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A Blueprint for Portugal’s Future Growth

IMF Survey





June 27, 2016

Portugal’s stabilization program was a success

Unemployment, high sustained growth remain challenges

New skilled workforce can contribute to faster growth

Portugal has bounced back from economic crisis but to keep up momentum it will need to carry out additional reforms aimed at boosting growth, generating jobs, and improving competitiveness, according to a new IMF publication on the country’s economy.

The book, From Crisis to Convergence – Charting a Course for Portugal, was written by the IMF’s Portugal team and published on June 28. IMF Survey discussed the book’s findings with Subir Lall, the Mission Chief for Portugal.

IMF Survey: What would you say were the most significant achievements of the stabilization program?

Lall: The program succeeded putting the economy on sound footing and restoring market access. Portugal transformed itself from a perennially large net external borrower into a net lender, with the current account rapidly turning positive for the first time in decades. With credibility restored and the recovery taking hold, the country has been able to obtain financing from markets at comfortable yields.

At the same time, many of the other underlying imbalances that had been built up over many years could not be unwound quickly. Low competitiveness and its twin, low household savings, have been longstanding challenges highlighted repeatedly in our reports. While substantial efforts were made to improve competitiveness, more needs to be done.

In addition, even though many reforms were legislated, implementation has lagged. As a result, unemployment is still higher than it should be, especially among the elderly and the young, and the corporate sector remains deeply indebted, exerting a drag on investment and growth. Looking forward, Portugal’s main challenge is to maintain the hard-won external balance while moving toward an internal balance, that is, full employment and high sustained growth.

IMF Survey: In retrospect, what could have been done differently: the design of the program, or the demanded measures and targets?

Lall: The program began in 2011 at a time of great uncertainty, with the very viability of the euro questioned. The team had to continuously adjust course with the rapidly evolving situation both in Portugal and abroad. For example, the deepening euro area crisis early in the program and the drying out of private capital flows resulted in a much more pronounced output contraction than originally anticipated.

As a result, the fiscal targets were relaxed to minimize the impact on an already weak economy, once limited market financing became available. Some have argued that the program’s fiscal consolidation had a lot to do with the sharp slowdown in activity. It is worth recalling, however, that the economy began to recover by early 2013, as confidence in a sustainable policy mix was restored, even though the necessary fiscal consolidation continued through 2014.

The composition of the fiscal adjustment was also modified during the program. The initial plan was to focus more on the spending side, since Portugal’s expenditure-to-GDP ratio was very high. That became impossible given stiff domestic opposition and several decisions by the Constitutional Court. In the end, the adjustment had to be based more on raising revenues than on cutting spending.

IMF Survey: With low growth and productivity and high unemployment, can Portugal ever tackle its high public and private debt?

Lall: This is the most fundamental challenge for Portugal and meeting it requires significant effort. Our book focuses exactly on what needs to be done. One of the key tasks would be creating more jobs for lower-skilled workers, who were disproportionately affected by the adjustment process. To this end, a prudent minimum wage policy must be complemented by measures that remove the remaining barriers to the entry of new firms and exit of unviable ones.

The limited pool of managerial talent among many small- and medium-sized enterprises should also be increased. In addition, a social dialogue that fully takes into account the interests of those who do not succeed in obtaining a stable job would foster greater transparency and social inclusion. Other reforms should aim to raise the value added of Portuguese exports, control public expenditure, implement a systemic approach to corporate debt restructuring, and improve the efficiency of public administration and the court system. Last but not least, institutional change improving the global competitiveness of the country’s trading sector should be a key element of reforms.

IMF Survey: The footwear industry is always mentioned as a successful example of being more competitive. Could this be replicated to the entire economy? More broadly, could a mature European economy compete in that area with nimbler emerging markets?

Lall: The Portuguese footwear industry is a perfect example of how a mature economy can compete successfully with emerging market economies. Facing stiff competition from low-cost Asian producers, the Portuguese shoe manufacturers chose to compete on quality rather than price. They invested in modern equipment and processes, and have been steadily introducing higher-end products, taking full advantage of available technology and skills. The sector is now thriving, with greatly expanded output and export prices second only to Italy’s. There is no reason why that success cannot be replicated elsewhere.

Meanwhile, due to better education, the skill composition of Portugal’s labor force is projected to improve more rapidly than in its European peers, giving the country an opportunity to quickly ramp up activities that require a more skilled workforce and generate more value. Complementary product and labor market reforms will be essential in helping the expanding cohort of highly-skilled people find a good match in jobs. Research also shows that even lower-skilled workers benefit from this development, as they tend to earn more in high-value-added companies.