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Salazar’s legacy

Portuguese economic policy can be split into the periods pre-1974 and post-1974, due to the radical shift that took place. Pre-1974 had seen Portugal’s first Republic and an ensuing dictatorship. When Salazar was appointed as prime minister, he brought fiscal stability and good credit prospects. Means of production was privately owned, and direct foreign investment increased 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.

Interventionist policy

The period post-1974 saw a turnaround in policy as the nationalisation of major sectors and government intervention became the new policy. Direct foreign investment took a dive, even though it was permitted, due to the new price of labour.

Public debt

The public sector was now huge, and 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.

EU membership

In 1986 Portugal became an EU member, as its economic growth and development were found to be sufficiently stable. Benefits included 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 were introduced to try and bring Portugal into a new era.

Economic reforms

To comply with the Economic Monetary Union (EMU), Portugal cut its fiscal deficit and undertook structural reforms to improve exchange rate stability, curb inflation and reduce interest rates. All of this contributed to reducing the debt and Portugal introduced the euro in 1999 when all fiscal targets were met. The downside was household debt, which grew massively. In 2001 the public deficit exceeded 3%, contravening the EMU rules, and increased financial supervision is to be expected if Portugal does not take measures to improve this situation.

Economy today

Recent statistics show GDP growth in 2006 was 1.3%, and is estimated to be 1.8% in 2007. According to figures from Portugal’s National Institute for Statistics, the unemployment rate in the second quarter of 2007 was 7.9%. According to OCO Monitor, foreign direct investment projects in Portugal in 2006 came to $1.6 billion, which was ten times that of the previous year.

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