..' l I- i \ii|\' :<. s \i " '< i if' PORTUGAL %z 19934994 PORTUGAL ORGANISATIONFORECONOMICCO-OPERATIONANDDEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT PursuanttoArticle 1 ofthe Convention signed inParis on 14th December 1960, and which came intoforce 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,whilemaintainingfinancialstability,andthusto contributetothedevelopmentoftheworldeconomy; to contribute to sound economic expansion in Member as well as non-member countries in the processofeconomic 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), New Zealand (29th May 1973) and Mexico (18th May 1994). The Commission ofthe European Communities takes part in the work of theOECD(Article 13oftheOECDConvention). Publiéégalementenfrançais. ©OECD1994 Applicationsforpermissiontoreproduceortranslate allorpartofthispublicationshouldbemadeto: HeadofPublicationsService,OECD 2,rueAndré-Pascal,75775PARISCEDEX16,France Table of contents Introduction 9 I. Recent developments and prospects 11 Recent developments 1 1 The labour market and inflation 16 The outlook to 1995 26 II. Macroeconomic policies 29 Overview 29 Monetary and exchange-rate policy 31 Fiscal policy 37 III. Promoting competition 48 Introduction 48 Forces shaping the evolution of relative prices 50 Rolling back the State presence in the economy 60 Strengthening competitive forces in the private sector 69 The scope for further action 75 IV. Conclusions 77 Notes and references 83 Annexes 1. Supporting material to Part III 88 II. Calendar of main economic events 90 Statiscal and structural annex 93 Tables 1. Recent macroeconomic developments 14 2. Labour-market indicators 17 3. Wage and price developments 19 4. Export market shares 22 5. Trade by regions 24 6. Trade by commodities 25 7. Balance of payments 25 8. Short-term projections 27 9. Money-market intervention and lending rates 33 10. General government accounts 41 1 1. Medium-term targets 45 12. Consumer prices for tradeables and non-tradeables 48 13. Productivity in the business sector 52 14. Weight of public enterprises in total employment by main branches of activity 64 15. Major privatisations, 1989-1993 65 16. Telecommunications indicators 67 17. The top 5500 European banks 71 Annex Al. The "sheltered" sector 88 Statistical and structural annex Selected background statistics 94 A. Expenditure on gross domestic product 95 B. Household appropriation account 96 C. General government account 97 D. Prices and wages 98 E. Civilian employment by sector 99 F. Money supply and its counterparts 100 G. Breakdown by nationality of foreign visitors 101 H. Foreign trade by main commodity groups 102 I. Geographical breakdown of foreign trade 103 J. Balance of payments 104 K. Labour-market indicators 105 L. Public sector 106 M. Production and employment structures 107 Diagrams 1. Macroeconomic performance 12 2. Industrial production and business indicators 13 3. Conjunctural indicators of demand 15 4. Inflation developments 20 5. Real wages, productivity and economic activity 21 6. Indicators of competitiveness and foreign trade 23 7. Exchange-rate and interest-rate developments 30 8. Interest rates 35 9. Monetary and credit aggregates 36 10. Escudo exchange rates 38 1 1. Targets and outturns 39 12. The stance of fiscal policy 42 13. Public debt developments 44 14. Consumer price inflation 49 15. Sectoral labour productivity levels 51 16. The rise in relative service prices 51 17. Real GDP per capita 52 18. Labour productivity growth in the sheltered and open sectors 54 19. Sectoral labour productivity trends 55 20. Trends in real compensation per employee by sector 56 21. Sectoral output price deflators 58 22. Relative price levels in 1990 between Portugal and the EC 59 23. Weight of public enterprises in the non-agricultural business sector 63 24. Planned privatisations in Europe 66 Annex Al. GDP per capita and relative price levels 89 UJ CD < û. < CQ BASICSTATISTICSOFPORTUGAL THELAND Area(thousandssq.km) 92.0 Majorcities,residentpopulation inthousands(1991): GreaterLisbon 1832 GreaterPorto 1 153 THEPEOPLE Population(1992,thousands) 9345 Civilianemployment 4310 Numberofinhabitantspersq.km 102 (1992,thousands) Civilianlabourforce(1992,thousands) 4569 Asapercentageoftotal: Agriculture 11.4 Industry 33.4 Services 55.2 PRODUCTION Grossdomesticproductin1992 Grossdomesticproductatfactor (millionofUS$) 71450 costbyorigin(1990,%oftotal): Grossdomesticproductperheadin 1992(US$); 7646 Agriculture 5.8 Grossfixedassetformationin1992: Industry 37.8 %ofGDP 26.0 Services 56.4 Perhead(USS) 1985 THEGOVERNMENT Publicconsumption(1992,%ofGDP) 20.2 CompositionofParliament(numberofseats): Publicinvestment(1992,%ofGDP) 4.2 SocialDemocrats(PSD) 135 (%oftotalinvestment) 16.2 Socialists(PS) 72 GeneralGovernmentcurrentrevenue UnifiedDemocraticCoalition(CDU) 17 1992,%ofGDP 47.0 CenterSocialDemocrats(CDS) 5 NationalSolidarity(PSN) 1 FOREIGNTRADE Exportsofgoodsandservices Importsofgoodsandservices 1992,%ofGDP 29.0 1992,%ofGDP 37.6 Mainexportsasa%of Mainimportsasa%of commoditiesexports,1992SITC: commoditiesimports, 1992SITC: Food,beveragesandtobacco(0,1) 7.1 Food,beveragesandtobacco(0,1) 9.8 Basicandsemi-finishedmaterials(2,3,4) 9.8 Basicandsemi-finishedmaterials(2,3,4) 12.8 Manufacturedgoods(5,6,7,8) 82.9 Manufacturedgoods(5,6,7,8) 75.7 ofwhich:Chemicals(5) 4.2 ofwhich:Chemicals(5) 9.1 Machineryandtransport Machineryandtransport equipment(7) 21.6 equipment(7) 37.6 THECURRENCY Monetaryunit:Escudo CurrencyunitsperUSS averageofdailyfigures: Year1993 160.7 March1994 174.1 Note; Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable. This Survey is based on the Secretariat's study preparedfor the annual review of Portugal by the Economic and Development Review Committee on 15th March 1994. After revisions in the light ofdiscussions during the review, final approval ofthe Surveyfor publication was givenbythe Committeeon31stMarch 1994. The previous Survey ofPortugal was issued in June 1993. Introduction Having enjoyed one ofthe fastest expansions in the OECD area since 1987, Portugal suffered a small fall in GDP in 1993, the first such decline since 1984. The downturn in Europe has been partly responsible, by weakening exports and business fixed investment, but domestic demand has also been depressed by high real interest rates, the squeeze on corporate profits and a deteriorating labour market. Personal consumption, which had been rather buoyant until late 1992, has been adversely affected by weaker labour demand, which pushed up unem¬ ploymentto 5.5 percent in 1993. A resumption in economic growth is dependent upon both a further global decline in interest rates and a revival of exports, but should get underway in 1994. However, as output growth is likely to remain below potential for some time, unemployment may climb further. Weaker activity and falling nominal wage growth have helped the disinfla¬ tion process, reducing the inflation gap between Portugal and the EU to 3 points by the end of 1993. However, both monetary policy and fiscal consolidation suffered setbacks in 1993 as the escudo was once again devalued and the budget deficit dramatically overshot. At nearly 8 per cent of GDP, the general govern¬ ment budget deficit in 1993 was nearly twice as large as projected, reversing the falling trend ofpublic debt in terms of GDP. The economy is thus faced with an unbalanced policy mix. While exchange rate stability has remained the key intermediate target of monetary policy, and interest rates have been allowed to fall in line with European rates since mid-1993, the scope for future inflation convergence depends on the achievement ofgreaterpolicy consistency, including action to enhance competition in the sheltered sectors of the economy. This Survey begins with an examination of the factors pushing Portugal's economy into recession (Part I). Macroeconomic policies are analysed in Part II, with an emphasis both on the effects ofERM realignments and on the budgetary overshoot. The opening-up of the sheltered sector is the focus of this Survey's