A Blueprint for Portugal’s Future Growth
IMF News, June 27, 2016
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- A Blueprint for Portugal’s Future Growth
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- Published: June 27, 2016
Portugal’s stabilization program: achievements and remaining imbalances
- 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, "the country has been able to obtain financing from markets at comfortable yields."
- Persistent structural problems that could not be unwound quickly:
- "Low competitiveness and its twin, low household savings"
- "Unemployment is still higher than it should be, especially among the elderly and the young"
- "The corporate sector remains deeply indebted, exerting a drag on investment and growth"
- Central forward challenge: "maintain the hard-won external balance while moving toward an internal balance, that is, full employment and high sustained growth."
Retrospective on program design and adjustments
- Program timing and context:
- "The program began in 2011 at a time of great uncertainty, with the very viability of the euro questioned."
- Early program evolution required continuous adjustment "with the rapidly evolving situation both in Portugal and abroad."
- Macroeconomic consequences:
- "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."
- Fiscal targets were relaxed once limited market financing became available "to minimize the impact on an already weak economy."
- "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."
- Composition of fiscal adjustment:
- Initial plan: "focus more on the spending side" because "Portugal’s expenditure-to-GDP ratio was very high."
- In practice, spending cuts were constrained by "stiff domestic opposition and several decisions by the Constitutional Court."
- Final outcome: "the adjustment had to be based more on raising revenues than on cutting spending."
Tackling high public and private debt: jobs, competitiveness, and reforms
- Fundamental challenge: high public and private debt in the context of "low growth and productivity and high unemployment."
- Key tasks and policy directions:
- "Creating more jobs for lower-skilled workers, who were disproportionately affected by the adjustment process."
- Complement a "prudent minimum wage policy" with measures that "remove the remaining barriers to the entry of new firms and exit of unviable ones."
- Increase "the limited pool of managerial talent among many small- and medium-sized enterprises."
- Foster a "social dialogue that fully takes into account the interests of those who do not succeed in obtaining a stable job" to support transparency and social inclusion.
- Reforms to raise export value added, control public expenditure, and implement "a systemic approach to corporate debt restructuring."
- Improve "the efficiency of public administration and the court system."
- Pursue "institutional change improving the global competitiveness of the country’s trading sector" as a key reform element.
Sectoral example and human capital: footwear industry and skill composition
- Footwear industry as an illustrative success:
- Portuguese shoe manufacturers "chose to compete on quality rather than price," investing "in modern equipment and processes," and introducing "higher-end products."
- The sector is "now thriving, with greatly expanded output and export prices second only to Italy’s."
- Conclusion: "There is no reason why that success cannot be replicated elsewhere."
- Labor force skill dynamics:
- "Due to better education, the skill composition of Portugal’s labor force is projected to improve more rapidly than in its European peers."
- This gives Portugal an opportunity "to quickly ramp up activities that require a more skilled workforce and generate more value."
- Complementary product and labor market reforms are "essential in helping the expanding cohort of highly-skilled people find a good match in jobs."
- Research indicates "even lower-skilled workers benefit from this development, as they tend to earn more in high-value-added companies."
IMF Survey, June 27, 2016 — discussion of From Crisis to Convergence – Charting a Course for Portugal (book published June 28).