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Text File | 1994-05-02 | 16KB | 329 lines

<text> <title> Portugal: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Portugal </hdr> <body> 1. General Policy Framework Despite virtual full employment and one of the European Community (EC)'s highest growth rates in recent years (an estimated 4.3 percent average from 1986 through 1991), the Portuguese economy is still characterized by structural imbalances and low general development. Labor productivity is considerably lower than that of other EC countries, particularly in the agricultural sector, and wide gaps separate upper socio-economic groups from those at the bottom. Contrasts are marked also between the more developed and industrialized coastal regions and the rural hinterland, as well as between modern and traditional economic sectors. The most important manufacturing sector is textiles and apparel, responsible for about one third of total manufacturing employment and about 30 percent of total Portuguese exports. The external trade of this increasingly open economy is conducted mostly (about 74 percent) with other EC member countries. Medium term economic policy has the objective of approaching EC average development levels. Its principal goals are modernization of the Portuguese economy and preparation for the European economic and monetary union (and particularly for the European Single Market of 1993), by increasing productivity and external competitiveness, and by upgrading quality standards. The main macroeconomic problem is a high inflation rate (which at 12 percent is triple the average of members of the European Monetary System Exchange Rate Mechanism (ERM). Other problems include: a chronic trade deficit (compensated by substantial foreign capital inflows and emigrant remittances) and a significant fiscal deficit. To cool the economy, overheated by demand and foreign capital inflows, the Government has relied on a restrictive monetary policy, while fiscal policy has tended to accommodate inflation. The fiscal deficit is mainly due to public debt interest repayments, a large bureaucracy, increased civil service salaries, and infrastructure investments (mostly as counterpart of EC financing). To date, monetary control measures and commercial lending interest rates ten points above the inflation rate have proved ineffective in bringing inflation down to targeted figures. The combined effects of slower growth internationally and the appreciation of the escudo, have led to a stagnation of Portuguese exports in 1991. As a result, textiles and other export oriented industries are experiencing increased unemployment and in some cases actual bankruptcies. Prime Minister Cavaco Silva's party won a renewed absolute majority in the October 1991 general election. Although Cavaco Silva reappointed most of his cabinet, many observers expect tighter fiscal policy and a deepening of structural reforms as Portugal prepares for increased integration with its EC partners. 2. Exchange Rate Policies For many years the exchange rate policy was used as a means to maintain export competitiveness. The policy was changed in October 1990 in order to simulate the future entry of the escudo in the ERM. The rate is now keyed to a basket of five major European currencies. The Bank of Portugal (central bank) repeatedly intervened on the exchange markets during the September 1990 to August 1991 period to limit the appreciation of the escudo against main European currencies to three percent. The timing of the entry of the escudo into the ERM has been a key issue in economic policy debate. For the time being, policymakers consider that the current inflation differential vis-a-vis ERM member countries prevents such a move, because a significant part of Portuguese industry would not survive enhanced competition. This makes inflation reduction the highest priority on the economic policy agenda. 3. Structural Policies Portuguese economic structures are being liberalized in order to modernize the country and to approach EC standards. A program of privatization of State-owned industrial and financial firms is being undertaken with the goal of reducing the size of the public sector. The backward and decapitalized agricultural sector, where markets have seldom played an important role, is being submitted to important changes and challenges. Portuguese agriculture is increasingly governed by EC Common Agricultural Policy rules which has led to increased agricultural imports from EC partners. EC structural funds are available for investments by more progressive farmers. In order to help Portugal narrow its overall development lag vis-a-vis other EC countries and reduce structural imbalances, several major European Community assistance programs were designed for Portuguese agriculture, industry, commerce, regional development and education. These programs are financed by EC structural funds and require significant Portuguese counterpart funding. In 1991, EC structural funds totaled almost two billion dollars or 1.8 percent of GDP. 4. Debt Management Policies External debt is decreasing in both absolute and relative terms. In 1985, outstanding external debt totaled almost 17 billion dollars or 80 percent of GDP. By June 1991, external debt was reduced to slightly more than 15 billion dollars or approximately 22 percent of GDP. Most of this is medium and long term debt owed by the Government and public companies. Government policy is to prepay as much external debt as possible and transfer it to the domestic monetary market. Monetary authorities have taken steps to discourage domestic companies from utilizing external credits which are attractive due to much lower interest rates. These measures have enjoyed limited success. 5. Significant Barriers to U.S. Exports As a result of Portuguese membership in the European Community in 1986, the economy has experienced rapid liberalization and restructuring. Under the terms of EC accession, Portugal agreed to a seven-year transition period, ending in December 1992, after which all barriers to trade, capital flows, and labor mobility to EC partners are to be eliminated. Portugal has only a few remaining quantitative restrictions applied to the following products: articles of rubber, paper and paperboard; special fabrics and nets; parts of footwear; iron and steel tubes and pipes; weaving machines and parts; and certain electrical goods such as fuses, plugs, lampholders and switches. Import quotas also apply to automobiles. Specific import levels are reviewed annually. Since the re-opening of the banking system to the private sector in 1984, the Portuguese financial system has been rapidly moving towards greater liberalization and deregulation. Several foreign banks, including three U.S. banks, operate in Portugal. For the most part, U.S. banks report that they receive national treatment with their domestic competitors. In order to expand an existing network, all banks must obtain prior Central Bank approval and meet some negotiated requirements. Since 1985, the insurance business has been open to the private sector and several local and foreign companies, including three U.S. companies, share the market. State-owned insurance firms are being privatized on a case-by-case basis. In transportation, a new law permits Portuguese companies to compete with the state-owned airway company (TAP) on scheduled international flights. Recent reforms also permit concessions for private railway operation. Private participation is restricted or excluded in certain sectors. These are: water, sewage, postal, main trunkline telecommunication and harbors. The Portuguese Quality Institute (IPQ) establishes national standards and implements EC directives. The National Laboratory of Civil Engineering (LNEC) is responsible for construction standards