How Portugal Can Become “California of the European Union”
Updated: Aug 18, 2022
“To embrace the ugly is beautiful: Respect all that nature gives us in all of its forms. In 2020, we saved more than 3,000 tons of food to be used in our products,” reads an ad for the food distribution firm, which occupies the 50th position in a world ranking of retailers.
Amid some gloomy economic indicators, Portugal shines some light on others: the country is gaining ground as an investment destination in Europe; the average 15-year-old outperforms peers in other advanced economies in reading, mathematics and science, and the country has one of the highest percentages of speakers of English, the lingua franca of business, among non-native English-speaking nations, reported Portugal Resident.
However, in the span of two and a half decades, Portugal has fallen 11 places in the world ranking of gross domestic product per capita, according to the International Monetary Fund (IMF) and reported in the Expresso, which began a series of articles on December 23, 2021, about the economy’s challenges.
Since 1999, the birth year of the single currency, Portugal has had the third slowest economy in the eurozone. Also, in the past 22 years, the gross domestic product (GDP) accumulated a balance of 28 percent which, annually, corresponds to an average rate of about 1 percent per year. Only Greece and Italy did worse.
Yet, especially at this juncture in time when the pandemic has forced change – and creative change -- in terms of work structure such as teleworking, there is reason for optimism, said Ricardo Reis, professor at the London School for Economics. Reis, 43, won the German Bernacer Prize in 2016 for top young European economists who have made outstanding contributions to macroeconomics and finance.
According to Anthony Beachey, a former BBC World Service journalist, who writes in Portugal about finance and economics, in Portugal Resident (May 5, 2020):
"Given the country has one of the best climates in Europe, high numbers of English speakers, good infrastructure, political stability and a reputation as being safe, there is no reason why Portugal could not eventually be the California of the EU, or even the Switzerland of southern Europe.
"That may seem far-fetched. Yet, it simply requires the type of political ambition and determination seen in the Asian tiger economies of Singapore, South Korea and Hong Kong, all of which were poorer than Portugal prior to the 1974 revolution. They are now all much richer."
Expresso wrote: "South Korea is known worldwide for its brands in the international market, such as Samsung or Kia Motors but also, more recently, for its cinematic success. In 2020, South Korea won the Oscar for Best Film for Parasites and is creating a phenomenon with the series, Squid Game, on Netflix."
In the European Union, Ireland, at the beginning of the 1980s, had a GDP per capita slightly superior to the Portuguese. Then it underwent tremendous economic growth during its Celtic Tiger years from 1995 to 2007. Today, it is practically at the top of world rankings, according to Expresso.
Portugal's average monthly wage was €1,180 in 2019 compared with about €4,000 in Germany, reported Portugal Resident. Many Portuguese earn far less and receive a monthly minimum wage of €741 (taking into account the mandatory summer and Christmas 13th and 14th wage packets), less than half the levels in Germany (€1,584), the United Kingdom (€1,600) or the Netherlands (€1,636). Portugal's minimum wage increased on January 1, 2022, to €705, according to the government website. However, when including the two additional payments, the figure was €775.83.
Why should this be the case?
Portugal's relatively low productivity, the key driver of economic success, is the main reason, according to Portugal Resident. Productivity simply measures output per worker, and countries with high productivity are more efficient at producing goods than low-productivity countries, and can thus afford higher wages and salaries. Germany and the U.S. are among the world leaders in productivity -- the average German or U.S. worker tends to be more than twice as productive as a Portuguese.
Productivity is the marriage of labor and capital.
"The problem is the eternal question of low productivity of work to which low intensity of capital contributes fundamentally," said Pedro Brinca, professor of the Nova School of Business and Economics (Nova SBE), in Expresso.
The data from the Ameco database (the annual macro-economic database of the European Commission’s Directorate-General for Economic and Financial Affairs) show that, in 2019, the productivity of work in Portugal (measure of the GDP of workers) was the 8th lowest in the EU. Already the intensity of capital (measure of the capital stock by work hours) was in decline since 2014; it was 51.2% of the EU and 43.6% in the eurozone.
"Investment in Portugal is situated at historically low levels in the half dozen years before the pandemic, and it is already declining in proportion to GDP since the beginning of the century," said Miguel St. Aubyn, professor of Lisbon School of Economics and Management (ISEG) and a member of the Conselho das Finanças Publicas (CFP), which is the independent body of the state, created in 2011, that assesses the sustainability of fiscal policy.
St. Aubyn recalled an analysis of the accounting of growth made recently by CFP:
"The capital contribution appears as negative, that is, if it had not been for the contribution of labor and the total productivity of factors, the real GDP would have decreased.”
How can investment happen?
For the State, there is the question of political will and, of course, of available finance. Already the private sector "depends on multiple factors of business capacity, of confidence in the economy, of perspectives of perceived future gains and, therefore, of good market conditions, of availability of complementary factors for productivity, namely, labor, of financing and the possibilities of access to credit," said St. Aubyn.
Ricardo Reis is a New Keynesian, a school of economics that argues that macroeconomic stabilization (using fiscal policy) and the Central Bank (using monetary policy) can lead to a more efficient outcome than a laissez-faire policy in which the government abstains from interfering in the market. Reis said:
"In the last 30 years, it is especially the lack of growth and productivity that is responsible for the major slice of Portuguese stagnation. For many years, it was easier to get rich by exploiting income in the domestic market than by making costly investments and achieving the productivity gains that allowed us to be competitive abroad."
Besides that, "innovation doesn't fall from trees and requires constant effort in structural policies that promote it, and that has been lacking."
Stimulating competition and exports, helping public investment and lowering the tax burden requires better management of public accounts, promoting innovation and grabbing opportunities of new industries and organizations of production that the pandemic is opening up, said Reis.
Economist Ricardo Pinheiro Alves in Portugal Resident interpreted the stagnation of growth since the mid-1990s in this way:
“Productivity growth has stalled as a result of low investment in information technology, labor market rigidities, and the allocation of labor and capital to industries partly dominated by state-owned firms or those less open to competition.”
High levels of bureaucracy are another factor in low productivity.
“Bureaucracy in Portugal is difficult. You may receive courteous and attentive service at a personal level, but government employees in Portugal work firstly for themselves, secondly for the state, thirdly for the people,” according to Understanding Portugal.
“A job in government in Portugal is a very good job, perhaps not well-paid but with good job security, benefits and pension rights by national standards. So, government employees hang onto their jobs like crazy. Risk-averse behavior you get from state employees includes: avoiding decisions that imply a degree of personal responsibility; passing the buck; strictly interpreting rules where some completely legal discretion could work in your favor; insisting that you employ a local lawyer or accountant who can bear the brunt of responsibility and shield them from that responsibility; requiring paperwork and correspondence that is not absolutely required, etc.
“There are deep structural issues here. A bloated public sector just reflects that Portugal is not competitive in the modern world economy.”
As compared with 20 years ago, the population is a more educated one.
Fernando Alexandre, professor at the University of the Minho, said in Expresso:
"The enormous increase of the qualifications of the Portuguese isn't reflected in the increase in productivity” because of “structural blocks to change for a new paradigm based on qualifications.”
Joao Cerejeira, also a professor at the University of the Minho, said: “Looking at qualifications, we don't have problems in the younger group. But we have an older population and older management teams.”
Pedro Brinca pointed out: “Despite impressive progress since 2000," we are the country of the EU with the major percentage of the population between 25 and 65 with 9th grade of schooling or less."
The data of personnel staff indicate that in 2019 in nearly half (45.7 percent) of businesses, workers had at most 9th grade of schooling. And education of managers also makes a difference.
Older managers tend to have an authoritarian style.
"Top-level Portuguese management is clearly too often authoritarian, but this probably is a throwback to the fact that those managers were still youngsters at the time of the 1974 revolution," according to Understanding Portugal.
"Subsequent generations of Portuguese managers currently in their 30s and 40s are much more assured, international and progressive, but it will take time for them to get the top jobs, where they can make a real difference."
Older workers also carry a stultifying political legacy.
"Astonishingly, the lingering effects of the dictatorship, overthrown in 1974, can also be detected, according to some businesses," said Anthony Beachley in Portugal Resident. "They have told me that older employees or public servants often shirk responsibility, constantly referring decisions up the chain of command, the legacy of a time when it was best not to raise your head above the parapet."
Fernando Alexandre underscored in Expresso: "Diverse studies have shown that companies created by more qualified managers begin bigger and grow faster, quickly approaching the most productive companies."
With regard to qualifications, there is still a problem.
"A recent study in which I participated revealed that only 58 percent of jobs in Portugal are taken by workers with an adequate level of qualifications and, of that, 36 percent are from a different area than the one they work in," said Pedro Brinca.
How do the young view their future? According to Expresso (December 17, 2021):
“In 2019 alone, it is estimated that 77,000 have emigrated. They are mostly young people, many qualified, and the majority end up not returning. And the future is not rosy, considering that almost a third of young people intend to leave the country, according to a survey by the Francisco Manuel dos Santos Foundation, released in November 2021.”
"Another survey conducted in 1984 showed that the majority of the Portuguese perceived the opportunity structure as inegalitarian, the main cleavage in society being that between the rich and the poor. (Cabral 1995)," according to Attitudes and Shared Perceptions: Unemployment and Immigration in Portugal in South European Society and Politics (1999).
Has this perception changed?
In Netflix's first Portuguese series, Gloria, which was set in 1968, the doctor in the village of Gloria do Ribatejo, where an American broadcasting center transmits Western propaganda to eastern Europe, leaves his post for a prestigious one as chief of staff at a Lisbon hospital.
"You only get a position like that if you know the right people," surmises a station engineer in the groundbreaking thriller, which began airing in November 2021.
How much have things changed?
Beachey suggested how the State could accelerate growth:
"As well as bearing down on debt, the government must do more to encourage foreign investment and, in particular, attract high-tech companies, improve education, reduce bureaucracy and tackle corruption."
Miguel St. Aubyn offered proposals for the State in Expresso (December 23, 2021): long-term planning, including investment; improving the efficiency of the judicial and the fiscal system; better qualifications of the active population; a housing policy; a more equitable distribution of income; and the provision of an adequate safety net in which private activity develops, investing productively and creating wealth.
One thing is for certain, Ricardo Paes Mamede, professor at Instituto Universitario de Lisboa (ISCTE), stressed:
"There is no silver bullet. If someone comes to you with one or two of these measures, saying that they will solve the problems, he is either naive or he is lying."
Ricardo Reis looked backward to look ahead:
“Portugal was experiencing a wave of optimism. It’s not normal in a country whose national music is fado and where nostalgia (saudade) is the word everyone is proud of. But in those last 40 years of the 20th century, there had been a period of tremendous economic growth with a very fast recovery with the rest of Europe and the conciliation of our country as part of the group of the richest countries in the world.
“It was the end of the dictatorship (1974) and the Fascist option as well as the implantation of democracy and a moving away from the spectrum of Communist options. The Portuguese entry into the European Union (1986) reinforced freedom and democracy and, later, entry into the eurozone (1999) allowed a free movement of people and integration of our country into the big discussions of a supernational group.
“This is a time to be optimistic about Portugal’s future and view challenges as a great opportunity,” Ricardo Reis told an audience at a talk sponsored by the Francisco Manuel dos Santos Foundation in Lisbon in October 2021.
According to the Francisco Manuel dos Santos Foundation, it addresses a loophole in Portuguese society: despite considerable discussion about the most diverse subjects in the public arena, the debate in Portugal always seems to be based on subjective opinions and personal perceptions rather than on solid data and careful research. Alexandre Soares dos Santos and his family started the foundation in 2009.
Francisco Manuel dos Santos was one of the three partners who, in 1921, acquired Jeronimo Martins, launching the dynasty, which still controls the food distribution company today. The firm, which operates in Portugal (Pingo Doce), Poland and Colombia, occupied the 50th position in the world ranking of 250 retailers in the 2020 annual study by Consulting Deloitte, which was its best ranking yet.
Sonae, another Portuguese company, ranked 155th. Sonae has a diversified portfolio of businesses in retail (Worten), financial services, technology, shopping centers and telecommunications.