How come the Portuguese economy did so well after joining the European Union in 1986, and then became totally stagnant for a whole decade starting around 2000? In a blog about the Portuguese economy, this must and will surely be one of the key questions.
A quick look at the evolution of real GDP per worker since the late 1970s is enough to show how dramatic the picture is. From 1978 until 1986, GDP per worker grew on average at just below 1 percent per year. Economic activity really picked up around 1986, and until 2000 the average yearly growth rate was a very robust 2.6 percent. Since 2000, the economy slowed down abruptly, and growth has been slightly negative... These are 10 long years that Pedro Pita Barros rightly calls a lost decade.
Why did this happen? I do not have an answer, but I have a few conjectures. I do not think it was because the economy simply ran out of steam, from the productivity gains generated by the fundamental reforms introduced since joining the European Union. Such large productivity gains would have led to growth extending well beyond 15 years. Plus, we need to understand why growth was negative.
One or more negative shocks must have hit the economy. We need to identify and understand them. My two candidates are: (1) the emergence of Eastern Europe and China, producing cheap low-skill manufacturing goods; this will have induced an important structural transformation, and Portugal will soon recover from the lost decade. (2) the large increase in the size of the Government sector, in a particularly distortionary fashion; this will have caused important productivity losses, which will last insofar as those distortions stay in place; Portugal may stay lost for long.
A quick look at the evolution of real GDP per worker since the late 1970s is enough to show how dramatic the picture is. From 1978 until 1986, GDP per worker grew on average at just below 1 percent per year. Economic activity really picked up around 1986, and until 2000 the average yearly growth rate was a very robust 2.6 percent. Since 2000, the economy slowed down abruptly, and growth has been slightly negative... These are 10 long years that Pedro Pita Barros rightly calls a lost decade.
Why did this happen? I do not have an answer, but I have a few conjectures. I do not think it was because the economy simply ran out of steam, from the productivity gains generated by the fundamental reforms introduced since joining the European Union. Such large productivity gains would have led to growth extending well beyond 15 years. Plus, we need to understand why growth was negative.
One or more negative shocks must have hit the economy. We need to identify and understand them. My two candidates are: (1) the emergence of Eastern Europe and China, producing cheap low-skill manufacturing goods; this will have induced an important structural transformation, and Portugal will soon recover from the lost decade. (2) the large increase in the size of the Government sector, in a particularly distortionary fashion; this will have caused important productivity losses, which will last insofar as those distortions stay in place; Portugal may stay lost for long.
A análise do Rui Castro parece-me lúcida. Acrescentaria apenas que em relação os parceiros na zona euro, nesses anos a moderação salarial em Portugal brilhou pela sua ausência.
ReplyDeleteA análise do Rui Castro parece-me lúcida. Acrescentaria apenas que em relação os parceiros na zona euro, a moderação salarial em Portugal brilhou pela sua ausência. Isto acabou por ser afectar de forma determinante a competitividade de Portugal.
ReplyDeleteI think that the two candidates have played a role.
ReplyDeleteThe emergence of Eastern Europe and China, producing cheap low-skill manufacturing goods has been quite important but unfortunately I'm not so optimist that I can agree that "this will have induced an important structural transformation, and Portugal will soon recover from the lost decade". In fact this reestruturaction has not happenned at least in the scale taht was needed and I think that the reason for that was not only your second candidate (that is, the increase in the size of the Government sector) but also (an in my view mainly) the consequences of the credit boom associated with the entry in the euro.
I tend to disagree with the reasons for the lost decade. I moved and lived in Portugal during the 90's, a decade marked by 'stellar' growth, however much of the growth was based on two main reasons 1) consumerism and 2) government spending. Consumerism was largely supported by easy credit together with state funded youth-credit initiatives. The government spending, supported with European subsidies, gave rise to all types of programs, public works, mega ominous projects like Expo 98, Euro 2004, etc (all this served to increase the size of government). All of the above gave Portugal a lot of jobs, easy wealth and a facelift, the country went from a peripheral rural back-water to sophisticated urban back-water.
ReplyDeleteHowever it's important to note it was still a back-water, because deep down nothing really changed, sure there were highways galore, toll roads, fancy metro stations, cell phones, new cars, new homes, but deep down it was still the same country. The people weren't more educated, skilled and most importantly they weren't more productive. The Portuguese were basing their newly improved standard of living not on productivity but on the goodies they could afford and the nice European-like roads they now drove on.
Productivity is measured by the value of goods and services produced per unit of its resources. Productivity depends both on the value of a nation’s products and services – measured by the prices they can command in open markets – and by the efficiency with which they can be produced...True competitiveness, then, is measured by productivity. Productivity allows a nation to support high wages, attractive returns to capital, a strong currency – and with them, a high standard of living (Porter, 1987).
Therefore once the easy-credit and the European subsidies dried-up the Portuguese found themselves in exactly the same back-water reality they have always been in. Add to that a legacy colonial era state sized beaurocracy, an incompetent and corrupt government, an entitled population and an ever more competitive global economy and we are left with a bankrupt state. How embarrassing.
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ReplyDelete