Convergence: Gross domestic product (GDP) per capita in purchasing power parities -- It is curious that Ireland was as developed as the Iberian Peninsula when Portugal and Spain joined the EEC (European Economic Community) in 1986. But by the end of the century, it was already above the average of the 15 pre-2004 EU (European Union) member states.
This article was published in Expresso on August 25, 2023. It was written by Joana Nunes Mateus with infographics by Jaime Figueiredo.
Andres Rodriguez-Pose, the expert chosen to modernize the European cohesion fund policy, and Duarte Rodrigues, vice-president of the Agency for Development and Cohesion (Agencia para o Desenvolvimento e Coesao), discussed with Expresso the ingredients of the “magic formula” capable of accelerating convergence with the European Union.
“Development is a table,” summarizes Andres Rodriguez-Pose, the expert from the London School of Economics chosen by the European Commission to lead the high-level group that is reflecting on the future of cohesion policy and the maximization of the impact of these funds for convergence with the European Union (EU).
“To develop, we need four legs, interconnected, that keep the table stabilized. Every leg of the table involves all kinds of investment in infrastructure, skills, innovation and institutions.
“For a long time, Portugal, like Spain, invested European funds in a single leg on the table and forgot all the others. Today, it has one of the best motorway networks, not only in the EU but in the world, because of investing massively in infrastructure.”
Duarte Rodrigues, vice-president of the Agency for Development and Cohesion (AD&C), says:
“It was at the turn from QCAIII (European Commission 2000-2006 Structural and Cohesion Fund Cycle) to QREN (2007-2013 EC funding cycle) that Portugal substantially changed its bets on European funds. It was in the 2007-2013 community framework, which preceded (Portugal) 2020.
“It has become the country that most invests in human capital and – among the least developed countries – the one that most invests in innovation. But this takes time. Public policy bets on four legs, but it has to find the moment when they are mutually reinforcing.”
Andres Rodriguez-Pose says: “Once it has these bases of economic development, Portugal has immense talent and potential to grow significantly and converge with the EU.”
Even while losing so many qualified young people to migration?
“We can see emigration as a short-term loss of talent or as an asset,” replies the expert. Take the example of Ireland, which experienced a similar problem.
“When Portugal joined the EU in 1986, Ireland had more or less the same GDP per capita as Portugal and less than Spain. “Now it has the second highest GDP per capita in the world, after Luxembourg.” (See graph above.)
“The many talented Portuguese people working abroad are gaining experience and knowledge that can be leveraged later on. That’s what happened to Ireland when it brought the four legs of the table together to offer the right conditions for their return, starting in the late 1980s, 1990s – to Dublin, Cork and other parts of Ireland to work. To contribute to the dynamism of a country that has witnessed the highest level of growth in Europe that we have seen in recent decades. They left a traditional Ireland and returned to a modern Ireland open to the world.”
Why do so many say Ireland is all about low taxes and multinationals?
“If that were the case, it would have been simple for Portugal: all you would have had to do is lower taxation,” replies Andres Rodriguez-Pose. “But it wasn’t that simple. Ireland is committed to transforming the economy through skills, making it more dynamic and diversified. What attracted the investment were the right conditions.”
In this context, Portugal must invest in the quality of its institutions and ensure that the country, as a whole, generates a consensus on the right path to follow, with everyone rowing in the same direction. “Where do we want to go? What’s the strategy?” says Andre Rodriguez-Pose. “I have a serious problem with this rush to spend money that generates a certain short-term dynamism, but long-term stagnation. It is important to ensure that the funds are used strategically to boost the Portuguese economy in a more sustainable and resilient way. That’s how Ireland was able to prosper. If Ireland did it, why can’t Portugal do it?”
Consensus and Commitment
This consensus on the way forward must involve all economic, social or cultural actors create sustainable development for the benefit of all Portuguese people and not just for the individual benefit of some, builders or politicians.
“It is important to ensure that any type of intervention is, in fact, for the benefit of the community. It’s not every actor saying, ‘How much can I receive in the short term’. This does not benefit anyone,” warns Andres Rodriguez-Pose.
“Knowing the Portuguese economy and society better, I think, the problem is not so much consensus, but commitment,” says Duarte Rodrigues. “We quickly reach consensus that is then too fragile. And structural policy needs time. It doesn’t have results the next day. It forces you to make choices, to be persistent.” Now, “this means commitment. It means not being afraid of what is big. It is not possible to compete in today’s global economy without cooperation and with thinking small.”
Portugal 2030 Strategy
Recover the economy, protect employment and make the next decade a period of recovery and convergence of Portugal with the EU, ensuring greater resilience and social and territorial cohesion. This is the vision of the government’s strategy, defined at the beginning of the decade, as a reference for European funds and other public policy instruments.
The vice-president of AD&C explains. “What does our 2030 strategy say? The vision is to accelerate our external convergence while maintaining internal cohesion. And it has two very ambitious key indicators. One is to make all regions of the country converge with the European average in this decade. That is, if they all converge, not only does the country converge, we don’t leave any region behind. Another is to lower poverty and ensure regions are close to each other.”
Cooperation and Risk
The convergence route involves increasing productivity through innovation and internationalization.
“We have to gain scale either because we have bigger institutions and bigger companies or because we have a lot of cooperation. This is the hardest bet given the way our economy works. It is necessary to assume that scale is absolutely decisive to compete in a global economy,” says Duarte Rodrigues. Examples are the clustering processes and the Recovery and Resilience Plan Agendas (PRR), as consortia that involve hundreds of companies and research centers in the collective effort to develop innovative products with high added value for export.
“But innovation is risk. We have to be risk tolerant. We have to take the risk of an economic project failing, not because it was poorly selected or there was fraud,” warns Duarte Rodrigues. “If half of the PRR Agendas are successful, Portugal can evolve a lot.”
Andres Rodriguez-Pose recalls how the culture of accepting risk explains the greater dynamism of the USA vis-à-vis Europe. “The US has invested massively in supporting new startups and small businesses to ensure they grow into larger companies. You have a brilliant new idea, you get institutional backing, but you are not doomed for life if you fail. You can start over later.”
When it comes to betting European funds, it is therefore important to take risks. “We must bet on new ideas and new entrepreneurs with potential,” says Andres Rodriguez-Pose. “It is not viable to continue to put money into the same companies that are not going anywhere.”
The expert warns of this problem, which is not exclusive to Portugal. “Often, the projects that are supported are not the most innovative, but those that already have been financed previously.” This is an institutional problem to be resolved.
Forecast of Covergence: Gross domestic product (GDP) per capita in purchasing power parities -- The indicator used is GDP (Gross Domestic Product) per capita in purchasing power parities. If Portugal has stagnated at around 70%, Ireland is already worth more than 230% and is approaching the leader, Luxembourg, a small county two and a half times more developed than the European standard. It should be noted that Irish GDP is particularly distorted by the high number of US technology companies and large multinationals that have chosen Dublin – and its low corporate tax rate – to account for wealth that, in fact, does not accrue to this country of 5 million. Driven from abroad, it is still impressive how Ireland has progressed in recent decades compared to the European average.
Growth of GDP Per Capita: Average annual growth rate in % -- Even discounting the share of wealth that belongs to foreign investors in this globalized economy, the fact is that Ireland knew how to seize the opportunity to mediate the US relationship with Europe to become more productive and better pay those who work there. It has the fifth highest minimum wage in the EU. It ranks eighth on the United Nations Development Index, behind Switzerland, Norway, Iceland, Hong Kong, Australia, Denmark and Sweden. And it continues to grow as much or more than the countries of the Eastern enlargement.
Development Trap: Number of years in stagnation or economic decline -- In contrast, one of the reasons for the stagnation of Portuguese GDP per capita is the decline of its capital region. Lisbon should be the engine of growth in the country, but it is moving backwards, stuck for two decades in the so-called “development trap”.
Convergence: Gross domestic product (GDP) per capita in purchasing power parities -- At the beginning of the century, Lisbon was 23% more developed than the European standard. Since then, its GDP per capita has plummeted from 123% to 96% of the EU average.