ANALYSIS:Low skill levels, lack of social mobility and stifling bureaucracy have held Portugal back
IRELAND AND Greece partied hard for most of the past decade. Both countries are now suffering blinding hangovers. But in Portugal it has been a very long time since the good times rolled – it was one of the slowest-growing economies in the euro zone over the past decade. Despite the absence of Irish- and Greek-style boom to bust the Iberian state is now on the brink of bailout. How did Portugal reach the point of becoming the third of 17 euro zone members to require rescue?
The country’s economic woes are nothing new and its decline sometimes appears unending. It has been on the slide since its moment of global importance half a millennium ago when it spearheaded Europe’s imperial assault on the rest of the world, running colonies from the spice islands to the Americas.
The rise of Spain saw it eclipsed and by the late 16th century Portugal was swallowed whole by its bigger Iberian neighbour. Although it regained its independence 60 years later, decline continued over the following centuries.
Despite extraordinary maritime capacities and its vicious but vain rearguard action to retain its few remaining colonies in the 20th century, the country became a backwater.
In the 1970s, with the ending of decades of isolationist authoritarian rule, and in the 1980s, when the country joined the EU, there were well-founded hopes that decline could be halted and reversed. But, alas, that didn’t happen. The country has made no real progress in closing the prosperity gap with the rest of the continent and the Portuguese remain Western Europe’s poorest people.
And it is the failure to grow over the longer term, combined with – if to a much lesser extent – political weakness in getting to grips with rising public indebtedness, that has left Portugal so vulnerable now.
So why has the county so consistently been a laggard? As was the case in Ireland up to the 1990s, when this country’s economy was among the few always bringing up the rear in Europe, no single reason explains Portugal’s long-term economic feebleness. There are, instead, many contributing factors. One is education.
Simply put, low skills levels mean low incomes and because Portugal has one of the lowest levels of education in the developed world it hasn’t been able to break out of relative poverty.
Just 14 per cent of the adult population has a third-level qualification, according to the OECD. That is just half the average across that bloc and far below the Irish rate, where one in three grown-ups has a degree of some kind. On international rankings of schoolgoers’ reading, writing and science abilities (the Pisa scores), Portugal is well below average on all three.
Much of this underperformance is explained by an education system that is underfunded, old fashioned and un-encouraging of questioning and independent thought. That system also hinders social mobility, with further negative consequences for economic dynamism.
But the social mobility that is so important for economic renewal and growth is hindered not only by poor schooling. In Portugal, where you start in life determines to a great extent where you will end up. While all countries have golden circles, some are harder to break into than others. Portugal’s is very hard to break into because those on the inside work hard to keep outsiders out. Not infrequently, for instance, the already wealthy use their influence to do such things as ensure licences are denied to potential competitors or have the taxman pay stifling attention to less well connected but more competitive rivals.
If the influence of insiders sometimes keeps new companies from sprouting, excessive officiousness also makes life difficult for those who have business ideas and want to act on them. Doing something as simple as setting up a company, for example, is both time-consuming and costly, with numerous forms to fill out, long waits and lots of cash to be stumped up. According to the World Bank, Portugal is way down the global rankings, at 59th, for the ease with which a business can be started. Although successive governments have made efforts to ease the administrative burden, miles of red tape produced over decades will take a lot longer to cut through.
All of the above factors have contributed to Portugal’s limited success in hitching itself to the globalisation engine – vital if small economies with small domestic markets are to scale up and raise incomes.
Portugal’s exports relative to the rest of the economy are the lowest after Greece among small countries in Europe. It has been more successful at attracting inward investment but, per head, direct investment in Portugal is just one-quarter of Ireland’s.
And the relatively closed nature of the small Portuguese economy persists despite long-term membership of the EU and its single market and single currency; and despite opportunities in Spain, its much bigger neighbour, which was booming until recently, and opportunities in still-booming Brazil, its enormous former colony with which it shares a language.
If the features of the Portuguese economy described above differentiate it from Ireland, there are some similarities. Portugal’s public finances over the past decade resemble Ireland’s in the 1980s.
Portugal had a sizeable public debt burden at the beginning of the last decade, but instead of easing that burden by controlling spending, successive governments tried to grow tax revenues. This tack failed, as it did in Ireland in the 1980s. Prior to the onset of the financial crisis, Portugal had one of the poorest records in meeting EU budget deficit targets and an already high level of debt, at some 70 per cent of GDP in 2007. From such a high starting point, public debt grew rapidly as deficits soared in the recession. The combination of high and rising debt and persistently low growth has led to the bond market’s rising aversion to Portugal. With its cost of borrowing now prohibitive and multibillion debt repayments falling due in April and June, the country’s fate looks sealed this weekend.
DAN O'BRIENis Economics Editor