal in this direction has been presented by the sector regulator.
The electricity industry is in transition from a regulated to a fully liberalised market. The government should continue to encourage greater competition in generation by issuing licences to build new power stations to non-incumbents and, eventually, including renewable generators in the wholesale market. In the meantime, the virtual power plant scheme should be extended to allow non-incumbents greater access to current generation capacity. Transmission capacity with Spain needs to be further increased and it is important that government facilitate this by ensuring that there are no administrative and regulatory obstacles impeding the planned capacity expansion. At the retail level, regulated tariffs should be phased out as planned and consideration given to extending this to all consumers.
In transport, bottlenecks still remain in railways, at the Lisbon airport and in logistics. Furthermore, port charges are high and the state-owned railway companies are making large losses. The proposed new investments in high-speed rail and for the new Lisbon airport should be based on transparent cost-benefit analysis and be used to promote competition. Continuing to lower cargo handling and processing costs at ports through better IT systems and an expansion of logistics platforms should be a priority. To increase efficiency and lower port prices, it would be appropriate to promote yardstick competition among the ports. In rail, the government should introduce performance contracts for both the state rail and rail track companies with clear performance and financial targets, to help strengthen efficiency. This would prepare the ground for introducing open competitive tendering for rail services that would further increase efficiency in the sector.
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.