"' - A / - ' ' . r - .*..4 (- SWEDEN 1 * * * . ..; . r 4u . ^ USTRIA/ a :,.'r -t,,.- *V,*j»^'.U^Oai * ,-'h-\ /GXEECE / / ©ECO /GREECE/ I I /NORWAY /AUSTRIA/ ITALY URVEY! LAND/DALY / MANY/ /AUSTRIA/ nALY/ / MANY/GREECE SWEDEN DENMARK/ LAND/NORWAY / ITALY /GREECE/ICELAND/ /NORWAY /SWITZERLAND/TURKEY/ /YUCOSL/MA/ /FINLAND/FRANCE/ / / /NORWAY/PORTUGAL/SPAIN /AUSTRIA/BELGIUM/CANADA/ i /GREECE/ mixi /BELGKJM/CANADA/DENMAKK /GREECE / /YUGOSLAVIA/ / FINLAND/ / / ITALY/ / /NORWAY/PORTUGAL/SRUN / LIA/AUSTRIA/BELGIUM/CANADA/ /FRANCE/GERMANY /PORTUGAL/SPAIN/SWEDEN YUGOSLAVIA CANADA/DENMARK ITAOT/JAPAN/ OECD ECGNOMBC SURVEYS PORTUGAL ORGANISATION FORECONOMIC CO-OPERATIONAND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant lo Article 1 oftheConvention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD)shallpromotepoliciesdesigned: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, whilemaintainingfinancial stability,andthusto contributetothedevelopmentoftheworldeconomy; to contribute to sound economic expansion in Member as well as non-membercountries in theprocess ofeconomic development; and to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with internationalobligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland,Italy,Luxembourg,theNetherlands, Norway,Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971) and New Zealand (29th May 1973). The Commission of the European Communities takes part in the work ofthe OECD (Article 13 of the OECD Convention). Yugoslavia has a special status at OECD (agreementof28thOctober 1961). Publiéégalementenfrançais. ©OECD 1992 Applicationsforpermissiontoreproduceortranslate allorpanofthispublicationshouldbemadeto: HeadofPublicationsService,OECD 2,rueAndre-Pascal,75775PARISCEDEX 16,France Table of Contents Introduction 9 I. Portugal's integration into the EC: a progress report 11 Terms of entry, EC assistance and accompanying structural policy changes 13 Impact on external trade, product markets and factor markets 20 Progress towards real economic convergence 34 Nominal convergence 41 II. Recent economic policies 49 Budgetary policy 49 The weight of the public sector 54 Monetary and exchange-rate policy 56 Other structural reforms 64 III. Recent trends and short-term outlook: an overheated economy 68 Recent economic performance 68 The outlook to end-1993 82 IV. Conclusions 86 Notes and references 93 Annexes 1. Determinants of Portuguese Private-Sector Wages 100 II. References 102 III. Chronology of economic Events 105 IV. Supplementary Tables 111 Statistical Annex 115 Tables Text 1. Selected infrastructural indicators: an international comparison 15 2. Financial flows with the EC 16 3. Role of EC financing in Portuguese development, 1989-93 17 4. Private-sector wages and compensation in the EC 25 5. Balance of payments over the 1980s 26 6. Composition of output and employment in EC countries 28 7. Rate of convergence of relative prices in OECD countries, 1980-85 30 8. Inward direct investment shares in OECD countries 32 9. Foreign direct investment by sector and origin 34 10. Relative labour productivity performance 37 11. Educational attainment: Portugal versus EC, 1987 38 12. General-government account 52 13. The weight of the general government 55 14. Recent credit growth 60 15. Environmental indicators: a Portugal-OECD comparison 66 16. Demand and output 70 17. Household appropriation account 70 18. Labour-market indicators 74 19. Cost and price deflators 76 20. Balance of payments 79 21. Foreign trade 80 22. The short-term outlook 84 Annex Al. Concentration of foreign trade in smaller OECD countries 1 12 A2. Export shares by product, 1985 and 1990 113 A3. Share of intra-industry trade in intra-EC trade 114 A4. Rate of return on capital of US firms abroad 1 14 Statistical Annex Selected background statistics 116 A. Expenditure on gross domestic product 117 B. Household appropriation account 118 C. General government account 1 19 D. Prices and wages 120 E. Civilian employment by sector 121 F. Money supply and its counterparts 122 G. Breakdown by nationality of foreign visitors 123 H. Foreign trade by main commodity groups 124 I. Geographical breakdown of foreign trade 125 J. Balance of payments 126 K. Labour-market indicators 127 L. Public sector 128 M. Production and employment structures 129 Diagrams 1. Evolution of economic performance 12 2. Importance of foreign trade 21 3. Import and export shares by main partners 23 4. Evolution of Portugal's revealed comparative advantage 24 5. Real convergence 35 6. Importance and efficiency of fixed capita] formation 39 7. Inflation differentials 41 8. Evolution of the exchange rate 43 9. Real effective exchange rate: an international comparison 45 10. The stance of fiscal policy 50 11. Money and credit 59 12. Interest rates 61 13. Exchange rate of the escudo vis-à-vis selected currencies 63 14. Macroeconomic performance 69 15. Contributions to real GDP growth 72 16. Consumer prices 77 17. Indicators of competitiveness and foreign trade 81 BASICSTATISTICSOFPORTUGAL THELAND Area(thousandssq.km) 92.0 Majorcities,residentpopulationinthousands(1981): Lisbon 808 Porto 327 THEPEOPLE Population(1990,thousands) 10390 Civilianemployment(1989,thousands) 4395 Numberofinhabitantspersq.km 113 Asapercentageoftotal: Civilianlabourforce(1989,thousands) 4676 Agriculture 18.9 Industry 35.2 Services 45.9 PRODUCTION Grossdomesticproductin1990 Grossdomesticproductatfactor (millionofUSdollars) 59748 costbyorigin(1989,%oftotal): Grossdomesticproductperheadin1990 Agriculture 6.2 (USdollars) 5751 Industry 38.1 Grossfixedassetformationin1990: Services 55.7 %ofGDP 26.9 Perhead(USdollars) 1549 IEGOVERNMENT Publicconsumption(1990,%ofGDP) 19.6 CompositionofParliament(numberofscats): Publicinvestment(1990,%ofGDP) 3.7 SocialDemocrats(PSD) 135 (%oftotalinvestment) 13.8 Socialists(PS) 72 GeneralGovermentcurrentrevenue UnifiedDemocraticCoalition(CDU) 17 (1990,%ofGDP) 40.5 CenterSocialDemocrats(CDS) 5 NationalSolidarity(PSN) 1 FOREIGNTRADE Exportsofgoodsandservices(1990,%ofGDP) 37.2 Importsofgoodsandservices(1990,%ofGDP) 47.2 Mainexportsasa%ofcommoditiesexports,1990 Mainimportsasa%ofcommoditiesimports,1990 SITC: SITC: Food,beveragesandtobacco(0,1) 6.6 Food,beveragesandtobacco(0,1) 9.7 Basicandsemi-finishedmaterials(2,3,4) 12.8 Basicandsemi-finishedmaterials(2,3,4) 16.9 Manufacturedgoods(5,6,7,8) 80.3 Manufacturedgoods(5,6,7,8) 73.3 ofwhich; Chemicals(5) 5.2 ofwhich: Chemicals(5) 9.1 Machineryand Machineryand transportequipment(7) 19.6 transportequipment(7) 36.9 THECURRENCY Monetaryunit: Escudo CurrencyunitsperUS$, averageofdailyfigures: Year1990 142.31 November1991 141.22 Note: Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable. This Survey is based on the Secretariat's study pre¬ pared for the annual review of Portugal by the Economic and Development Review Committee on 18th November1991. After revisions in the light ofdiscussions during the review,final approval ofthe Surveyforpublication was given by the Committeeon 16thJanuary1992. The previous Survey of Portugal was issued in January1991. Introduction When the Economic and Development Review Committee lastreviewed the economic situation in Portugal in November 1990, it expressed concern about excess demand pressures in both labour and product markets. Budgetary policy had been inappropriately expansionary in 1990 but looked set to tighten some¬ what in 1991. Due to capital inflows the monetary authorities had been unsuc¬ cessful in theirattempts to tighten monetary conditions sufficiently to bring about disinflation. The Committee recommended more restrictive stabilisation policies in order to restore macroeconomic balance and improve inflation outcomes, termed the major disappointment in economic performance in recent years. With such apolicy stance domestic-demand growth was expected to ease substantially, but output expansion was projected to be better maintained, given a smaller deterioration in the real foreign balance. Consumer-price inflation in 1991 was expected to recede to the 12 per cent range, after the over 13 per cent outcome recorded in 1990, as theunemploymentrate reversed its trend decline in line with waning job creation. In the intervening year the economy has remained overheated. The govern¬ ment deficit has widened further in 1991, as current spending increases have surpassed 20 percent. Although interestrates have risen in both nominal and real terms, once again, despite the efforts ofthe central bank, liquidity increases have been excessive as capital inflows have defied both the range of official controls imposed in order to hinder them and sterilisation efforts to offset their effects. Outputgrowth has indeed slowed, perhaps even morethan hadbeen foreseen, but domestic demand has continued to expand at unsustainable rates, led by a boom in private consumption, while merchandise-export growth has vanished. Farfrom abating, demand for labour has picked up, and employment growth has surged, leaving the unemployment rate below 4 per cent, one ofthe lowest in the OECD and substantially below its sustainable level. As a result, real wage gains have