Trade in Portugal

Portugal

Mosjeed of Portugal

 

Formal Name: Portuguese Republic.
Short Form: Portugal.
Term for Citizen(s): Portuguese (singular and plural); adjective--Portuguese.
Capital: Lisbon (Portuguese, Lisboa).
Geography: 92,080 square kilometers; land area: 91,640 square kilometers; includes Azores (Portuguese, Açores) and Madeira Islands.
Topography: Hills and mountains north of Rio Tejo; rolling plains to south.
Climate: Varied with considerable rainfall and marked seasonal temperatures in north; dryer conditions in south with mild temperatures along coast but sometimes in low 40°Cs in interior.

Portugal in map

Economy

Gross Domestic Product (GDP): purchasing power equivalent--estimated at US$87.3 in 1991 (US$8,400 per capita). Economy stagnant during second half of 1970s and first half of 1980s because of world economic slump and extensive nationalizations during revolution of mid-1970s. Between 1986 and 1990, GDP grew at 4.6 percent each year.
Agriculture: Made up 6.2 percent of GDP and employed about 17.8 percent of labor force in 1990. Small farms in north, larger farms in the south; productivity and mechanization below European Community levels; imports more than half of food needs. Major crops: grain, corn, rice potatoes, olives, grapes, cork; important livestock: pigs, cattle, sheep, and chickens; dairy farms mostly in north. EC membership threated long-term servival of southern grain-growing and cattle-raising farms; farms producing rice, vegetables, and wine likely to fare well.
Industry: 38.4 percent of GDP in 1990. Concentrated in two regions: Lisbon-Setúbal, much heavy industry (steel, ship building, oil refineries, chemicals); and Porto-Aveiro-Braga, mostly light industry (textiles, footwear, wine, food processing). Ownership of industries varies: light industry usually privately owned; heavy industry often state owned; high technology manufacturing often foreign owned.
Services: 55.5 percent of GDP in 1990; accounted for 47 percent of work force. Tourism important component of service sector; 19.6 million visitors in 1991.
Imports: In 1990 imports of goods and services accounted for about 47 percent of GDP. Manufactured goods (machinery, transport equipment, chemicals) accounted for about 75 percent of merchandise imports, food and beverages for about 10 percent, and raw materials (mostly petroleum) for about 16 percent.

Export value of Portugal

Exports: in 1990 exports of goods and services accounted for about 37 percent of GDP. Manufactured goods accounted for 80 percent of merchandise exports in 1989. In 1990 textiles, clothing, and footwear made up 37 of total export value; machinery and transport equipment, 20 percent; forest products, 14 percent; and agricultural products, 8 percent.
Major Trade Partners: EC major trading partner, buying 74 percent of Portugal's exports in 1990, and supplying 69 percent of its imports. Germany and Spain the most important trading partners. Only 3.4 percent of Portugal's imports in 1990 came from the United States; Organization of Petroleum Exporting Countries (OPEC) accounted for less than 7 percent.
Balance of Payments: Despite negative trade balences, large earnings from tourism and remittances from Portuguese living abroad, in addition to direct foreign investment and EC tranfers, resulted in generally favorable balances of payments (US$4.6 billion in 1989, US$3.5 billion in 1990).
Exchange Rate: in March 1992, 143.09 escudos per US$1.
Fiscal Year: Calendar year.

The Economy of the Salazar Regime

The First Republic was ended by a military coup in May 1926, but the newly installed government failed to solve the nation's precarious financial situation. Instead, President Óscar Fragoso Carmona invited António de Oliveira Salazar to head the Ministry of Finance, and the latter agreed to accept the position provided he would have veto power over all fiscal expenditures. At the time of his appointment as minister of finance in 1928, Salazar held the Chair of Economics at the University of Coimbra and was considered by his peers to be Portugal's most distinguished authority on inflation. For forty years, first as minister of finance (1928-32) and then as prime minister (1932-68), Salazar's political and economic doctrines were to shape the Portuguese destiny.
From the perspective of the financial chaos of the republican period, it was not surprising that Salazar considered the principles of a balanced budget and monetary stability as categorical imperatives. By restoring equilibrium both in the fiscal budget and in the balance of international payments, Salazar succeeded in restoring Portugal's credit worthiness at home and abroad. Because Portugal's fiscal accounts from the 1930s until the early 1960s almost always had a surplus in the current account, the state had the wherewithal to finance public infrastructure projects without resorting either to inflationary financing or to borrowing abroad.

Commercial Trade

At the bottom of the Great Depression, Premier Salazar laid the foundations for his Estado Novo, the "New State." Neither capitalist nor communist, Portugal's economy was cast into a quasi-traditional mold. The corporative framework within which the Portuguese economy evolved combined two salient characteristics: extensive state regulation and predominantly private ownership of the means of production. Leading financiers and industrialists accepted extensive bureaucratic controls in return for assurances of minimal public ownership of economic enterprises and certain monopolistic (or restricted-competition) privileges.
Within this framework, the state exercised extensive de facto authority regarding private investment decisions and the level of wages. A system of industrial licensing (condicionamento industrial), introduced by law in 1931, required prior authorization from the state for setting up or relocating an industrial plant. Investment in machinery and equipment designed to increase the capacity of an existing firm also required government approval. Although the political system was ostensibly corporatist, as political scientist Howard J. Wiarda makes clear, "In reality both labor and capital--and indeed the entire corporate institutional network--were subordinate to the central state apparatus."
Under the old regime, Portugal's private sector was dominated by some forty great families. These industrial dynasties were allied by marriage with the large, traditional landowning families of the nobility, who held most of the arable land in the southern part of the country in great estates. Many of these dynasties had business interests in Portuguese Africa. Within this elite group, the top ten families owned all the important commercial banks, which in turn controlled a disproportionate share of the national economy. Because bank officials were often members of the boards of directors of borrowing firms in whose stock the banks participated, the influence of the large banks extended to a host of commercial, industrial, and service enterprises.
Portugal's shift toward a moderately outward-looking trade and financial strategy, initiated in the late 1950s, gained momentum during the early 1960s. A growing number of industrialists, as well as government technocrats, favored greater Portuguese integration with the industrial countries to the north as a badly needed stimulus to Portugal's economy. The rising influence of the Europe-oriented technocrats within Salazar's cabinet was confirmed by the substantial increase in the foreign investment component in projected capital formation between the first (1953-58) and second (1959-64) economic development plans. The first plan called for a foreign investment component of less than 6 percent, but the plan for the 1959-64 period envisioned a 25-percent contribution. The newly influential Europe-oriented industrial and technical groups persuaded Salazar that Portugal should become a charter member of the European Free Trade Association (EFTA) when it was organized in 1959. In the following year, Portugal also added its membership in the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund, and the World Bank.
In 1958 when the Portuguese government announced the 1959-64 Six-Year Plan for National Development, a decision had been reached to accelerate the country's rate of economic growth--a decision whose urgency grew with the outbreak of guerrilla warfare in Angola in 1961 and in Portugal's other African territories thereafter. Salazar and his policy advisers recognized that additional claims by the state on national output for military expenditures, as well as for increased transfers of official investment to the "overseas provinces," could only be met by a sharp rise in the country's productive capacity. Salazar's commitment to preserving Portugal's "multiracial, pluricontinental" state led him reluctantly to seek external credits beginning in 1962, an action from which the Portuguese treasury had abstained for several decades.

Chief export markets

Beyond military measures, the official Portuguese response to the "winds of change" in the African colonies was to integrate them administratively and economically more closely with Portugal through population and capital transfers, trade liberalization, and the creation of a common currency--the so-called Escudo Area. The integration program established in 1961 provided for the removal of Portugal's duties on imports from its overseas territories by January 1964. The latter, on the other hand, were permitted to continue to levy duties on goods imported from Portugal but at a preferential rate, in most cases 50 percent of the normal duties levied by the territories on goods originating outside the Escudo Area. The effect of this two-tier tariff system was to give Portugal's exports preferential access to its colonial markets.
Despite the opposition of protectionist interests, the Portuguese government succeeded in bringing about some liberalization of the industrial licensing system, as well as in reducing trade barriers to conform with EFTA and GATT agreements. The last years of the Salazar era witnessed the creation of important privately organized ventures, including an integrated iron and steel mill, a modern ship repair and shipbuilding complex, vehicle assembly plants, oil refineries, petrochemical plants, pulp and paper mills, and electronic plants. As economist Valentina Xavier Pintado observed, "Behind the facade of an aged Salazar, Portugal knew deep and lasting changes during the 1960s."
The liberalization of the Portuguese economy continued under Salazar's successor, Prime Minister Marcello José das Neves Caetano (1968-74), whose administration abolished industrial licensing requirements for firms in most sectors and in 1972 signed a free trade agreement with the newly enlarged EC. Under the agreement, which took effect at the beginning of 1973, Portugal was given until 1980 to abolish its restrictions on most community goods and until 1985 on certain sensitive products amounting to some 10 percent of the EC's total exports to Portugal. EFTA membership and a growing foreign investor presence contributed to Portugal's industrial modernization and export diversification between 1960 and 1973.
Notwithstanding the concentration of the means of production in the hands of a small number of family-based financial-industrial groups, Portuguese business culture permitted a surprising upward mobility of university-educated individuals with middle-class backgrounds into professional management careers. Before the revolution, the largest, most technologically advanced (and most recently organized) firms offered the greatest opportunity for management careers based on merit rather than on accident of birth.

FOREIGN ECONOMIC RELATIONS

After becoming a charter member of EFTA in 1959, Portugal became increasingly open to the rest of the world through international trade and other payment flows. In 1990 exports of goods and services accounted for about 37 percent of Portugal's GDP, and imports of goods and services represented about 47 percent of GDP. The accession of Portugal to the EC on January 1, 1986 required fundamental changes in the country's commercial and foreign investment policies. A seven-year transition period ending in 1993 would eliminate most barriers to trade, capital flows, and labor mobility among the twelve EC member countries. During this period, Portugal was a net recipient of EC financial transfers to help modernize its agricultural and industrial sectors for competition in the single market.

Portugal Current Account Deficit

To rein in domestic demand growth--mainly the result of the public sector deficits after 1973--the Portuguese government was obliged to pursue IMF-monitored stabilization programs in 1977-78 and 1983-84 to help achieve a return to current account equilibrium in the balance of international payments. Building on the 1983-85 stabilization program and in the context of Portugal's accession to the EC, the Council of Ministers introduced in March 1987 the Program for the Structural Adjustment of the Foreign Deficit and Unemployment (Plano de Correcção Estrutural do Déficit Externo e Desemprêgo--PCEDED), a medium-term program aimed at a lasting correction of structural imbalances--inflation, fiscal deficit, external deficit, and unemployment. The program's macroeconomic approach included a set of articulated measures involving fiscal, monetary, exchange, and incomes policy. As an instrument of the government's "controlled development strategy," this program was to be implemented in two stages covering the periods 1987-90 and 1991-94 and was designed to reduce Portugal's susceptibility to external shocks by strengthening especially the energy and agricultural sectors.

Composition and Direction of Trade

Portugal's rising share of manufactured goods in total merchandise exports, which reached 80 percent in 1989, was indicative of the country's newly industrialized status. Between 1980 and 1988, exports of manufactured goods increased by 10 percent per year by volume, which was double the rate of its European neighbors, and Portugal gained market share. The country's major commodity exports in 1990 included textiles, clothing, and footwear (accounting for 37 percent of total export value); machinery and transport equipment (20 percent); forest products (10 percent, including pulp and paper and cork products); agricultural products (8 percent, mainly wine and tomato paste); chemicals and plastic products (5 percent); and energy products (about 4 percent). Portugal's comparative advantage appeared to lie with high forestry resources content (wood and cork products, including pulp and paper) and labor-intensive products (textiles, clothing, and footwear). With the participation of multinational firms, Portugal was also gaining competitive strength in the export of automobiles and automotive components and electrical and electronic machinery.

Consumer oriented Exports to portugal

When compared with the other EC member countries and the United States, Portugal had a strong competitive advantage because of its low wage scale. As an example, 1989 hourly labor costs in Portuguese manufacturing (in United States dollars) averaged approximately half those of Greece (a country with a similar per capita GDP), a third those of Spain, and about a fifth of most other West European countries and the United States.
Manufactured goods (notably machinery, transportation equipment, and chemicals) accounted for about 75 percent of merchandise imports in 1989, food and beverages for about 10 percent, and raw materials (mainly crude petroleum) for about 16 percent. Portugal imported about 60 million barrels of oil yearly during the late 1980s, but the share of crude petroleum varied between 8 and 20 percent of total imports depending on fluctuations in world oil prices.
Portugal's commodity trade was increasingly dominated by the EC. In 1990 the EC member countries purchased nearly 74 percent of Portugal's exports and supplied over 69 percent of its imports; in 1985, the year prior to Portugal's membership in the EC, the EC member counties purchased about 63 percent of Portugal's exports and supplied nearly 46 percent of Portugal's imports. Within the EC, the former West Germany, France, and Britain were Portugal's leading trading partners. But after the accession of both Iberian countries to the EC in 1986 (and the dismantling of trade restrictions between them), Spain suddenly emerged as a significant trading partner, taking over 13 percent of Portugal's exports in 1990 and providing 14.4 percent of the latter's imports. Thus, Spain ranked with West Germany as Portugal's premier national supplier in 1990, ahead of France, Britain, and Italy.
The relative position of the United States in Portugal's import trade declined sharply from nearly 10 percent of the total in 1985 to 3.9 percent in 1990. Because Portugal heavily imported grain, soybeans, and animal feedstuffs, its adoption of the CAP led to costly trade diversion from former, more efficient sources, mainly the United States, to higher-cost continental EC member countries. On the other hand, Portugal's full membership in the EC would permit its manufacturers to capture a larger share of exports to EC member countries at the expense of lower-cost exporters from Latin America and East Asia; similarly, Portuguese producers of quality wine were expected to gain market share at the expense of wine producers in Southern Mediterranean countries that were not fully integrated into the EC. In both these cases, trade diversion would favor Portuguese entrepreneurs.
Portugal's trade with the previous Escudo Area (its former African colonies) had fallen sharply since the revolution. Still, a restructured Angola under a competent, non-Marxist regime could once more offer Portugal significant opportunities for two-way trade in the late 1990s. The share of Portuguese imports supplied by the Organization of the Petroleum Exporting Countries (OPEC), which amounted to over 17 percent in 1985 (the year before the collapse of world oil prices), shrank to below 7 percent in 1990.

Tourism and Unilateral Transfers

Measured in terms of arrivals and foreign exchange receipts, Portuguese tourism had grown at a phenomenal rate since the early 1980s. Foreign arrivals, which averaged about 7.3 million in 1981-1982, expanded sharply each year thereafter, stabilized at between 16 and 17 million during 1987-89, and then increased to an estimated 18.4 million in 1990. Receipts from tourism rose from US$1.15 billion in 1980 to US$3.58 billion in 1990.

Portugal loss

In 1990 unilateral transfers reached US$6.5 billion (22 percent of Portugal's current account receipts), of which 73 percent were private, mainly emigrant remittances. About three-fourths of the emigrant remittances originated in Western Europe (mainly France) and one-fifth in North America (mainly the United States). These private inflows not only contributed to the country's foreign exchange earnings, but also represented a significant component of Portuguese household savings.
Gross public transfers in favor of Portugal amounted to US$1,740 million in 1990, of which nearly half (US$837 million) represented structural funds from the EC in support of the country's economic and social modernization. The European Social Fund assisted in vocational and professional training; other funds participated in the Specific Plan for the Development of Portuguese Agriculture (Plano Económico para o Desenvolvimento da Agriculltura Portuguêsa--PEDAP) and the Specific Plan for the Development of Portuguese Industry (Plano Económico para o Desenvolvimento da Indústria Portuguêsa--PEDIP). The Portuguese government was required to cofinance projects funded by these EC transfers. Although Portugal no longer was a member of EFTA, the latter continued to assist the former member country in its economic restructuring efforts. Finally, included in the category of official unilateral transfers were United States government military and economic grants that totaled some US$160 million annually for the use of the large United States Air Force base in the Azores.

Foreign Direct Investment

Foreign direct investment increased at an extraordinary pace after Portugal's accession to the EC. From a modest commitment of around US$166 million in 1986, the annual inflow of investment controlled and managed by foreigners rose sharply in the following years, reaching US$2.7 billion in 1991. At the end of that year, the accumulated stock of direct foreign investment exceeded US$8 billion, or eight times its value at the end of 1986.
From the perspective of multinational firms, Portugal was a strong export base to the emerging single market of 327 million high-income consumers, and since the mid-1980s the country had become especially competitive in attracting foreign investment. These attractions included political stability and a hospitable investment climate that included EC investment subsidies, the lowest wage scale among the EC-12, and programs of economic deregulation and privatization, as well as robust national economic and export growth.

Sliding Euro

The participation of EC-based investors in the annual investment flow to Portugal increased from less than half of the total in 1985-86 to about 70 percent from 1987 to 1990, Britain being the principal country source. Interesting trends in the composition of this investment could be discerned. Britain was the leading country of origin throughout this period, but the United States share fell sharply from 18 percent of the total investment in 1985-86 to less than 3 percent in 1989-90. Within the recently enlarged EC, Spain emerged as a significant direct investor, increasing its share from only 3 percent of Portuguese new investment in 1985-1986 to over 13 percent in 1989-90. Brazilian investors, whose share was negligible in 1985-86, increased their participation to around 7 percent in 1989-90.
Manufacturing, the destination of just under half of foreign investment inflow in 1985-86, received only 27 percent of the total in 1988-89; by contrast, the services sector's share in total investment flow rose from 45 percent in 1985-86 to over 60 percent in 1988-89. Within that sector, banking and insurance increased their participation, although investment in wholesale and retail trade and in hotels and restaurants continued to be significant, reflecting foreign investor participation in Portugal's booming tourism industry. Several new investment projects in the automotive industry were being considered in the spring of 1991, including participation by Japanese and South Korean firms. None, however, approached in scale the Ford-Volkswagen commitment to organize an automotive complex at Sines. This joint venture capitalized at US$3.2 billion was to manufacture a new European minivan.
Portugal, unlike many other middle-income countries, was remarkably hospitable to foreign investment (foreign-owned enterprises were legally exempted from nationalization during 1975-76). The growing pace of privatization since 1988, however, gave rise to debate regarding the ultimate ownership and control of major state firms being divested. One school of thought anticipated that privatization would "de-Portugalize" vital sectors of the economy. To some degree, Prime Minister Cavaco Silva shared this anxiety: "At the same time, we shall have to foster economic groups in Portugal. These were destroyed at the time of the revolution with nationalization. We need them, as otherwise foreigners will come in and take over our enterprises and economic strategy will be determined from abroad. Thus we are supporting the new entrepreneurs in industry and agriculture."
Despite the formation of new Portuguese groups able to compete against foreign-based multinational companies, it was doubtful that these national firms were sufficient in number, risk capital, and managerial-technical know-how to absorb most of the large enterprises scheduled for divestiture.
Although the government had succeeded in limiting foreign participation in a number of key enterprises, including the withholding of a temporary "golden share" for the state, such limits on foreign direct investment were to become illegal in 1995, when Portugal's capital movement regulations would come fully into compliance with those of the rest of the EC members.
Consequently, the prospect of losing national control over large branches of the economy appeared to be the inevitable price of securing Portugal's economic future and closing the income gap between the Portuguese and their more prosperous neighbors.