Remarks by Angel Gurría, Secretary-General OECD
Lisbon 25 June 2008,
Prime Minister, Minister Teixeira dos Santos, Ambassador Ferro, Ladies and Gentlemen:
It is a pleasure to be back in Lisbon to present our OECD Economic Survey of Portugal. I would like very briefly to share with you some of its key conclusions and main recommendations.
Let me first thank the Portuguese government for the excellent cooperation during the preparation of the Survey. Throughout the process we had access to high quality information and we benefited from frank and thorough exchanges with many government officials and experts; but also with independent researchers, central bank representatives and members of civil society.
This report was discussed at a meeting in the OECD where all member countries are represented. It therefore benefited from the peer review process that is so characteristic of our Organisation. We hope it will help Portugal to benefit from the experience of other OECD countries and thus contribute to improve your economic performance.
Beyond the current international economic situation which is particularly unsettled - and I hope also temporary -, our review of Portugal’s economic policy focuses on the broader picture.
The 2008 Economic Survey of Portugal reflects a general positive assessment. But it leaves no room for complacency; rather it makes a strong case for continuing the reform process.
Let’s take a closer look. Good news first.
Portugal has made remarkable progress in fiscal consolidation
The fiscal consolidation programme - introduced in 2005 - has produced remarkable 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) has been an outstanding accomplishment.
The consolidation strategy has included both short-term measures (with an immediate impact) and in-depth reforms to tackle the unsustainable current expenditure growth, which caused large deficits in the past.
The public administration reform is an important pillar of this fiscal consolidation. The State Administration is being reorganised. The number of services and public servants are being reduced. A new legal framework for mobility within the public administration has also been introduced. These measures can help achieve organisational improvements at all levels of government.
Work is in progress to bring labour market 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.
In the immediate future, Portugal will need to consolidate the gains it has made to date.
But while pursuing this goal it will also have to address the challenge of achieving long term and sustainable growth.
The challenge of growth: a central concern
Even though Portugal’s growth performance has recently improved (discounting of course the current slowdown), we see medium-term growth potential - estimated at around 1½ per cent - as too low to substantially improve living standards. It is also low relative to the speed at which other economies are moving.
The unemployment rate - another disappointing indicator - has been creeping up since the beginning of the decade. Although recently this rate may have stabilised, this remains a limited and perhaps fragile improvement. Reforms are needed to durably reverse this trend and bring long-term unemployment down.
Removing the remaining bottlenecks to increase productivity is fundamental to achieve a stronger and more sustainable economic expansion. 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 to foster innovative activities. However, Portugal has still to reap the full benefits of globalisation.
Let me expand on these issues…
Making the most of globalisation
As everyone knows, Portugal was a pioneer of globalisation more than 500 years ago. Today, the economy is in the process of adjusting to accelerated changes in world trade. This is not an easy challenge.
Export performance has been improving stronger and there are some encouraging signs about the economy’s capacity to deliver growing product and market diversification and a shift towards higher technology exports.
Greater trade with the rest of the world is an important engine of growth and the benefits of increasing FDI are illustrated by the contribution that current investors are making to productivity and innovation in Portugal, two key ingredients to improve economic performance.
To make the most of globalisation Portugal requires a more favourable business environment. The government has already made significant progress in this area through a wide range of reforms, including the SIMPLEX programme. We would urge that this action continues.
More also needs to be done to increase competition; particularly in infrastructure sectors that provide services to the whole Portuguese economy. Prices remain high for some services, such as telecommunications, electricity and ports. Competition is extremely limited in rail transport. Greater efforts need to be made to strengthen competition in these areas, which are especially important for SMEs.
The government has a key role to play, providing the appropriate regulatory environment and encouraging competition through its own procurement processes. Increasing competition is a powerful tool that will help lower prices, encourage innovation and higher quality. This in turn will improve the cost-competitiveness of Portuguese firms and the attractiveness of the country as an investment platform.
Portugal also has to improve its local innovation capacity. It is one of the OECD countries with the lowest “investment in knowledge” as a percentage of GDP, with less than 2%. It is also at the bottom of our list of patent-based indicators, the so called Triadic Patent Families (with 9 patents per year). Technology payments to foreigners actually exceed the R&D investment by domestic firms.
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 more diplomatically, but it certainly makes the point.
Let me now highlight one more challenge which is crucial for improving Portugal’s economic performance:
Making the labour market more adaptable
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 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 (which is close to 50%). The labour market has not been able to get job-seekers back into work as effectively as in the past.
Building on measures already taken, reforms are needed to develop human capital and facilitate labour market adjustments in a changing environment. To encourage hiring of workers under regular contracts and reduce long-term unemployment, Portugal needs to address some of the rigidities in its labour market.
There is a need to improve the balance between flexibility and workers’ protection. This is difficult, and each country has its own recipe. The proposed amendments to the Labour Code now being discussed with the social partners will help tackle these problems. If enacted, they would represent a significant step forward.
We know the Government is looking for alternative ways to introduce reforms in this crucial area. OECD welcomes these efforts; because we are certain they can give a significant impulse to Portugal’s productivity and socio-economic progress.
Regarding human capital development, action is under way. There are interesting reforms in education. The well designed Novas Oportunidades programme is being implemented. It provides new learning opportunities for the young who are at risk of dropping out of school and offers opportunities to adults with low educational attainment.
The results to date are promising. In fact, several countries in the OECD could now benefit from Portugal’s experience in this area. As the scale of the programme is increased - and in order to maximise its benefits -, it will be crucial to focus heavily on the continuous monitoring of the implementation and the evaluation of the results.
To conclude this brief presentation, let me just say that we are confident that Portugal can build a brighter and stronger economic future. The government has made steady progress in improving its fiscal position and a wide range of growth-enhancing reforms is being implemented. These reforms go in the right direction and we encourage the government to press ahead with the reform agenda. Commitment and continuity will help put the economy on a stronger path and thereby raise living standards in a sustainable way.
Of course, “the devil is in the implementation”. Transforming reforms into policies and policies into action is a complex challenge. But it is the only way forward. As Fernando Pessoa, that fantastic Portuguese poet used to say: “Success consists in being successful, not in having potential for success”.
OECD will be there to help Portugal succeed in its reform efforts.
We are looking forward to working with you. You can count on us, Prime Minister.
Thank you very much.
Economic survey of Portugal 2008
to be changed
The 2008 OECD Economic Survey of Portugal - Presentation at the Workshop