Portugal’s stagnant growth conundrum

If any country in Europe could identify with the classic Catch 22 problem of low growth, low wages, low productivity and high taxes then Portugal is the classic case study.

On the one hand, in order to become more competitive and productive, it needs to keep wages low and introduce the latest technology into its industries which today are centred around textiles, footwear, car parts, chemicals, wines and, of course, property and tourism both of which are largely interlinked.
But here’s the rub. Portugal has several problems that make a more tax-friendly environment hard. It has a huge public administration, twice the size needed for a country of just 10 million inhabitants, and with the introduction of AI and new digital technologies, that staffing requirement will only lessen over the next decade.
But short of introducing a temporary dictatorship, it is too much of a political hot potato for a Portuguese government and political party driven establishment to actually deal with the issue and not face a massive social and public backlash, which no democratic government would risk, especially since public sector jobs and political affiliation go hand in glove in Portugal.

Why the State is at fault

Unfortunately, there does not seem to be a dedicated, professional public administration at senior level that is not tied to one of the mainstream major political parties. This means when a government changes, so do the people who run the country at a central government, public company management and local government admin level. This needs to change.
There is a second, even more toxic problem. In order to keep its public administration staff happy, and ensure they vote for a government that in turn pledges to keep their salaries, bonuses and perks in place and their party in power, any government has to pay reasonable wages and provide “jobs for the boys” even if that means that those who are doing those jobs are not actually that competent to do them.
Then comes another problem. To feed this huge public administration, with its gargantuan appetite, and provide a good national health service and reasonable level of public education, no government from the centre left to the centre right would dare to reduce the mind-boggling array of taxes — there are scores of them, that pays for all this, particularly indirect taxation on imports, property, social security (super high for freelancers), regional and municipal taxes which all add up to 34.9% of GDP. (2018)
This is without mentioning the level of red tape that exists in Portugal, whereby companies that want to invest or relocate in the country are faced with so much bureaucracy and paperwork and such a long timeframe from beginning to completion, they night find it easier to invest elsewhere. In short, despite some improvements, Portugal is still hostile to overseas investors. If it weren’t, why has the country been unable to attract another Autoeuropa to its shores?
Granted, things have got much better thanks to the government’s SIMPLEX programme which has accelerated the starting up of small businesses, and a range of procedures aimed at the public such as automatic renewal of ID cards and drivers’ licences which are two of around 120 measures being introduced by the Portuguese government to make life easier for those living working in the country.

SIMPLEX – a good start

Among other measures to be presented as part of the programme include the introduction of a one-stop shop at Portuguese consulates to simplify and merge procedures for granting visas and residence permits. Foreigners wishing to come and live in Portugal only need to contact this single entity.
A good start. But when you have always traditionally been a market of low-skilled, low paid workers, and the emphasis has shifted to Eastern Europe, North Africa, Pakistan, China and South-East Asia where labour legislation and union power is weak and qualifications often higher, how do you compete without mechanising and adopting high technology production that is low on manpower requirements?
So, high technology driven startups and services is an answer, but education here is a stumbling block. Those high-flying professionals that have been educated at a cost to the Portuguese State won’t and don’t settle for a monthly salary of €1,000 when they can move to France, the UK, Germany and Holland and earn twice that amount leaving them quids in, even given the higher cost of living in those countries. And why should they?
In fact, two economic crises over the past decade has seen the brightest and most highly educated leading lights in Portugal leave the country with small chance of them returning before retirement. This workforce exit happened before in the 1960s; then it didn’t matter so much as most of the émigrés were low skilled. Today, it does matter. Most of the brain drain is from the highly qualified levels of Portuguese society.
Of course, it’s not that recent governments aren’t aware and have done nothing to tackle the problem. The Golden Visa scheme was introduced in 2012 and has attracted nearly €6B in investment. US, French and British relocation and retirement and second home purchases are at an all-time high thanks to this and the D7, Tech and Startup visas and Non-Habitual Resident regimes which offer a 20% flat tax for those areas which the Portuguese government deems important for the economy. These have helped, but only superficially, and have attracted relatively small numbers of talent and entrepreneurs once retired overseas citizens are removed from the equation.
All of the problems outlined above are well known by Portugal’s economists, business leaders, government figures and the President of Portugal’s industrial confederation (CIP), António Saraiva, who devoted the subject of his presentation at the International Club of Portugal to this and other topics on Tuesday.
While also touching on a challenging global economic and geo-political landscape with China, Russia, Turkey, Iran and rising inflation, energy costs, shipping and transportation costs, as part of his presentation ‘Portugal, Europe and the Post-Pandemic World’.
Saraiva echoed others before him who have addressed the ICPT this year, particularly candidates for the country’s prestigious Economists’ Association such as António Mendonça – a former transport minister (he subsequently was elected its new head this month) — and a former president of Portugal’s overseas trade and investment agency AICEP, Pedro Reis. (who surprisingly did not).

Exports – a miracle they’re as robust as they are

Curiously enough — or perhaps not curious at all given the amount of effort and hard work AICEP has done over the past 20 years to get Portugal’s SMEs exporting – António Saraiva discussed what Reis had already informed; Portugal ’s exports have actually exceeded this year (2021) the export levels achieved in pre-pandemic 2019, which in itself was a record year for the past decade, if not longer.
The issue, however, is twofold: scale and consistency in exportation. Portugal, which is largely made up of SMEs, with only around 1,200 large companies, is not unlike pre-industrial England in the early 1800s when Napoleon famously referred to her as “a nation of shopkeepers”.
Of course, Portugal is not a nation of retail outlets (it does boast lots of pretty good US-style malls, actually), but it IS a nation of small businesses and here Saraiva calls on a new industrialisation drive, using bazooka funds to help companies modernise, scale up and get exporting to the EU (70% of its export market) and new markets worldwide. An alternative could be to use some of the funds to reduce taxation on certain companies in specific sectors that do export.
Calling on a new economic cycle based on better and greater growth, António Saraiva says “Portugal has a had a growth problem for the past 20 years. “We’ve got the resources, we’ve got the conditions, so why is it that we can’t seem to grow?”.
Saraiva’s recipe, or rather vitamin shots to treat Portugal’s anaemic growth rate, is “courage and political will”. “What we’ve been experiencing is a decadence in our political class”, but he does admit that it is largely up to entrepreneurs to tackle the issue and turn the corner.

Bazooka funds – wisely spent?

The CIP head said it was sad, when the country’s economy needed a new direction, that the Government had focused on just three valances to apply EU funding of which Portugal has around €16Bn.
“One of them is digitalisation, but “our companies have been investing in this for quite some time” he said.
Furthermore, António Saraiva cannot understand why “only 27% of the ‘bazooka’ funds is going to Portuguese companies, warning “we may not get to where we need to be under these circumstances”.
“We’ve had numerous meetings with the Government and given suggestions, but at the end of the day we have to ask ourselves if we want more State or more economy”, he said.
Saraiva also questioned why the Government felt the need to take on 60,000 new public sector staff when the public administration was already digitalising this sector, theoretically making them less needed. The Government argues it is doing so to recruit highly qualified and technically dynamic young employees which the public sector needs, while shedding older and less qualified members the workforce now doesn’t through early retirement packages.
The CIP chairman is also well aware of the considerable increase in government expenses in recent years (not including 2020 and 2021 which were extraordinary years for obvious reasons), and which increased expenditure by €25Bn and public sector debt by €70Bn. “If we continue on like this we’ll be facing another IMF/ECB bailout round the corner,” he said, saying, on the question of Portugal’s massive tax burden, “we have to have the courage to do things differently”.
He said that Portugal’s governing leaders have failed to grasp the fundamental truth that increasing the standard of living in the country — which means higher wages — required an increase in productivity.
But over the next 10 years technology and mechanisation will naturally do this, leaving much of the workforce redundant and irrelevant. So this comes back to retraining and education in new areas that industry and markets do need.
“With talent comes growth and to achieve that it is vital that our companies are linked to our universities,” he said.
Yet, the Government has already announced that 16 new technology hubs covering key areas of the modern economy will be developed over the next two or three years which should bring new knowledge to companies.
In conclusion, the President of the CIP argues that it is vital to have a 10-year companies’ roadmap based on a vision and coherent strategy, one which places emphasis on competitiveness and innovation with digitalisation and new products at its fore.
Calling on companies to be more involved in sustainability and the circular economy, António Saraiva said there needed to be more agreement and consensus between unions, the government and company bosses. But as was seen with the rejection of the State Budget 2022, that will prove hard while Portugal’s left-wing parties continue to hold influence and the power to block reforms in the Portuguese parliament. With elections next month (January 2022), António Saraiva, company bosses and the PS and PSD parties must secretly be wishing that far-left politician Catarina Martins either disappears or goes back to the theatre.