The Po(o)rtuguese Problem: Portuguese Economic Growth Backwardness

Introduction

The Industrial Revolution in 18th century Britain was a turning point in History. With industrialization countries were able to have sustained economic growth for long periods. Successive waves of industrialization, occurred in Europe during the 19th century, bringing a period of great economic expansion. However, some countries, like Portugal, grew but not as much as the European leaders. This trend continued for most of the 20th century, with some exceptions. Today Portugal still lags in many indicators from its European counterparts.

            Our goal with this article is to understand a part of the historical dynamics that prevented Portugal from reaching sustained economic growth. We will use the “four golden rules to achieve lasting economic growth” as explained by a group of our colleagues (https://theawarenessnews.com/2021/03/08/four-golden-rules-to-achieve-lasting-economic-growth/) and explain how they evolved during Portugal’s contemporary history.

Economic Diversification

One of the main drivers for real economic growth is economic diversification. Succinctly, if an economy is well-diversified, then its performance will not be as crippled if one of its sectors faces adversities, thus being easier to deal with shocks and facilitating long-term economic growth.  

Concerning Portugal, it would be valuable to analyze the impact of its different economic sectors on its GDP to discover whether the country ever was dependent on a specific area of its economy.  

From the table presented above, we see that Portugal’s Agricultural and Industrial sectors have lost significant influence over this period, going from a combined 55% of Portugal’s GDP in 1954 to a mere 14,5% in 2011. Consequently, a gradual increase in the services industry has been observed, overtaking the previous two as the main sector in Portugal’s economy.

One must ask then if this evolution is different than the one experienced in most Western countries. The answer is negative. This information is reflective of the contemporary deindustrialization phenomena that have led to a gradual shifting of industries that were once established in the Global North to the Global South, particularly to South East Asia. Likewise, the development of the services industry, mainly propelled by developments in technology, has been observed throughout most developed economies.

Besides, Portugal has never even been a country with the possibility of being dependent on a certain commodity which could have swayed Portugal’s past leaders to fully focus on the development of a certain facet of its economy.

Therefore, we do not believe that a lack of economic diversification could explain Portugal’s economic shortcomings.

Productivity

Another factor that is usually employed to explain long-term economic growth is the level of productivity of an economy. Productivity measures the efficiency of production, meaning that a productivity improvement would be an increase in the output produced by each worker or each machine in an economy. It is expected that higher levels of productivity would lead to greater profits for businesses and income for individuals.

Regarding Portugal, throughout its history, there have been many periods where productivity growth was observed. From the late 19th century to the First World War, when the fires of industrialization were first ignited in Portugal, to the periods of 1951-1973 and 1985-2000 there have been plenty of years where productivity in Portugal grew.

However, these levels of productivity have always been worse than the ones experienced in most of western Europe. When in the mid-19th century countries in central Europe started to benefit from the industrial revolution, Portugal’s main economic activities were still related to the primary sector, with the exportation of cork and wine, for example. It seems as if, throughout its most recent history, Portugal has always been trailing behind the rest of Europe in this field.

This trend has not stopped for the past two centuries, resulting in Portugal today being the 7^th least productive country in the European Union, having only 65,9% of the EU average levels of productivity in 2017.

Could lower levels of productivity explain the economic flaws of Portugal? Perhaps. The problem with productivity is that many other variables can influence it, such as geography or the a country’s institutions. For example, it would be nonsensical to claim that the main reason why the Bedouin tribes of Mauritania are not as wealthy as the Portuguese is a reduced level of productivity when the hardships of the Sahara Desert and the historical phenomena of the region are vastly different from the Portuguese’s.

Openess to trade

It is a well-known result in economics that openness to trade is highly correlated with long-term economic growth. As the economic historian Jaime Reis pointed in his investigation of the phenomenon of Portuguese economic backwardness, peripherical economies in Europe seemed to benefit from integration in international trade in the 19th century. However, for the Portuguese case, the data indicates that there were not many developed exporting sectors in the country that could have lead to an industrial take-off. Even more, Portugal was not fully open to international trade, nor able to exploit all opportunities trade gave to development.

Analysis for other periods gives even more evidence of the important correlation between a higher degree of openness to trade and economic growth. A study by Óscar Afonso and Álvaro Aguiar concludes that the acceleration of trading relations relates to the improvement of the economy’s productivity from the 1950s and 1960s onwards and the convergence with the most developed European countries. The integration in the European Economic Community in the 1980s was also an important driver of economic growth and convergence.

In conclusion, it does seem that openness to trade is correlated with the historical growth of the Portuguese economy, but there is not much evidence to support the idea that this is the most important factor to explain the country’s problems.

Institutions

Lack of “inclusive institutions” might be the factor. This term first appeared in Why Nations Fail and reinforces the importance of respecting property rights and having an effective justice to achieve continuous prosperity. The concept is defined in opposition to the concept of “extractive institutions”, ones that extract resources from the economy to the benefit of a small group, thus preventing sustained growth.

Portugal’s contemporary history is a pendulum that swings between more inclusive to more extractive institutions, and back to more inclusive institutions. The 19th century starts with the end of absolutism and the instauration of the liberal monarchy. However, the monarchy was not always a fully liberal regime, with periods of instability and authoritarian rule. In 1910 came the Republic, another period of instability that ended in the corporativist dictatorship of the Estado Novo, an obvious example of “extractive institutions”. Only in the 1970s did Portugal come to be a modern democracy.

We see that overall, the period is marked by instability, lack of liberal and democratic institutions, and by regimes and elites that prevented the development of growth-friendly institutions and reforms.

The weight of history can be seen in the institutional problems Portugal faces today. The 2020 Corruption Perceptions Index places Portugal in 33^rd place, behind several developing countries. This value suggests Portugal is not among the most efficient economies, as corruption is expected to result in lower levels of capital productivity.

In the 2020 Economic Freedom Index, Portugal has an overall score of 67, making it the 52^nd freest economy in the world and 29^th in Europe. The index identifies the government’s longstanding record of overspending and the continuing need for labor market reforms to reduce the number of workers who are forced to take temporary or part-time positions as the two major impediments to a greater economic freedom. While the business and monetary freedom are considered attractive from a regulatory point of view, labor reform packages in recent years have not been able to succeed in raising labor productivity.

The institutional factor may be the reason why Portugal is not achieving strong prosperity and still lags behind the most developed countries.

Sources: Análise Social; Banco de Portugal; Conselho para a Produtividade; ECO; Francisco Manuel dos Santos; Jornal de Negócios; Jornal I; Instituto de Ciências Sociais; Instituto Nacional de Estatística; Pordata; Público; Sábado; Transparency International; The Heritage Foundation

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