Innovative property investments
Investment property in Portugal
Buying Guide
Economic Overview
Swings and roundabouts
Twentieth century Portuguese economic policy could be described as a bad case of swings and roundabouts and can be classified as pre-1974 and post-1974, due to the radical shift that took place.
Pre-1974: Estado Novo
Pre-1974 had seen Portugal’s first Republic and an ensuing dictatorship.
Salazar was the Chair of Economics at the University of Coimbra and an expert on inflation.
When appointed as Prime Minister, his agenda included his Estado Novo (New State).
Through his careful and meticulous balancing of the country’s accounts, he brought fiscal stability and good credit prospects.
His policies used extensive state regulation in all sectors and yet means of production were privately owned.
His two Economic Plans for Development invited the arrival and increase of direct foreign investment from less than 6% to 25%, permitting Portugal’s accession to the European Free Trade Association, General Agreement of Tariffs and Trade, the International Monetary Fund and the World Bank.
He made significant ventures into an iron and steel mill, pulp and paper mills, a shipbuilding complex, a vehicle assembly plant, a petrochemical plant, an electronic plant, and in oil refinery.
A real legacy as today Portugal still counts many of those as their main exports, such as paper, machinery and chemicals.
Increased industrial modernisation, diversification of exports and investment in infrastructure were the three most important factors during Salazar’s government.
Post-1974: nationalisation and public sector growth
Post-1974 saw a turnaround in policy as the nationalisation of sectors such as banking, insurance, petrochemicals, cement, wood pulp, iron and steel mills, shipping lines, public transport, shipyards, radio and TV, mining, fishing and agriculture kept the country on its toes.
Government intervention was the new policy ‘without prejudice to the legitimate interest of private enterprise’.
The new government also reformed the tax system to be fairer on the less well-off, the land tenure system in order to stimulate agriculture, and introduced a minimum wage to all sectors.
Direct foreign investment took a dive, even though it was permitted, due to the new price of labour.
The public sector was now massive accounting for 24% of employment.
The consequences were a vast government deficit and a borrowing level of 24% of GDP in 1982.
The problems that are now endemic to Portugal’s economy are a result of this regime, namely a public debt of 60% of GDP, an uncompetitive public sector which is slow to respond and inefficient bureaucracy in its purest of forms and a welfare state on the edge of bankruptcy.
1986: joining the EU and denationalisation
In 1986 Portugal made it into the EU as its economic growth and development were proven to be stable.
The benefits were trade ties and EU funding for further infrastructural improvements.
In 1989 the road to denationalisation began, privatisation was welcomed once more and economic deregulation and tax reforms introduced to try and bring Portugal into a new era.
However, figures show that Portugal’s output stood at 56% in 1973, just before the economic reforms but by 1991 this had dropped to 54.9% - no marked improvement there.
1990s: surviving EU-wide recession
By 1993 growth was at an annual average of 3.3%, above the EU average, impressive as Europe was going through a recession.
To comply with Economic Monetary Union (EMU) Portugal had to seriously review its fiscal policies.
The fiscal deficit was cut and structural reforms undertaken to improve exchange rate stability, curb inflation and reduce interest rates.
All contributed to reducing the debt and as a result, Portugal introduced the euro in 1999 with all fiscal targets adhered to.
The downside was household debt, which grew massively.
2000 onwards
Portugal did not take full advantage of the opportunities created by its early membership of the EU and euro adoption and, following a period of convergence to average EU living standards, the catching-up process has since stalled.
Real GDP growth averaged less than 1% between 2000 and 2005 and on-going recovery remains fragile, with annual growth expected to remain below 2% in 2006-07.
The public deficit, which exceeded the EMU-sanctioned 3% in 2001, has remained above that agreed level and was close to 6% of GDP in 2005 in spite of close EU supervision and supported consolidation efforts during 2002 to 2004.
Its export performance is also deteriorating in the face of new, younger, European-member competition offering lower labour costs in its traditional product markets.
To raise revenue and foster growth, the OECD 2006 assessment urges stringent control of public expenditure, educational reform and investment in tertiary education, training and innovation - particularly the sciences and technologies, alongside encouraging internal marketplace competition and a more flexible business operating environment.
Key facts
- Pre-1974 saw fiscal stability and good credit prospects under a regime of state regulation and private ownership of production
- Post-1974 nationalisation and the growth of the welfare state resulted in deficits, declining foreign investment and a country steeped in bureaucracy
- 1986, Portugal joined the EU, benefiting from trade links and investment
- From 1989 onwards, it embarked on privatisation and economic deregulation
- By 1991 it had still not recovered to pre-1974 levels: 1973 output was 56% but 54.9% by 1991
- By 1993 annual average growth was 3.3%, well-above the EU average
- By 1999, it had met its fiscal targets and introduced the euro
- Annual growth stalled between 2000-2005 to under 1% and is predicted to remain below 2% in 2006-2007
- Public deficit has exceeded the EMU-sanctioned 3% since 2001 and was close to 6% of GDP in 2005
- Portugal needs to clamp down on public spending and encourage internal growth and innovation in the face of new European competitors
Downloadable Reports and Documents
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