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Labour productivity growth Portugal’s problem says economist

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In the last three year’s Portugal’s productivity growth has been negative says a Harvard Business School economist.

In the second part of two articles on the state of Portugal’s economy, Richard Vietor warns that public and private debt are no the only problems facing the country. Productivity too is still painfully low at 0.24% in March 2019 – an increase of only 0.08% on Q4 of 2018. In fact, Portugal’s labour productivity which was around 0.823% in July 2016 was only 0.236% by January 2019.
The negative figures can, in part, by explained by Portugal’s huge growth in tourism in since 2016, a key indirect export while Portugal’s once high level of unemployed have largely gone back into the workplace or emigrated overseas.
“I think there are things that business and government can do to stimulate productivity although it will take several years” said the US economist who has advised the IMF in countries such as Greece and Turkey.
The efficiency of labour capital in 2018 grew at 0.2% while the IMF predicts improvements over the next two years.
“Portugal can not grow and be competitive if it doesn’t grow its productivty” advises Vietor. According to the OECD, Portugal falls short on structural adjustment, particularly government bureaucracy and over-regulation.

Institutional problems
And according to the 2019 World Bank Business Report (April), Portugal ranked 34th in the world out of 188 countries. While not bad, Poland, Rwanda, Thailand and Latvia all ranked better than Portugal.
The report said that starting a business was still too complicated, time-consuming and bureaucratic (ranked 57th). “It should be incredibly easy to start a business here” said Vietor.
Construction permits suffered from the same problem. Portugal ranked 60th from 188 countries. Getting credit too was hard for businesses. (Portugal ranked 112th), partly because the banks are still adjusting.
Protecting minority investors (64th place), registering property (32nd). “These are constraints that need not exist. These are institutional problems that get in the way of Portugal’s productivity growth and that can be fixed” said the economist.

Fiscal deficit “doing quite well”
In terms of GDP and fiscal deficit, Vietor says that Portugal is “doing quite well” compared to Spain or Italy, the latter being on the verge of a serious debt crisis.
Portugal’s public debt (121.5%) too is coming down (as in Greece and Cyprus) but is not falling in Italy where it is currently 135% of GDP.
In fact, Portugal recorded a government debt equivalent to 121.50% of the country’s GDP in 2018. Government debt to GDP averaged 79.30% from 1990 until 2018, reaching an all time high of 130.60% in 2014 and a record low of 50.30% in 2000.
According to the IMF Portugal’s growth will slow from 2.1% to 1.7% while there is no inflation in Portugal, its current account is slightly negative (less than 1%) while the unemployment rate is “spectacularly low” (a fall from 16%-6.8% since the crisis).
Overall and according to the IMF, while the non financial private sector’s debt-to-GDP ratio has fallen 47 percentage points since 2012, it is still: “among the highest in the euro area,” with total household and corporate debts standing at 74% and 138% of GDP at the end of 2017.
Public debt remains high at 126% of GDP. In the banking sector, the still high stock of non-performing loans (13.3% of total loans at the end of 2017) and modest profitability prospects remain concerns.
In the housing markets, prices continue to increase (about 20% in real terms since 2013 compared to 7% in the euro area), and there are concerns that the current easy financial conditions could boost mortgages and further drive up prices. In such an environment, a sudden repricing of risks could affect financial stability and economic growth.

Remedies?
The Harvard economist made some suggestions about what Portugal needed to do in order to really grow its economy to significant rates or over 3%.
Vietor admitted the suggestions were “easy to make” but not so “easy to do”.
1) Portugal has to continue fiscal austerity. “Portugal just cannot let its deficits grow significantly.
2) Portugal needs to continue reducing its overall debt. The IMF sets an acceptable standard of Debt to GDP ratio which is 60-90%. Portugal’s is 121%.
3. Portugal needs to increase its savings. “The government could have a PR campaign to encourage savings with some, albeit limited incentives because the government doesn’t have a lot of incentives to give, which would help get the country out from underneath foreign debt”.
Portugal needs to increase its Direct Domestic Investment, although it would be better to balance that at home rather than just overseas investment, except, of course, Foreign Direct Investment and here Vietor says the Government can do things to encourage more FDI.
The economist pointed out that if Portugal got the numbers highlighted by the World Bank report mentioned above down, more overseas people and businesses would want to invest and start up businesses in Portugal.

Improving productivity
Richard Vietor says that when he did a case study in 2016 he searched for productivity improvements which he thought would have begun to happen since the structural reforms were implemented in 2012, 13 and 14.
“By early 2017 when I completed the case I had expected to see productivity adjusting. I didn’t. Productivity does take a long time to improve and perhaps we will see productivity grow over the next two years as a result of the reforms already done” he said.
“I wouldn’t rely on that. Education needs to be improved in Portugal a lot over the next 10-15 years, particularly regarding the impact of digital transformation” he added.
Structural adjustments, while spectacular so far, are not enough. Above all, Portugal also has problems anchoring its young graduate talent at home, and preventing it from going overseas. It need to attract that talent back today which, given the salary structures and lack of opportunities, may well prove difficult.

TEXT: Chris Graeme


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