OECD RVEY: VU PORTUGAL OECD OCPE 1993 ECONOMIC 3 PORTUGAL ORGANISATIONFORECONOMICCO-OPERATIONANDDEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT PursuanttoArticle 1 oftheConventionsignedinParis on 14th December I960, andwhich cameintoforceon 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 ofliving in Member countries,whilemaintainingfinancialstability, andthusto contributetothedevelopmentoftheworldeconomy; to contribute to sound economic expansion in Memberas well asnon-membercountries intheprocess 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 ofthe 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 ofthe European Communities takes part in the work ofthe OECD (Article 13 ofthe OECDConvention). Publiéégalementenfrançais. ©OECD1993 Applicationsforpermissiontoreproduceortranslate allorpaîtofthispublicationshouldbemadeto: HeadofPublicationsService,OECD 2,rueAndré-Pascal,75775PARISCEDEX16,France Table of contents Introduction 9 I. The policy implications of the treaty on European Union 1 1 Introduction 11 The medium-term economic strategy 1 1 Progress towards convergence 16 Implications of the current policy mix 20 II. Controlling government expenditure 22 The size of government: an international comparison 22 Reforms to improve the control of government expenditure 27 III. Recent economic policies 40 Fiscal policy 40 Monetary and exchange-rate policy 45 Structural policies 53 IV. Recent trends and projections 57 Recent trends 57 The outlook to end-1994 72 V. Conclusions 75 Notes and references 82 Annexes I. Bibliography 84 II. Supplementary table and diagram 87 III. Calendar of main economic events 90 IV. The size of government: some contributory factors 95 Statistical and structural annex 97 Tables Text 1. Convergence criteria for EMU and actual performance in 1992 12 2. The convergence programme for 1992-95 ("Q2") in perspective 15 3. Financial flows with the EC 20 4. The size of government: some contributing factors 24 5. Government expenditure: an international comparison 25 6. Education in international perspective 26 7. Composition and growth of government employment 28 8. Expenditure by lower levels of government 30 9. Local government accounts 32 10. Indicators of non-financial public enterprise size and performance 37 1 1. Privatisation and the general government borrowing requirement 37 12. General government account 42 13. Fiscal stance indicators 45 14. Money-market intervention and lending rates 47 15. Recent macroeconomic developments 59 16. Labour market indicators 61 17. Wage and price formation 66 18. Balance of payments 69 19. The short-term outlook 73 Annexes Table Al. Government revenue and expenditure trends 88 Statistical and structural annex Selected background statistics 99 A. Expenditure on gross domestic product 100 B. Household appropriation account 101 C. General government account 102 D. Prices and wages 103 E. Civilian employment by sector 104 F. Money supply and its counterparts 105 G. Breakdown by nationality of foreign visitors 106 H. Foreign trade by main commodity groups 107 I. Geographical breakdown of foreign trade 108 J. Balance of payments 109 K. Labour-market indicators 110 L. Public sector 111 M. Production and employment structures 112 Diagrams 1. The various adjustment programmes 14 2. Decomposition of changes in the GDP deflator 18 3. Total and primary government expenditure 23 4. Pension payments 35 5. Future public pension expenditure and contributions 36 6. Adjusted government debt developments 38 7. Exchange-rate and interest-rate developments 46 8. Monetary and credit aggregates 49 9. Interest rates 51 10. Exchange rate of the escudo vis-à-vis selected currencies 54 I I. Evolution of economic performance 58 12. The labour market 63 13. Inflation developments 68 14. Indicators of competitiveness and foreign trade 70 Annexes Diagram Al. Welfare payments and beneficiaries 89 LU CD < û. < CQ BASICSTATISTICSOFPORTUGAL THELAND Area(thousandssq.km) 92.0 Majorcities,residentpopulationinthousands (1981): Lisbon 808 Porto 327 THEPEOPLE Population(1991,thousands) 9814 Civilianemployment(1991,thousands) 4607 Numberofinhabitantspersq.km 107 Asapercentageoftotal: Civilianlabourforce(1991,thousands) 4805 Agriculture 17.3 Industry 34.7 , Services 47.9 PRODUCTION Grossdomesticproductin1991 Grossdomesticproductatfactor (millionofUSdollars) 68375 costbyorigin(1990,%oftotal): Grossdomesticproductperheadin1991 Agriculture 5.8 (USdollars) 6967 Industry 37.8 Grossfixedassetformationin1991: Services 56.4 %ofGDP 26.1 Perhead(USdollars) 1818 THEGOVERNMENT Publicconsumption(1991,%ofGDP) 17.2 CompositionofParliament(numberofseats): Publicinvestment(1991,%ofGDP) 3.6 SocialDemocrats(PSD) 135 (%oftotalinvestment) 13.9 Socialists(PS) 72 GeneralGovermentcurrentrevenue UnifiedDemocraticCoalition(CDU) 17 (1991,%ofGDP) 38.5 CenterSocialDemocrats(CDS) 5 NationalSolidarity(PSN) 1 FOREIGNTRADE Exportsofgoodsandservices(1991,%ofGDP) 31.9 Importsofgoodsandservices(1991,%ofGDP) 41.3 Mainexportsasa%ofcommoditiesexports,1991 Mainimportsasa%ofcommoditiesimports,1991 SITC: SITC: Food,beveragesandtobacco(0,1) 7.3 Food,beveragesandtobacco(0,1) 11.2 Basicandsemi-finishedmaterials(2,3,4) 10.5 Basicandsemi-finishedmaterials(2,3,4) 14.5 Manufacturedgoods(5,6,7,8) 81.9 Manufacturedgoods(5,6,7,8) 74.2 ofwhich: Chemicals(5) 4.6 ofwhich: Chemicals(5) 9.0 Machineryand Machineryand transportequipment(7) 19.7 transportequipment(7) 36.5 THECURRENCY Monetaryunit: Escudo CurrencyunitsperUS$, averageofdailyfigures: Year1992 134.82 April1993 148.59 Note: Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable. ThisSurveyisbasedon theSecretariat'sstudyprepared for the annual review ofPortugal by the Economic and DevelopmentReviewCommitteeon22ndMarch 1993. After revisions in the light ofdiscussions during the review, final approval ofthe Surveyforpublication was givenbythe Committeeon20thApril1993. Theprevious Survey ofPortugal was issued in January 1992. Introduction After several years of strong growth, output expansion slowed to Vh per cent ofGDP in 1992. While domestic demand growth appears to have remained very buoyant until mid-1992, the contribution of the foreign balance to GDP growth was strongly negative, as in 1991. Rapid GDP growth in earlieryears had pushed up capacity utilisation rates to very high levels and the unemployment rate down to close to4 per cent in 1992. The overheating ofthe economy led to a surge in wage and price inflation between 1989 and 1991. The cooling off in 1992 and falling import prices induced lower wage and price inflation, but underlying inflation has remained stubbornly high (at around 10per cent adjusted for the effects of increased VAT) and disinflation has largely taken place in the open sector. The current account, however, has swung to balance, reflecting terms-of-trade gains and increasing inflows of EC transfers. The deepening of macroeconomic imbalances since the late 1980s largely reflect an unbalanced policy stance, with budgetary policy strongly expansionary in 1990 and to a lesser extent in 1991. Hence, monetary policy had to bear the brunt of disinflation. Interest rates rose in nominal and real terms and the exchange rate even appreciated in nominal terms from 1989 until the escudo entered the Exchange Rate Mechanism of the European Monetary System in April 1992. To correct increasing macroeconomic imbalances, the Government announced a medium-term convergence plan in 1991, aimed at a sharp reduction in inflation rates and a considerable cut in the government deficit by 1995. The 1992 Budgetwas restrictive, largely because ofanotherincreasein taxation. New budgeting procedures were able to halt the rise in the expenditure-to-GDP ratio and the government deficit fell to close to 5 per cent of GDP. The 1993 Budget aims at afurtherfall in thedeficit, with expenditurebudgeted to expand consider¬ ably less than GDP.