Digging into the roots of Portugal’s downturn

Portugal is a small, leveraged and imbalanced economy inserted in the EU since 1986. Currently it is under EU’s financial assistance programme following worrying signs of distress on its public debt about a year ago. It turned out this event represented Portugal’s economy (and society) “day of reckoning”.

Sterile green shoots

A former colonial great that has been languishing ever since the proclaimed independence of Brazil in the beginning of the XIX century. Without the important stream of revenue stemming specially from the trade of gold and soft commodities like cocoa and coffee the following decades saw the aggravation of Portugal’s economic demise.

In fact, back in the late XV century, Portugal had propelled itself to a century of great prosperity when a generation of visionary and brave sailors – Ínclita Geração [Notable Generation]found its way by sea to the then remotest places on earth. At the time the country had established itself as a proficient and sole trader of valuable commodities connecting the suppliers – were it in India, Brazil, Java, coastal Africa or Japan – and its customers in Europe. The competitive advantage consisted of the more economic and faster way of doing the trade: through sea.

Soon, as the money poured in large sums the royal crown mistakenly opted to expand the borders of the empire overseas as other European countries started to dispute some of Portugal’s possessions. This effort proved to be a little bit too much to Portugal’s already overstretched army and naval fleet. By the end of the XVI century, the Spanish king took advantage of its neighbor’s greed and capitalized on its feebleness claiming the Portuguese crown.

Under the Spanish rule the country was stripped of a quite a few overseas possessions and hence some commodities exclusive trade. Eventually it reclaimed its independence sixty years later and soon plugged again into the Brazilian gold trade to support the crown’s, the nobles’ and the wealthy merchant families’ careless bourgeois style of living.

After the decline of the Portuguese empire, and as the conquest drive faded away, the restlessness of the Portuguese people turned indoors. Civil war, political fights, social unrest, coupe-d’états, and its many attempts, would take place frequently through time until the 1930’s.

At this juncture, it was the combination of both naive overreliance on the commodities’ trade revenues and perennial social unrest that drove Portugal out of a sustainable growth path.

  • The former dashed Portugal’s chances to sit on the saddle of the industrial revolution. In fact, the dependability on the commodities’ markets receipts overshadowed the importance of modernizing its inland economic activity. This issue only started to make part of the government’s agenda late into the XIX century when its ruling elite Portugal started to struggle without the means to finance its lavish style. That implied that except for some agricultural based goods every other manufactured ones were imported.
  • The latter combined to the desperate actions to take hold of the Industrial bandwagon lead to the depletion and misuse of the country’s treasury. Hence the country would find itself bankrupt twice in less than ten years at the turn of the XX century.

Falling further back…

If things weren´t looking bright in that troublesome first quarter of the XX century they would get undeniably worse, economically speaking. An authoritarian regime would impose itself on the people to fix the abovementioned disruptive problems.

So, in order to clean up the house, the ruling party deliberately restricted the people’s freedom, prohibited any kind of opposition and introduced censorship to filter every kind of information or data that could jeopardize the regime’s order.

In the economic field entrepreneurship was severely crippled whereas to start a meaningful business in key sectors one would have to apply for permission to a panel composed by members of the government and the industrial oligarchy. Hence, freedom of establishment was limited mostly to low value added services like restaurants, bars, bakeries or newsstands and competition in key sectors was simply locked in a cage.

Meanwhile, the people remained hovering around the poverty threshold with limited access to basic social facilities and infrastructures. The middle class was nowhere to be seen at this stage.

Back to the heydays

In the 1970’s following a, so called, popular revolution – it was more of a military coup – democracy made its way through. At the same time Portugal relinquished its former colonies in Africa putting an end to almost 15 years of independence grueling wars.

Unavoidably, the vacuum created by the dictatorship overthrowing lead to a Bill of Rights framework too rich in rights and neglect on duties. In a matter of days the population went from a choked free will to a libertarian will. Lots of excesses were made and the country would soon find itself bankrupt and under financial assistance from the IMF in the early 1980’s.

After successfully managing to repay the IMF’s loans, balancing national accounts’ major aggregates and taming inflation                Portugal was admitted to the European Union (then, European Economic Community). Soon, Portugal would be gorging itself in a flood of money coming from Brussels awarded under cohesion and structural convergence policies. From then until the turn of the century standard of living improved significantly and so did the well-being.

These achievements and Europe’s unrestrained generosity lead to a fake sense of wealth. Debts to foment consumption started to pile, which in turn inflated Portugal’s imports, contributing to prop up the country’s indebtedness to fund its current account’s successive shortfalls. In the meantime, hazardous political decisions would come by the dozen such as replicating (unconditional) social policies from northern Europe countries targeting low to no income families/individuals or the construction of expensive and idle infrastructures: overlapping motorways, bridges, tunnels, roundabouts, stadiums, etc., just to name a few.

Rude Awakening

Effectively, the Portuguese economy lacks width but most of all depth. The truth is that the majority of businesses is small scale services and of low value added. Industry is mostly confined to family owned small and medium-sized enterprises (SME) using low-skilled labor. Apart from these you get medium sized companies that are branches or representation units of higher value added operations of multinational companies whose profits are repatriated. The only large companies belong to sectors that were under the state protection from competition in the past and who still exert their clout: telecommunications, energy, utilities, financials and engineering & construction. In the tradable goods department the main exports are – still – low price tagged items such as clothing, shoes, wine, paper or cork, for instance. This means that very little has changed throughout the years. This concurs to Portugal’s scarcity of growth drivers.

Every now and then the puncture of the thin line between business making and the political power is a freedom of establishment strong deterrent. Strikingly is the conflict of interest that emerges from law drafting blurs that allow these suspicious actions to go around unpunished. Besides the legal framework complacency the judicial system seems stuck in the 1970’s. It takes too much time to issue verdicts and it is very expensive. This, of course, hinders business making, too.

The society is all but cohesive. There are times where it seems that is “every man for himself”. Disturbingly, free riding is a common place that goes unchecked most of the times: be it in tax payment, subsidies entitlement, use of public goods, European cohesion funds deployment or even in ordinary things like waiting on a line. The problem is that accountability is hardly seen when (serious) wrongdoing takes place.

Currently, austerity mode is on and while it is, Portugal has a mountain to climb amid a storm of international headwinds. Despite the delicate situation it’s facing, it is a country with a sought-after skilled labor force that is capable of putting the country in the right track. If it weren’t for the roadblocks created by the most influential political parties permanent disarray that run it, Portugal would be in a firmer footing. In fact there have been a whole lot of evidences that these organizations aren´t particularly tuned into seeking the best for their country. Unlike Ínclita Geração long term envisioning that set Portugal’s golden era in late XV century this generation of – “so called” – leaders has really short sightings! Particularly when these parties’ agenda is set to endure their tenure on the job (the government, a city hall, etc.). And especially when a “musical chairs” outcome pushes the late incumbent party out of the game and its job is mostly scratched, as their people.

Recently, the state of affairs has been similar to the one Portugal witnessed after Brazil’s independence in the XIX century. After squandering the windfall of EU’s convergence subsidies and the easy money era (very unlikely its return), Portuguese have to toughen up and to actively participate of the restructuring plans ahead of them. That’s precisely what they haven’t done until the economic crisis stroke the country. Poor judgments were being done for years as everybody turned a blind eye while eagerly chased easy and plentiful money. So, finger-pointing is useless and won’t do any good, at this stage.

The Portuguese can’t simply leave it on the hands of those who drove the country to this deadlock and do nothing…once again. The setting is pretty dire and the structural challenges are tremendous. Cohesion, accountability and long term planning must be dragged into the recipe…

Otherwise hope will not suffice to overcome hopelessness!

Miguel Albuquerque (21-03-2012)

2 thoughts on “Digging into the roots of Portugal’s downturn

  1. Pingback: Portugal’s economic stagnation: genetics or disease?! (1/2) | acorda es(torpor)ado!

  2. Pingback: Portugal’s economic stagnation: genetics or disease?! | acorda es(torpor)ado!

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