Portugal - ECONOMY

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Portugal - The Economy

PORTUGAL'S POLITICAL ECONOMY holds our interest for a number of reasons. First, Portugal, a founding member both of the North Atlantic Treaty Organization (NATO) and the European Free Trade Association (EFTA), one of the newest members (along with Spain) of the European Community (EC). Second, scholars interested in revolutionary change and the associated economic consequences can compare the Portuguese experience with that of other nations that have undergone rapid systemic transformation. Third, Portugal's recent experiment with nationalization of the means of production will be of particular interest to students of industrial organization and public enterprise economics.

As a fledgling member of the EC, Portugal was required to adopt the EC's Common External Tariff on imports from nonmember countries and the Common Agricultural Policy (CAP). Portugal also was pledged to eliminate all barriers to the movement of goods, services, and capital between itself and the other members of the European Economic Community (EEC), as well as to phase out fiscal subsidies that distort competition. During a transition period ending in 1993, Portugal was a net recipient of EC funds to assist in the restructuring of its relatively backward economy.

At the beginning of the 1990s, Portugal's economy was classified by the World Bank as an upper-middle-income economy. Its 1990 gross domestic product (GDP) on a purchasing power parity basis was US$82 billion, and its per capita GDP was estimated at US$8,364. With a per capita GDP growth rate of 5.4 percent in 1989, Portugal moved ahead of Greece to eleventh place among the twelve members of the EC.

Several distinctive features characterized Portugal's economy at the time of its accession to the EC; one of the most striking was its dependence on foreign "invisible" income. This income, consisting of tourism receipts and emigrant worker remittances, financed the country's large merchandise trade deficit. The growth and magnitude of tourism together with the explosive rise of government services largely explain the expansion of the services sector to nearly 56 percent of GDP in 1990 from 39 percent of GDP in 1973. One of every three Portuguese workers in the active labor force was engaged in temporary work in highincome countries, mainly France. These emigrant workers, numbering about 2 million, contributed significantly to Portugal's foreign exchange income, as well as to the country's household savings. Although less educated and technically less proficient than their EC counterparts, Portuguese workers were recognized for their strong work ethic and frugality.

Another distinguishing feature was Portugal's anachronistic agricultural sector, whose overall performance was unfavorable when considered in the context of the country's natural resources and climatic conditions. In the mid-1980s, agricultural productivity was half that of the levels in Greece and Spain and a quarter of the EC average. The land tenure system was polarized between two extremes: small and fragmented family farms in the north and large collective farms in the south that proved incapable of modernizing. The decollectivization of agriculture, which began in modest form in the late 1970s and accelerated in the late 1980s, promised to increase the efficiency of human and land resources in the south during the 1990s.

A third economic distinction was the scale and sectoral spread of Portugal's public enterprises. Before the Revolution of 1974, private enterprise ownership dominated the Portuguese economy to a degree unmatched in other West European countries; in 1982 the relative size of Portugal's public enterprise sector (based on an average of value added, employment, and gross capital formation) substantially exceeded that of the other West European economies.

The dispossession of the family-based financial-industrial groups, together with the "antifascist" purges of the mid-1970s, inflicted a serious "brain drain" on Portugal through the exile of entrepreneurs and professional managers. Recent Portuguese governments have recognized the highly politicized public enterprise sector as a major obstacle to the resolution of macroeconomic problems, such as large fiscal deficits, inflation, and burdensome external debt.

Portugal's commodity trade increasingly has become dominated by the EC, and since the accession of both Iberian countries to the organization in 1986, Spain has suddenly emerged as a significant trading partner for Portugal, whose major commodity exports at the beginning of the 1990s included textiles, clothing, and footwear, machinery and transport equipment, forest products (including pulp and paper and cork products), and agricultural products (mainly wine). With the rising participation of multinational firms, Portugal also was gaining competitive strength in the export of higher technology automotive and electronic components and parts.

Privatization, economic deregulation, debt reduction, and supply-side tax reform became the salient concerns of government as Portugal prepared itself for the challenges and opportunities of full participation in the EC's single market in the 1990s. These market-driven policies deserved much of the credit for Portugal's economic resurgence. Led by surging exports and robust capital formation, Portugal's GDP grew by an annual rate of 4.6 percent from 1986 to 1990. During this five-year period, only Japan among the Organisation for Economic Co-operation and Development (OECD) countries exceeded Portugal's economic performance.

<>Economic Growth and Change
<>Revolutionary Change
<>The Consolidated Public Sector
<>Human Resources and Income Distribution
<>Agriculture, Forestry and Fishing
<>The Industrial Sector
<>Tourism

Portugal

Portugal - Economic Growth and Change

Portugal's First Republic (1910-26) became, in the words of historian Douglas L. Wheeler, "midwife to Europe's longest surviving authoritarian system." Under the sixteen-year parliamentary regime of the republic with its forty-five governments, growing fiscal deficits financed by money creation and foreign borrowing climaxed in hyper-inflation and a moratorium on Portugal's external debt service. The cost of living around 1926 was thirty times what it had been in 1914. Fiscal imprudence and accelerating inflation gave way to massive capital flight, crippling domestic investment. Burgeoning public sector employment during the First Republic was accompanied by a perverse shrinkage in the share of the industrial labor force in total employment. Although some headway was made toward increasing the level of literacy under the parliamentary regime, 68.1 percent of Portugal's population was still classified as illiterate by the 1930 census.

The Economy of the Salazar Regime

The First Republic was ended by a military coup in May 1926, but the newly installed government failed to solve the nation's precarious financial situation. Instead, President �scar Fragoso Carmona invited Ant�nio de Oliveira Salazar to head the Ministry of Finance, and the latter agreed to accept the position provided he would have veto power over all fiscal expenditures. At the time of his appointment as minister of finance in 1928, Salazar held the Chair of Economics at the University of Coimbra and was considered by his peers to be Portugal's most distinguished authority on inflation. For forty years, first as minister of finance (1928-32) and then as prime minister (1932-68), Salazar's political and economic doctrines were to shape the Portuguese destiny.

From the perspective of the financial chaos of the republican period, it was not surprising that Salazar considered the principles of a balanced budget and monetary stability as categorical imperatives. By restoring equilibrium both in the fiscal budget and in the balance of international payments, Salazar succeeded in restoring Portugal's credit worthiness at home and abroad. Because Portugal's fiscal accounts from the 1930s until the early 1960s almost always had a surplus in the current account, the state had the wherewithal to finance public infrastructure projects without resorting either to inflationary financing or to borrowing abroad.

At the bottom of the Great Depression, Premier Salazar laid the foundations for his Estado Novo, the "New State." Neither capitalist nor communist, Portugal's economy was cast into a quasi-traditional mold. The corporative framework within which the Portuguese economy evolved combined two salient characteristics: extensive state regulation and predominantly private ownership of the means of production. Leading financiers and industrialists accepted extensive bureaucratic controls in return for assurances of minimal public ownership of economic enterprises and certain monopolistic (or restricted-competition) privileges.

Within this framework, the state exercised extensive de facto authority regarding private investment decisions and the level of wages. A system of industrial licensing (condicionamento industrial), introduced by law in 1931, required prior authorization from the state for setting up or relocating an industrial plant. Investment in machinery and equipment designed to increase the capacity of an existing firm also required government approval. Although the political system was ostensibly corporatist, as political scientist Howard J. Wiarda makes clear, "In reality both labor and capital--and indeed the entire corporate institutional network--were subordinate to the central state apparatus."

Under the old regime, Portugal's private sector was dominated by some forty great families. These industrial dynasties were allied by marriage with the large, traditional landowning families of the nobility, who held most of the arable land in the southern part of the country in great estates. Many of these dynasties had business interests in Portuguese Africa. Within this elite group, the top ten families owned all the important commercial banks, which in turn controlled a disproportionate share of the national economy. Because bank officials were often members of the boards of directors of borrowing firms in whose stock the banks participated, the influence of the large banks extended to a host of commercial, industrial, and service enterprises.

Portugal's shift toward a moderately outward-looking trade and financial strategy, initiated in the late 1950s, gained momentum during the early 1960s. A growing number of industrialists, as well as government technocrats, favored greater Portuguese integration with the industrial countries to the north as a badly needed stimulus to Portugal's economy. The rising influence of the Europe-oriented technocrats within Salazar's cabinet was confirmed by the substantial increase in the foreign investment component in projected capital formation between the first (1953-58) and second (1959-64) economic development plans. The first plan called for a foreign investment component of less than 6 percent, but the plan for the 1959-64 period envisioned a 25-percent contribution. The newly influential Europe-oriented industrial and technical groups persuaded Salazar that Portugal should become a charter member of the European Free Trade Association (EFTA) when it was organized in 1959. In the following year, Portugal also added its membership in the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF), and the World Bank.

In 1958 when the Portuguese government announced the 1959-64 Six-Year Plan for National Development, a decision had been reached to accelerate the country's rate of economic growth--a decision whose urgency grew with the outbreak of guerrilla warfare in Angola in 1961 and in Portugal's other African territories thereafter. Salazar and his policy advisers recognized that additional claims by the state on national output for military expenditures, as well as for increased transfers of official investment to the "overseas provinces," could only be met by a sharp rise in the country's productive capacity. Salazar's commitment to preserving Portugal's "multiracial, pluricontinental" state led him reluctantly to seek external credits beginning in 1962, an action from which the Portuguese treasury had abstained for several decades.

Beyond military measures, the official Portuguese response to the "winds of change" in the African colonies was to integrate them administratively and economically more closely with Portugal through population and capital transfers, trade liberalization, and the creation of a common currency--the so-called Escudo Area. The integration program established in 1961 provided for the removal of Portugal's duties on imports from its overseas territories by January 1964. The latter, on the other hand, were permitted to continue to levy duties on goods imported from Portugal but at a preferential rate, in most cases 50 percent of the normal duties levied by the territories on goods originating outside the Escudo Area. The effect of this two-tier tariff system was to give Portugal's exports preferential access to its colonial markets.

Despite the opposition of protectionist interests, the Portuguese government succeeded in bringing about some liberalization of the industrial licensing system, as well as in reducing trade barriers to conform with EFTA and GATT agreements. The last years of the Salazar era witnessed the creation of important privately organized ventures, including an integrated iron and steel mill, a modern ship repair and shipbuilding complex, vehicle assembly plants, oil refineries, petrochemical plants, pulp and paper mills, and electronic plants. As economist Valentina Xavier Pintado observed, "Behind the facade of an aged Salazar, Portugal knew deep and lasting changes during the 1960s."

The liberalization of the Portuguese economy continued under Salazar's successor, Prime Minister Marcello Jos� das Neves Caetano (1968-74), whose administration abolished industrial licensing requirements for firms in most sectors and in 1972 signed a free trade agreement with the newly enlarged EC. Under the agreement, which took effect at the beginning of 1973, Portugal was given until 1980 to abolish its restrictions on most community goods and until 1985 on certain sensitive products amounting to some 10 percent of the EC's total exports to Portugal. EFTA membership and a growing foreign investor presence contributed to Portugal's industrial modernization and export diversification between 1960 and 1973.

Notwithstanding the concentration of the means of production in the hands of a small number of family-based financial-industrial groups, Portuguese business culture permitted a surprising upward mobility of university-educated individuals with middle-class backgrounds into professional management careers. Before the revolution, the largest, most technologically advanced (and most recently organized) firms offered the greatest opportunity for management careers based on merit rather than on accident of birth.

Changing Structure of the Economy

The Portuguese economy had changed significantly by 1973, compared with its position in 1961. Total output (GDP at factor cost) grew by 120 percent in real terms. The industrial sector was three times greater, and the size of the services sector doubled; but agriculture, forestry, and fishing advanced by only 16 percent. Manufacturing, the major component of the secondary sector, was three times as large at the end of the period. Industrial expansion was concentrated in large-scale enterprises using modern technology.

The composition of GDP also changed markedly from 1961 to 1973. The share of the primary sector (agriculture, forestry, and fishing) in GDP shrank from 23 percent in 1961 to 16.8 percent in 1973, and the contribution of the secondary (or industrial) sector (manufacturing, construction, mining, and electricity, gas and water) increased from 37 percent to 44 percent during the period. The services sector's share in GDP remained constant at 39.4 percent between 1961 and 1973. Within the industrial sector, the contribution of manufacturing advanced from 30 percent to 35 percent and that of construction from 4.6 percent to 6.4 percent.

The progressive "opening" of Portugal to the world economy was reflected in the growing shares of exports and imports (both visible and invisible) in national output and income. Further, the composition of Portugal's balance of international payments altered substantially. From 1960 to 1973, the merchandise trade deficit widened, but owing to a growing surplus on invisibles--including tourist receipts and emigrant worker remittances--the deficit in the current account gave way to a surplus from 1965 onward. Beginning with that year, the long-term capital account typically registered a deficit, the counterpart of the current account surplus. Even though the nation attracted a rising level of capital from abroad (both direct investments and loans), official and private Portuguese investments in the "overseas territories" were greater still--hence the net outflow on the long-term capital account.

The growth rate of Portuguese merchandise exports during the period 1959 to 1973 was 11 percent per annum. In 1960 the bulk of exports was accounted for by a few products--canned fish, raw and manufactured cork, cotton textiles, and wine. By contrast, in the early 1970s, Portugal's export list reflected significant product diversification, including both consumer and capital goods. Several branches of Portuguese industry became export-oriented, and in 1973 over one-fifth of Portuguese manufactured output was exported.

The radical nationalization-expropriation measures in the mid-1970s were initially accompanied by a policy-induced redistribution of national income from property owners, entrepreneurs, and private managers and professionals to industrial and agricultural workers. This wage explosion favoring workers with a high propensity to consume had a dramatic impact on the nation's economic growth and pattern of expenditures. Private and public consumption combined rose from 81 percent of domestic expenditure in 1973 to nearly 102 percent in 1975. The counterpart of overconsumption in the face of declining national output was a contraction in both savings and fixed capital formation, depletion of stocks, and a huge balance-of-payments deficit. The rapid increase in production costs associated with the surge in unit labor costs between 1973 and 1975 contributed significantly to the decline in Portugal's ability to compete in foreign markets. Real exports fell between 1973 and 1976, and their share in total expenditures declined from nearly 26 percent to 16.5 percent.

The economic dislocations of metropolitan Portugal associated with the income leveling and nationalization-expropriation measures were exacerbated by the sudden loss of the nation's African colonies in 1974 and 1975 and the reabsorption of overseas settlers (the so-called retornados), the global recession, and, as well, the international energy crisis.

Over the longer period, 1973-90, the composition of Portugal's GDP at factor cost changed significantly. The contribution of agriculture, forestry, and fishing as a share of total production continued its inexorable decline, to 6.1 percent in 1990 from 12.2 percent in 1973. In contrast to the prerevolutionary period, 1961-73, when the industrial sector grew by 9 percent annually and its contribution to GDP expanded, industry's share narrowed to 38.4 percent of GDP in 1990 from 44 percent in 1973. Manufacturing, the major component of the industrial sector, contributed relatively less to GDP in 1990 (28 percent) than in 1973 (35 percent). Most striking was the 16- percentage-point increase in the participation of the services sector from 39 percent of GDP in 1973 to 55.5 percent in 1990. Most of this growth reflected the proliferation of civil service employment and the associated cost of public administration, together with the dynamic contribution of tourism services during the 1980s.

Economic Growth, 1960-73 and 1981-90

There was a striking contrast between the economic growth and levels of capital formation in the 1960-73 period and in the 1980s decade. Clearly, the pre-revolutionary period was characterized by robust annual growth rates for GDP (6.9 percent), industrial production (9 percent), private consumption (6.5 percent), and gross fixed capital formation (7.8 percent). By way of contrast, the 1980s exhibited a pattern of slow-to-moderate annual growth rates for GDP (2.7 percent), industrial production (4.8 percent), private consumption (2.7 percent), and fixed capital formation (3.1 percent). As a result of worker emigration and the military draft, employment declined during the earlier period (by a half percent annually), but increased by 1.4 percent annually during the 1980s. Significantly, labor productivity (GDP growth/employment growth) grew by a sluggish rate of 1.3 percent annually in the recent period compared with the extremely rapid annual growth rate of 7.4 percent earlier. Inflation, as measured by the GDP deflator, averaged a modest 4 percent a year before the revolution compared with nearly 18 percent annually during the 1980s.

Although the investment coefficients were roughly similar (24 percent of GDP allocated to fixed capital formation in the earlier period; 26.7 percent during the 1980s), the overall investment productivity or efficiency (GDP growth rate/investment coefficient) was nearly three times greater (28.6 percent) before the revolution than in the 1980s (10.1 percent).

How does Portugal's GDP per capita compare with the average of the twelve members of the EC in the early 1990s, the European Twelve (EC-12), during the past three decades? In 1960, at the initiation of Salazar's more outward-looking economic policy, Portugal's per capita GDP was only 38 percent of the EC-12 average; by the end of the Salazar period, in 1968, it had risen to 48 percent; and in 1973, on the eve of the revolution, Portugal's per capita GDP had reached 56.4 percent of the EC-12 average. In 1975, the year of maximum revolutionary turmoil, Portugal's per capita GDP declined to 52.3 percent of the EC-12 average.

Convergence of real GDP growth toward the EC average occurred as a result of Portugal's economic resurgence since 1985. In 1991 Portugal's GDP per capita climbed to 54.9 percent of the EC average, exceeding by a fraction the level attained just before the Revolution of 1974.

Portugal

Portugal - Revolutionary Change in the Economy

The military coup of April 1974, which ousted the long-lived authoritarian Salazar-Caetano regime, was rapidly transformed into a social revolution that profoundly recast Portugal's political and economic systems. The revolutionary leadership undercut the old elite's economic base by nationalizing the banks and most of the country's heavy and medium-sized industries; expropriating landed estates in the central and southern regions; and giving independence to Angola, Mozambique, and other colonies. The last action dismantled the web of economic relationships, known as the Escudo Area, through which metropolitan Portugal was linked to its "overseas provinces."

In the brief period between the collapse of the old regime in April 1974 and the abortive leftist coup of November 1975, a variety of economic models were proposed for Portugal by the provisional Armed Forces Movement (Movimento das For�as Armadas-- MFA) governments, including the West European, Yugoslav, and Albanian models. In the early months following the military coup, the new Portuguese government's economic orientation could be described as moderate-reformist. The regime's Economic and Social Program published on May 15, 1974, made no provision for largescale nationalization of industry or agriculture. The program simply provided for the "adoption of new measures of government intervention in the basic sectors of the economy and particularly in the sectors of national interest, without prejudice to the legitimate interest of private enterprise"; argued for "reform of the tax system so as to rationalize it and ease the tax burden on less well-off groups, with a view of a fairer distribution of income"; recommended measures "to stimulate agriculture and gradual reform of the land tenure system"; and, within the sphere of social policy, favored introduction of "a minimum wage to be progressively extended to all sectors of activity."

The initial moderate-reformist policies reflected the views of General Ant�nio de Sp�nola, who was chosen by the MFA to lead the coup and to serve as the country's president. Sp�nola, the celebrated war hero, favored the establishment of civil liberties and the creation of democratic institutions. He also advocated rapid improvement of living standards, a modernized financial structure, and eventual Portuguese participation in the EC--objectives laid down in an economic plan he commissioned from Erik Lundberg of the World Bank. Sp�nola's view on the economy and the pace of decolonization diverged from those of the Coordinating Committee of the MFA, most of whose members were prepared to end completely the Portuguese presence in Africa and to expand substantially the scope of the public sector. By the early autumn of 1974, events both within and outside Portugal favored the course chosen by the MFA coordinating committee. Unable to stop the leftward drift of the country, Sp�nola resigned in September 1974.

Nationalization

The reorganization of the MFA coordinating committee in March 1975 brought into prominence a group of Marxist-oriented officers who, in league with the General Confederation of Portuguese Workers-National Intersindical (Confedera��o Geral dos Trabalhadores Portugueses-Intersindical Nacional--CGTP-IN), the communist-dominated trade union confederation known as Intersindical prior to 1977, sought the radical transformation of the nation's social system and political economy. Abandoning its moderate-reformist posture, the MFA leadership set out on a course of sweeping nationalizations and land expropriations. During the balance of that year, the government nationalized all Portuguese-owned capital in the banking, insurance, petrochemical, fertilizer, tobacco, cement, and wood pulp sectors of the economy, as well as the Portuguese iron and steel company, the major breweries, the large shipping lines, most public transport, two of the three principal shipyards, core companies of the Companhia Uni�o Fabril (CUF) conglomerate, the radio and TV networks (except that of the Roman Catholic Church), and important companies in the glass, mining, fishing, and agricultural sectors. Because of the key role of the domestic banks as holders of stock, the government indirectly acquired equity positions in hundreds of other firms. An Institute for State Participation was created to deal with the many disparate (often tiny) enterprises in which the state had thus obtained a majority shareholding. Another 300 small to medium enterprises came under public management as the government "intervened" to rescue them from bankruptcy following their takeover by workers or abandonment by management.

Although foreign direct investment was statutorily exempted from nationalization, many foreign-controlled enterprises curtailed or ceased operation because of costly forced labor settlements or worker takeovers. The combination of revolutionary policies and negative business climate brought about a sharp reversal in the trend of direct investment inflows from abroad.

A study by the economists Maria Belmira Martins and Jos� Chaves Rosa showed that a total of 244 private enterprises were directly nationalized during the sixteen-month interval from March 14, 1975 to July 29, 1976. Nationalization was followed by the consolidation of the several private firms in each industry into state monopolies. As an example, Quimigal, the chemical and fertilizer entity, represented a merger of five firms. Four large companies were integrated to form the national oil company, Petroleos de Portugal (Petrogal). Portucel brought together five pulp and paper companies. The fourteen private electric power enterprises were joined into a single power generation and transmission monopoly, Electricidade de Portugal (EDP). With the nationalization and amalgamation of the three tobacco firms under Tabaqueira, the state gained complete control of this industry. The several breweries and beer distribution companies were integrated into two state firms, Central de Cervejas (Centralcer) and Unicer; and a single state enterprise, Rodoviaria, was created by joining the ninety-three nationalized trucking and bus lines. The forty-seven cement plants, formerly controlled by the Champalimaud interests, were integrated into Cimentos de Portugal (Cimpor). The government also acquired a dominant position in the export-oriented shipbuilding and ship repair industry. Former private monopolies retained their company designations following nationalization. Included among these were the iron and steel company, Siderurgia Nacional; the railway, Caminhos de Ferro Portugueses (CP); and the national airline, Transportes A�reos Portugueses (TAP).

Unlike other sectors, where existing private firms were typically consolidated into state monopolies, the commercial banking system and insurance industry were left with a degree of competition. By 1979 the number of domestic commercial banks was reduced from fifteen to nine. Notwithstanding their public status, the remaining banks competed with each other and retained their individual identities and certain differences in their activities.

Before the revolution, private enterprise ownership dominated the Portuguese economy to a degree unmatched in other West European countries. Only a handful of wholly owned or majority owned state entities existed; these included the post office, the armaments industry, and the ports, as well as the National Development Bank and Caixa Geral de Dep�sitos, the largest savings bank. The Portuguese government held minority interests in TAP, the national airline; in Siderurgia Nacional, the integrated steel mill; and in oil refining and oil marketing firms. The railroads, two colonial banks, and the Bank of Portugal were majority privately owned but publicly administered. Finally, although privately owned, the tobacco companies and Radio Marconi were operated under government concessions.

Two years after the military coup, the enlarged public sector accounted for 47 percent of the country's gross fixed capital formation (GFCF), 30 percent of total value added (VA), and 24 percent of employment. These shares should be compared with 10 percent of GFCF, 9 percent of VA, and 13 percent of employment for the traditional public sector of 1973. Expansion of the public sector since the revolution is particularly noteworthy in heavy manufacturing; in public services, including electricity, gas, transport and communications; and in banking and insurance. Further, according to the Institute for State Participation, these figures did not include private enterprises under temporary state intervention, private enterprises with minority state participation (less than 50 percent of the common stock), or worker-managed firms and agricultural collectives.

The Brain Drain

Compounding the problem of massive nationalizations was the heavy drain of managerial and technical expertise away from the public enterprises. The income-leveling measures of the MFA revolutionary regime, together with the "antifascist" purges in factories, offices, and large agricultural estates, induced an exodus of human capital, mainly to Brazil. This loss of managers, technicians, and business people inspired a popular Lisbon saying, "Portugal used to send its legs to Brazil, but now we are sending our heads."

Notwithstanding the concentration of the means of production in the hands of a small number of family-based financial-industrial groups, Portuguese business culture permitted a surprising upward mobility of educated individuals with middle-class backgrounds into professional management careers. Before the Revolution of 1974, the largest, most technologically advanced (and most recently organized) firms offered the greatest opportunity for management careers based on merit rather than on accident of birth.

A detailed analysis of Portugal's loss of managerial resources is contained in Harry M. Makler's follow-up surveys of 306 enterprises, conducted in July 1976, and again in June 1977. His study makes clear that nationalization was greater in the modern, large, technically advanced industries than in the traditional industries such as textiles, apparel, and construction. In small enterprises (fifty to ninety-nine employees), only 15 percent of the industrialists had quit as compared with 43 percent in the larger. In the giant firms (1,000 or more employees), more than half had quit. Makler's calculations show that the higher the socioeconomic class origin, the greater the likelihood that the industrialist had left the firm. He also notes that "the more upwardly mobile also were more likely to have quit than those who were downwardly socially mobile." Significantly, a much larger percentage of professional managers (52 percent) compared with owners of production (i.e., founders--18 percent, heirs--21 percent, and owner-managers--32 percent) had left their enterprises.

The constitution of 1976 confirmed the large and interventionist role of the state in the economy. Its Marxist character before the 1989 revisions was revealed in a number of its articles, which pointed to a "classless society" and the "socialization of the means of production" and proclaimed all nationalizations made after April 25, 1974 as "irreversible conquests of the working classes." The constitution also defined new power relationships between labor and management, with a strong bias in labor's favor. All regulations with reference to layoffs, including collective redundancy, were circumscribed by Article 53.

Portugal

Portugal Economy - The Consolidated Public Sector

After the revolution, the Portuguese economy experienced a rapid, and often uncontrollable, expansion of public expenditures--both in the general government and in public enterprises. The lag in public sector receipts resulted in large public enterprise and general government deficits. In 1982 the borrowing requirement of the consolidated public sector reached 24 percent of GDP, its peak level; it was subsequently reduced to 9 percent of GDP in 1990.

To rein in domestic demand growth, the Portuguese government was obliged to pursue IMF-monitored stabilization programs in 1977-78 and 1983-85. The large negative savings of the public sector (including the state-owned enterprises) became a structural feature of Portugal's political economy after the revolution. Other official impediments to rapid economic growth after 1974 included all-pervasive price regulation, as well as heavy-handed intervention in factor markets and the distribution of income.

In 1989 Prime Minister An�bal Cavaco Silva succeeded in mobilizing the required two-thirds vote in the National Assembly to amend the constitution, thereby permitting the denationalization of the state-owned banks and other public enterprises. Privatization, economic deregulation, and tax reform became the salient concerns of public policy as Portugal prepared itself for the challenges and opportunities of membership in the EC's single market in the 1990s.

The Nonfinancial Public Enterprises

Following the sweeping nationalizations of the mid-1970s, public enterprises became a major component of Portugal's consolidated public sector. Portugal's nationalized sector in 1980 included a core of fifty nonfinancial enterprises, entirely government owned. This so-called public nonfinancial enterprise group included the Institute of State Participation, a holding company with investments in some seventy subsidiary enterprises; a number of state-owned entities manufacturing or selling goods and services grouped with nationalized enterprises for national accounts purposes (arms, agriculture, and public infrastructure, such as ports); and a large number of over 50-percent EPNF-owned subsidiaries operating under private law. Altogether these public enterprises accounted for 25 percent of VA in GDP, 52 percent of GFCF, and 12 percent of Portugal's total employment. In terms of VA and GFCF, the relative scale of Portugal's public entities exceeded that of the other West European economies, including the EC member countries.

Although the nationalizations broke up the concentration of economic power in the hands of the financial-industrial groups, the subsequent merger of several private firms into single publicly owned enterprises left domestic markets even more subject to monopoly. Apart from special cases, as in iron and steel, where the economies of scale are optimal for very large firms, there was some question as to the desirability of establishing national monopolies. The elimination of competition following the official takeover of such industries as cement, chemicals, and trucking probably reduced managerial incentives for cost reduction and technical advance.

As hybrid institutions, public enterprises find it difficult to separate market choices from political considerations. Their poorer economic performance may partially be explained by public management's frustration at attempting to reconcile impossible goals: on the one side, a concern for the "bottom line"; on the other, coping with the distributional struggles of interest groups. Special interest groups that shape the policies of state-owned firms include "elite" public enterprise unions aspiring to guarantee employment and above-market wages; consumer groups desiring goods and services at below user cost or market price; oversight ministries intent upon expanding their authority; and politicians, including chiefs of state, seeking to expand patronage opportunities. As a vehicle for redistribution, public enterprise often becomes the servant of special interest groups--those who are politically connected--rather than a guardian of the public or general interest.

It was not surprising that numerous nationalized enterprises experienced severe operating and financial difficulties. State operations faced considerable uncertainty as to the goals of public enterprises, with negative implications for decision making, often at odds with market criteria. In many instances, managers of public firms were less able than their private-sector counterparts to resist strong wage demands from militant unions. Further, public firm managers were required for reasons of political expediency to maintain a redundant labor force and freeze prices or utility rates for long periods in the face of rising costs. Overstaffing was particularly flagrant at Petrogal, the national petroleum monopoly, and Estaleiros Navais de Set�bal (Setenave), the wholly state-owned shipbuilding and repairing enterprise. The failure of the public transportation firms to raise fares during a time of accelerating inflation resulted in substantial operating losses and even obsolescence of the sector's capital stock.

As a group, the public enterprises performed poorly financially and relied excessively on debt financing from both domestic and foreign commercial banks. The operating and financial problems of the public enterprise sector were revealed in a study by the Bank of Portugal covering the years 1978-80. Based upon a survey of fifty-one enterprises, which represented 92 percent of the sector's VA, the analysis confirmed the debilitated financial condition of the public enterprises, i.e., their inadequate equity and liquidity ratios. The consolidated losses of the firms included in the survey increased from 18.3 million contos in 1978 to 40.3 million contos in 1980, or 4.6 percent to 6.1 percent of net worth, respectively. Losses were concentrated in transportation and to a lesser extent in transport equipment and materials (principally shipbuilding and ship repair). The budgetary burden of the public enterprises as a result of their overall weak performance was substantial: enterprise transfers to the Portuguese government (mainly taxes) fell short of government receipts in the forms of subsidies and capital transfers. The largest nonfinancial state enterprises recorded (inflation-discounted) losses in the seven-year period from 1977 to 1983 equivalent to 11 percent on capital employed. Notwithstanding their substantial operating losses and weak capital structure, these large enterprises financed 86 percent of their capital investments from 1977 to 1983 through increases in debt, of which two-thirds was foreign. The rapid buildup of Portugal's external debt from 1978 to 1985 was largely associated with the public enterprises.

The General Government

The share of general government expenditure (including capital outlays) in GDP rose from 23 percent in 1973 to 46 percent in 1990. On the revenue side, the upward trend was less pronounced: the share increased from nearly 23 percent in 1973 to 39.2 percent in 1990. From a modest surplus before the revolution in 1973, the government balance swung to a wide deficit of 12 percent of GDP in 1984, declining thereafter to around 5.4 percent of GDP in 1990. Significantly, both current expenditures and capital expenditures roughly doubled their shares of GDP between 1973 and 1990: government current outlays rose from 19.5 percent to 40.2 percent, capital outlays from 3.2 percent to 5.7 percent.

Apart from the growing investment effort, which included capital transfers to the public enterprises, government expenditure patterns since the revolution reflected rapid expansion in the number of civil servants and pressure to redistribute income, mainly through current transfers and subsidies, as well as burgeoning interest obligations. The category "current transfers" nearly tripled its share of GDP between 1973 and 1990, from under 5 percent to 13.4 percent, reflecting the explosive growth of the social security system, both with respect to the number of persons covered and the upgrading of benefits. Escalating interest payments on the public debt from less than half a percent of GDP in 1973 to 8.2 percent of GDP in 1990 were the result of both a rise in the debt itself and higher real effective interest rates.

The narrowing of the government deficit since the mid-1980s and the associated easing of the borrowing requirement was caused both by a small increase in the share of receipts (by two percentage points) and the relatively sharper contraction of current subsidies, from 7.6 percent of GDP in 1984 to 1.5 percent of GDP in 1990. This reduction was a direct consequence of the gradual abandonment by the government of its policy of curbs on rises in public utility rates and food prices, against which it paid subsidies to public enterprises.

Tax reform--comprising both direct and indirect taxation--was a major element in a more comprehensive effort to modernize the economy in the late 1980s. The key objective of these reforms was to promote more efficient and market-oriented economic performance. Beyond considerations of efficiency, a good tax system also should be simple (i.e., easy to administer), fair, and transparent.

Prior to the reform, about 90 percent of the personal tax base consisted of labor income. Statutory marginal tax rates on labor income were very high, even at relatively low income levels, especially after the revolution. The large number of tax exemptions and fiscal benefits, together with high marginal tax rates, entailed the progressive erosion of the tax base through tax avoidance and evasion. Furthermore, Portuguese membership in the EC created the imperative for a number of changes in the tax system, especially the introduction of the value-added tax (VAT).

Reform proceeded in two major installments: the VAT was introduced in 1986; the income tax reform, for both personal and corporate income, became effective in 1989. The VAT, whose normal rate was 17 percent, replaced all indirect taxes, such as the transactions tax, railroad tax, and tourism tax. Marginal tax rates on both personal and corporate income were substantially cut, and in the case of individual taxes, the number of brackets was reduced to five. The basic rate of corporate tax was 36.5 percent, and the top marginal tax rate on personal income was cut from 80 percent to 40 percent. A 25-percent capital gains tax was levied on direct and portfolio investment. Business proceeds invested in development projects were exempt from capital gains tax if the assets were retained for at least two years.

Preliminary estimates indicated that part of the observed increase in direct tax revenue in 1989-90 was of a permanent nature, the consequence of a redefinition of taxable income, a reduction in allowed deductions, and the termination of most fiscal benefits for corporations. The resulting broadening of the income tax base permitted a lowering of marginal tax rates, greatly reducing the disincentive effects to labor and saving.

Macroeconomic Disequilibria and Public Debt

Between 1973 and 1988, the general government debt/GDP ratio quadrupled, reaching a peak of 74 percent in 1988. This growth in the absolute and relative debt was only partially attributable to the accumulation of government deficits. It also reflected the reorganization of various public funds and enterprises, the separation of their accounts from those of the government, and their fiscal consolidation. The rising trend of the general government debt/GDP ratio was reversed in 1989, as a surge in tax revenues linked to the tax reform and the shrinking public enterprise deficits reduced the public sector borrowing requirement (PSBR) relative to GDP. After falling to 67 percent in 1990, the general government debt/GDP ratio was expected to continue to decline, reflecting fiscal restraint and increased proceeds from privatization.

The financing structure of the public deficits had changed since the mid-1980s under the effect of two factors. First, the easing of the PSBR and the government's determination to reduce the foreign debt/GDP ratio led to a sharp reduction in borrowing abroad. Second, since 1985 the share of nonmonetary financing had increased steeply, not only in the form of public issues of Treasury bills but also, since 1987-88, in the form of medium-term Treasury bonds.

The magnitude of the public sector deficit (including that of the public enterprises) had a crowding-out effect on private investment. The nationalized banks were obliged by law to increase their holding of government paper bearing negative real interest rates. This massive absorption of funds by the public sector was largely at the expense of private enterprises whose financing was often constrained by quantitative credit controls.

Portugal's membership in the EC resulted in substantial net transfers averaging 1.5 percent of annual GDP during 1987-90. The bulk of these transfers was "structural" funds that were used for infrastructure developments and professional training. Additional EC funds, also allocated through the public sector, were designed for the development of Portugal's agricultural and industrial sectors.

After 1985 the PSBR began to show a substantial decline, largely as a result of the improved financial position of public enterprises. Favorable exogenous factors (lower oil prices, lower interest rates, and depreciation of the dollar) helped to moderate operating costs. More important, however, was the shift in government policy. Public enterprise managers were given greater autonomy with respect to investment, labor, and product pricing. Significantly, the combined deficit of the nonfinancial public enterprises fell to below 2 percent of GDP on average in 1987-88 from 8 percent of GDP in 1985-86. In 1989 the borrowing requirements of those enterprises fell further to 1 percent of GDP.

In April 1990, legislation concerning privatization was enacted following an amendment to the constitution in June 1989 that provided the basis for complete (100 percent) divestiture of nationalized enterprises. Among the stated objectives of privatization were to modernize economic units, increase their competitiveness, and contribute to sectoral restructuring; to reduce the role of the state in the economy; to contribute to the development of capital markets; and to widen the participation of Portuguese citizens in the ownership of enterprises, giving particular attention to the workers of the enterprises and to small shareholders.

The Portuguese government was concerned about the strength of foreign investment in privatizations and wanted to reserve the right to veto some transactions. But as a member of the EC, Portugal eventually would have to accept investment from other member countries on an equal footing with investment of its nationals. Significantly, government proceeds from privatization of nationalized enterprises would primarily be used to reduce public debt; and to the extent that profits would rise after privatization, tax revenues would expand. In 1991 proceeds from privatization were expected to amount to 2.5 percent of GDP.

Portugal

Portugal - Human Resources and Income Distribution

One of the striking characteristics of the Portuguese people is their propensity to emigrate. In the late 1980s, an estimated 3.5-4.0 million Portuguese passport holders were living in foreign lands, equal to over a third of the population residing in Portugal. Emigration, which was once a reflection of Portugal's international importance as a maritime and colonial power, became in the twentieth century, according to Thomas G. Sanders, "a reflection of its poverty and economic weakness." As a consequence of this population diaspora, large numbers of Portuguese migrants lived in Latin America (mainly Brazil and Venezuela), industrial Western Europe (mainly France and Germany), Africa (predominantly the Republic of South Africa), and North America (the United States and Canada). The Portuguese emigrants to the EC countries, numbering over 1 million, differed in several ways from those who went overseas: most of them were temporary workers who planned to return to their homeland, and most originated from the mainland rather than Madeira and the Azores (A�ores in Portuguese).

Portugal's comparative poverty within the EC was closely associated with lower per capita investment in human and physical capital. On the other hand, Portuguese workers were recognized for their strong work ethic, adaptability, and frugality. Among middle-income countries, few could match Portugal for its high family savings rate. Real wage rates over extended time periods closely reflected labor productivity, which in turn was correlated with the factors mentioned above. Although government intervention could temporarily alter the distribution of income in favor of labor through the manipulation of wage rates and consumer prices--as indeed happened in the mid-1970s--labor productivity eventually determined labor's earnings.

Employment and Sectoral Composition of the Labor Force

From 1960 to 1973, Portuguese policy measures supported a shift of resources, including labor, from low-productivity toward high-productivity uses, especially export-oriented industries. Rapid and accelerated economic growth was reflected in the profound alteration of the sectoral composition of the work force. Between 1960 (the year after Portugal became a charter member of EFTA) and 1973, the share of the civilian labor force engaged in agriculture, forestry, and fishing fell from nearly 44 percent to just under 28 percent, whereas the share of labor engaged in industry (including construction) increased from slightly less than 29 percent to almost 36 percent, and in the services sector (including transport and communications) from nearly 28 percent to slightly more than 36 percent. The shift of labor out of agriculture involved a reduction of the number engaged in that sector (a decline of about 550,000 workers between 1960 and 1973), as well as in the proportion of farmers in the total labor force.

Because of heavy emigration, the working population of continental Portugal shrank from more than 3.1 million in 1960 to just only 2.9 million in 1973, and employment fell by an annual rate averaging 0.5 percent. The rapid shrinkage in the number of workers in agriculture was not accompanied by an equal or greater rise in the industrial and services sectors. Nearly two out of every three Portuguese taking up nonagricultural employment during this period did so in another West European country. France was, even at the beginning of the 1990s, host to about 80 percent of the emigrant workers, most of whom worked at unskilled or semi-skilled jobs. The 110,000 Portuguese in Germany, by contrast, had found higher-skilled work, with some two-thirds employed in industry in 1977. Consequently, net emigration between 1960 and 1973 exceeded 1 million, a number greater than the natural increase in the Portuguese population. In the thirteen years of war, from 1961 to 1974, 1.5 million Portuguese had seen military service in Africa, and during 1974 one in every four adult males was in the armed forces. During this period, unemployment was kept down to about 4 percent (and to less than 3 percent in the early 1970s), largely because of massive labor emigration to industrialized Western Europe and the military draft.

After the revolution, the demobilization of the military draftees and the return of Portuguese nationals from Africa produced important additions to the mainland population and labor force. From a combined strength of 220,000 at the beginning of 1974, the armed forces demobilized some 95,000 persons in that year and 60,000 in 1975. Furthermore, an estimated 500,000 returnees (retornados) were repatriated, mainly from Angola and Mozambique, and most of them were totally without resources, having had to leave the former colonies with only the barest essentials. Initially, their former occupations made them difficult to integrate into the metropolitan economy: 67 percent had held service jobs (as public employees or office workers), whereas only 20 percent had been engaged in industry, and 4 percent in agriculture. Consequently, the Portuguese government had to shoulder an extremely heavy burden in the form of the various benefits granted to the returnees, including cash subsidies, provision of hotel accommodations, and assistance with purchases of essential goods. The sum of these benefits was estimated at 14 billion escudos in 1976, or about 11 percent of total government spending. In all, the increase in the civilian population from 1974 to 1976 was probably about 900,000, i.e., 10 percent of the total population in 1973.

Following this brief population burst in the number of mainland residents, Portugal's population and labor force resumed their natural rates of growth; for example, in the 1980-89 decade, the annual percentage increases were 0.5 percent and 1.4 percent, respectively. Between 1973 and 1990, Portugal's labor force grew by more than 1.8 million, of which more than half was absorbed in the services sector and over a third in the industrial sector. Although the share of the work force in agriculture, forestry, and fishing resumed its historical relative decline (from nearly 28 percent of the total in 1973 to almost 18 percent in 1990), the absolute number of workers in that sector increased slightly. Industry's share in the labor force remained virtually unchanged between 1973 and 1990 (at about 35 percent), but the services sector nearly added 1.2 million employees, its share in the total rising from over 36 percent in 1973 to 47.4 percent in 1990. A major explanation for this growth of almost 11 percent was the explosive increase of civil service employment after the Revolution of 1974.

Wages and the Distribution of Income

Two approaches are used to determine how income is divided among citizens of a country. The first approach, involving the size of distribution of income, compares the household income shares received by the richest 20 percent of the population, the poorest 20 percent, and the three quintiles between these extremes. This approach yields an income concentration, or Gini ratio: the higher the ratio, the greater the degree of inequality. Gini ratios can be useful in comparing the degree of income inequality within a country over time or among countries during the same time frame. The International Labour Organisation estimates for Portugal indicate that the Gini ratio changed little between 1967-68 (0.423) and 1973-74 (0.431), corresponding to the end of the Salazar and Caetano administrations, respectively. By comparison, in the early 1970s, France's Gini ratio was 0.416, Germany's 0.376, and Sweden's 0.346. It may also be useful to compare the household income share received by the poorest 40 percent of the population with the share received by the richest 20 percent. According to this indicator (richest 20 percent and poorest 40 percent), Portugal's income distribution profile at the end of the Caetano period (3.5) reveals by comparison relatively greater equality in Spain (2.4) and Italy (3.0) but greater relative inequality in Costa Rica (4.6), Mexico (5.3), and Brazil (9.5). Portugal's income concentration profile, on the other hand, was similar to that of France (3.3) and Argentina (3.6) during the early 1970s.

The second, or functional, approach to income distribution measures the shares going to the various productive factors--entrepreneurship, land, capital, and labor. Wages and salaries or compensation of employees are concepts that normally show the proportion of national income or national product going to labor. In the aftermath of the 1974 military coup, the newly formed labor unions within the General Confederation of Portuguese Workers-National Intersindical (Confedera��o Geral dos Trabalhadores Portugueses-Intersindical Nacional--CGTP-IN) greatly increased their strength from mid-1974 to November 1975. The unions focused on expansion of the public sector, employment guarantees, and income redistribution. In response to labor's demands, the government instituted income-leveling policies that included a large increase in the minimum wage for a substantial proportion of the work force, a freeze on rents, a highly graduated income tax, and a ceiling on salaries. As a consequence of official measures affecting wages and salaries (including the US$800 a month ceiling on the maximum salary), the average pay gap between unskilled workers and managers shrank from 1:7 in 1973 to 1:4 in 1975. To protect increases in nominal wages, prices of essential commodities, particularly food, were fixed at below market levels. Real wages increased 25 percent between 1973 and 1975, and the share of the wage bill in national income rose explosively from 52 percent in 1973 to 69 percent in 1975. At the same time, the proportion of national income flowing to capital and entrepreneurship (including income of artisans and other self-employed workers) was sharply eroded.

Official policies were also reflected in the distribution of income. Average wage income of the lowest quintile almost doubled in real terms between 1972 and 1976; the second and third quintiles obtained an increase of 59 percent and 45 percent, respectively; but the real remuneration of the top 5 percent declined by 19 percent from 1972 to 1976.

In January 1979, the General Union of Workers (Uni�o Geral dos Trabalhadores--UGT) was organized. The UGT was viewed as a viable, democratic alternative to the CGTP-IN, which, as of the beginning of the 1990s, continued to be communist dominated, as it had been since its formation. By 1990 these two union confederations were roughly equal in size, and 30 percent of the labor force was unionized.

How had the working class fared since the revolution? Following the short-lived, government-induced wage explosion in 1975-76, the share of employee compensation in national income (52.9 percent in 1979) was again much the same as in 1973 (51.6 percent), and from 1979 to 1989 that share was on a downward trend. Real wages per capita increased only 10 percent between 1973 and 1989, a reflection both of slow labor productivity growth (20 percent) during this sixteen-year postrevolutionary period and the widening "tax wedge," i.e., the higher social security taxes contributed by both the employer and the employee. Real wages per capita moved on a downward trend between their peak level in 1976 to their lowest point (below their level in 1973) in 1984. From 1984 to 1990, real wages rose each year in response to the brisk demand for labor associated with Portugal's economic recovery. The rate of unemployment fell to 4.7 percent in 1990, the lowest level since the mid-1970s. This rate brought the cumulative decline since the unemployment peak of 1985 (8.5 percent) to 3.8 percentage points. An estimated 250,000 new jobs were added between 1985 and 1990.

The Portuguese government submitted legislation in 1988 to abolish the restrictive individual and collective dismissal regulations that had been in effect since 1976. Although approved by parliament, the law was declared unconstitutional by the courts. In the following year, however, the government gained court approval of less sweeping labor reforms: dismissal procedures were simplified and the conditions eased regarding both the termination of individual contracts and collective layoffs. Under this law, older unemployed workers were permitted reduction of the early retirement age from sixty-two to sixty. Until the 1989 labor reform, unemployment rigidity was coupled with a high degree of real wage flexibility. Consequently, adjustment to external shocks, such as the sudden price explosion of imported oil between 1979 and 1980, was effected by reducing real wages rather than the numbers of employed.

As a result of its EC membership, Portugal received transfers from the European Social Fund in support of training programs managed by private firms. The fund's contribution to the Portuguese labor market amounted to 1 percent of GDP in both 1987 and 1988, of which two-thirds was invested in training an estimated 160,000 young persons.

Portugal

Portugal - Agriculture, Forestry and Fishing

Agriculture, forestry, and fishing employed 17.8 percent of Portugal's labor force but accounted for only 6.2 percent of GDP in 1990. With the principal exception of the alluvial soils of the Rio Tejo (Tagus River in English) valley and the irrigated sections of the Alentejo, crop yields and animal productivity remained well below those of the other EC members. Portugal's agro-food deficit (attributable mainly to grain, oilseed, and meat imports) represented about 2.5 percent of GDP, but its surplus on forestry products (wood, cork, and paper pulp) offset its food deficit.

Portugal's overall agricultural performance was unfavorable when viewed in the context of the country's natural resources and climatic conditions. Agricultural productivity (gross farm output per person employed) was well below that of the other West European countries in 1985, at half of the levels in Greece and Spain and a quarter of the EC average.

A number of factors contributed to Portugal's poor agricultural performance. First, the level of investment in agriculture was traditionally very low. The number of tractors and the quantity of fertilizer used per hectare were one-third the EC average in the mid-1980s. Second, farms in the north were small and fragmented; half of them were less than one hectare in size, and 86 percent less than five hectares. Third, the collective farms set up in the south after the 1974-75 expropriations proved incapable of modernizing, and their efficiency declined. Fourth, poor productivity was associated with the low level of education of farmers. Finally, distribution channels and economic infrastructure were inadequate in parts of the country.

Agricultural Zones

Portugal is made up of the mainland and the Azores and Madeira islands, which altogether include an area of 91,640 square kilometers, about the size of Indiana. The mainland's land area of slightly more than 9.2 million hectares was classified as follows (in thousands of hectares): 2,755 arable land and permanent crops (including 710 in permanent crops), 530 permanent pasture, 3,640 forest and woodland, and 2,270 other land.

A useful categorization divides the mainland into three distinct topographical and climatic zones: the south (the Alentejo and the Algarve), the center (the Ribatejo and Oeste), and the north (the Entre Douro e Minho, the Tr�s-os-Montes, the Beira Litoral, and the Beja Interior).

The north is mountainous, with a rainy, moderately cool climate. This zone contains about 2 million hectares of cultivated land and is dominated by small-scale, intensive agriculture. High population density, particularly in the northwest, has contributed to a pattern of tiny, fragmented farms that produce mainly for family consumption interspersed with larger and often mechanized farms that specialize in commercial production of a variety of crops. On the average, northern levels of technology and labor productivity are among the lowest in Western Europe. Extreme underemployment of agricultural workers accounts for the north being the principal and enduring source of Portuguese emigrant labor.

The center is a diverse zone of about 75,000 hectares that includes rolling hills suitable primarily for tree crops, poor dryland soils, and the fertile alluvial soils of the banks of the Rio Tejo (Tagus River in English). A variety of crops are grown on the productive areas under irrigation: grains, mainly wheat and corn, oil seeds (including sunflowers), and irrigated rice. Farms located in the Rio Tejo Valley typically are 100 hectares in size.

The south is dominated by the Alentejo, a vast, rolling plain with a hot, arid climate. The Alentejo occupies an area of approximately 2.6 million hectares, about 30 percent of the total area of mainland Portugal, and produces about 75 percent of the country's wheat. Although much of the area is classified as arable land, poor soils dominate most of the area, and consequently yields of dryland crops and pasture are low by West European standards. The Alentejo is also known for its large stands of cork oak and its olive groves. The Algarve, less than a third the area of the Alentejo, occupies the extreme southern part of Portugal. This dryland area is characterized by smallholdings where animal grazing and fishing are the principal occupations of the inhabitants.

Crops and Livestock

In 1990 wheat was the leading Portuguese grain crop, followed by corn, which was grown mainly on the small farms of the north. Rice, although occupying less than one-tenth of the area of either wheat or corn, was a significant grain crop. Potatoes and corn silage were found throughout the north.

Portugal's leading edible tree crop was olive oil. In spite of the importance of olive oil for the economy and the increasing production of other edible oilseeds, such as safflower and sunflower, Portugal was a net importer of vegetable fats and oils. The country produced a variety of horticultural crops, some of which were exported. As an example, Portugal was a leading world exporter of tomato paste.

In the mid-1980s, over 300,000 hectares were in vineyards, and Portugal was one of Western Europe's major producers and exporters of wines. The most important vineyards were located in the northern valleys of the Rio Douro, Rio Mondego, and Rio Lima, but vineyards were also found in the Algarve and the Set�bal Peninsula. Portugal's dessert wines--port and muscatel--and ros� wines, notably Mateus, were well known abroad. Portuguese red and white table wines were less well known outside of the country, but their export and reputation were gradually increasing.

Crop yields, as noted above, and animal productivity remained well below those of Portugal's European counterparts as of the early 1990s. Yields of dryland crops and pastures were low by EC standards, but yields on irrigated land and in the alluvial soil areas of the Ribatejo were comparable with EC member countries. Portuguese grain-crop yields (kilograms per hectare) were less than a third of those in (Federal Republic of Germany (West Germany) and France and about 60 percent of those in Greece. Portugal's wheat, corn, and barley yields compared unfavorably with its European counterparts. Portuguese rice, grown on irrigated land, showed yields only about 14 percent below those of France and about 25 percent below those of Spain and Greece.

Although pastureland was scarce, livestock constituted a significant share of total agricultural production. Because of growing domestic demand for animal products and low livestock productivity, Portugal had to import about 10 percent of its meat requirements. Three-fourths of the mainland's milk was produced in the northwest's coastal areas.

The mainland's livestock numbers in 1987 included over 1.3 million head of cattle, over 5 million sheep, nearly 3 million pigs, and 745,000 goats. About 18 million chickens supplied the country's poultry industry that year.

Forestry and Fishing

Over a third of the mainland was forest and woodlands, and commercially valuable timber stands included pine, cork oak, and eucalyptus. Pine was used not only for timber but also for resin, pitch, and turpentine. Eucalyptus, a fast growing import from Australia, had become a major source of pulp and paper. Cork oak, found mostly in the Alentejo, was the source of processed cork, a traditional Portuguese export commodity accounting for about 60 percent of world sales.

The country's long coastline and seafaring tradition made fishing a significant, but declining, source of income and jobs. Lisbon, Set�bal, Matosinhos, and Portim�o were Portugal's main fishing ports and centers of commercial fish processing. Of the more than 200 edible species caught in Portuguese coastal waters and off West Africa, the most valuable was the sardine, an important source of domestic food supply and, in canned form, a traditional manufactured export product.

Notwithstanding Portugal's maritime tradition, the country's fishing industry in terms of fish catches in 1986 (390,000 tons) compared unfavorably with those of other small European countries, notably Norway (1,898,000 tons), and Denmark (1,871,000 tons).

Land Tenure and Agrarian Reform

The system of land tenure on the eve of the revolution was anachronistic. Very large estates in the south-central region coexisted with peasant farming in minute, fragmented plots in the north. The small farms typically were owner-operated, with the proprietors' families clustering in villages. Absentee landownership characterized the latifundio system with day-to-day operations in the hands of estate managers. Because of the high concentration of ownership in the south-central provinces, nearly half of the country's agricultural labor force in 1973 consisted of landless wage-earning rural workers whose standard of living was extremely low.

Holdings of over 200 hectares (about 0.3 percent of the total number) accounted for 39 percent of all farm land, whereas at the other end of the scale holdings of less than one hectare (about 39 percent of the total) represented no more than 2.5 percent of total Portuguese farm land.

The Agrarian Reform Law of July 29, 1975, which laid down the principles for the expropriation of land, validated de facto land seizures by rural workers that actually had begun five months earlier. The law provided that expropriation should apply to rural estates in the "intervention zone" south of the Rio Tejo. Lands that could have been expropriated under the provisions of the Agrarian Reform Law amounted to 1,640,000 hectares, but the area occupied by the rural workers reached only 1,140,800 hectares, or about one-fifth of the country's total farm land. On the occupied land, 449 "collective production units" were set up, bringing various estates of the former owners under a single peasant directorate. Major expropriations took place in the districts of �vora, Beja, Portalegre, Set�bal, and Santar�m. Very large collective farms were formed in Portalegre and Beja (averaging between about 3,500 and 4,200 hectares); smaller units were created in Santar�m and Set�bal (averaging between about 860 and 1,180 hectares).

As Portugal shifted toward moderation and the political center, collectivized agriculture increasingly was perceived as a counterproductive approach to the problems of the rural south. By the middle of 1990, only one-tenth (104,000 hectares) of the more than 1,080,000 hectares taken from the original landowners was still in possession of the remaining 30 collective farms. The gradual decollectivization of agriculture, which began in modest form in the late 1970s, culminated in a reformed agrarian law enacted by parliament in late 1988. Under its provisions, the maximum size of properties eligible for reprivatization was increased, and land could be divided among the heirs to an estate. Many collective farm members agreed to accept cash payments from the original owners in order to facilitate change of ownership or received individual titles to small shares of the former collective production units.

Agricultural Policy and the European Community

Portuguese agricultural markets, both inputs and outputs, were subjected to substantial policy intervention, particularly after the revolution. Under the old regime, agricultural pricing policy was largely oriented toward the provision of low-priced foodstuffs to urban areas, which required extensive controls over imports and marketing. Three state marketing enterprises were organized after 1974, primarily to manage trade in their respective commodity groups--cereals, oilseeds, and sugar and alcohol--in pursuit of price control objectives. Public assistance to farmers and ranchers involved subsidizing intermediate inputs, primarily fuels, fertilizers, and mixed feeds. These subsidies, however, were largely removed in June 1983. After the revolution, de facto credit subsidies for farmers (often associated with negative real interest rates) entailed very high transaction costs. As a result, only large farmers had access to the formal credit system.

As a condition of EC membership, Portugal adopted the Common Agricultural Policy (CAP), a basic instrument of the community's integration since 1962. The CAP was based on the principles of common pricing, EC preference, and joint financing. As Portugal adopted the transitional arrangements leading to full compliance with the CAP, both the locus of agricultural decision making and the level of incentives given by the system of price supports shifted from the nation to the EC. Portuguese prices of some commodities at the time of entry into the community were well above the EC levels. Cereal and dairy sectors would experience the most serious declines in real prices because they benefited most from price increases in the early 1980s and because they produced the commodities in chronic surplus in the EC. The Alentejo wheat and livestock systems, both based on poor soils, would likely become unprofitable during the transition to EC price levels. On the other hand, the prospects for rice, tomatoes, sunflowers, and potatoes, as well as Portugal's higher quality wine systems appeared to be favorable under the CAP regime.

Portugal

Portugal - The Industrial Sector

The growth of Portugal's industrial sector since the revolution was less dynamic than in the 1960-73 period. In this later period, growth was strongly affected by a number of major events, both domestic and external: the two oil price hikes, the nationalizations of 1975-76, and the country's accession to the EC. Nevertheless, Portugal's industrial production grew at a respectable 4.8 percent annual rate during the 1980-89 decade, leading GDP growth (2.7 percent annually). The overall industrial index advanced 43 percent between 1980 and 1989, with significant divergence in the growth rates among the subsectors of manufacturing (39 percent); electricity, gas, and water (74 percent); and mining (74 percent). Mining output was stagnant from 1980 to 1988, but in the following year it surged by 74 percent as the Neves Castro copper mine went into operation. Manufacturing, the largest component of the industrial sector, also showed marked growth differences among the several branches. Lumber and cork products, a traditional rural-based industry, declined by 26 percent during the decade; on the other hand, paper (75 percent), chemicals and plastics products (97 percent), and nonmetallic mineral products (65 percent) led the advance in manufacturing.

Industrial Regions

Manufacturing was concentrated in two major industrial regions: Lisbon-Set�bal in the south-central region and Porto-Aveiro-Braga in the north. Together they accounted for about three-fourths of Portugal's net industrial output. The Lisbon area included such major industries as iron and steel; ship building and repair; oil refining, machinery, chemicals, cement, and electronics; and food and beverages. Set�bal, about eighty kilometers to the southeast of Lisbon, also had a large shipyard and automobile assembly and machine industry plants, as well as cement, woodpulp, cork, and fish processing. Sines, located about 140 kilometers south of Lisbon, was the site of a major deepwater port and heavy industrial complex. Begun during the Caetano administration, Sines included an oil refinery, petrochemical plants, and a 1,200-megawatt coal-fired power plant.

Porto was primarily a center of light industry, including textiles, footwear, furniture, wine, and food processing. Porto was also the location of the nation's largest petroleum refinery; the other was located at Lisbon. Portim�o was a center for fishing. Aveiro specialized in woodpulp and other wood products but also produced footwear and machinery. Braga specialized in textiles and clothing, cutlery, furniture, and electronics. Covilha was also an active textiles area.

The two premier industrial regions offered the greatest concentrations of population, thereby stimulating market-oriented manufacturing operations. Furthermore, because of the dependence of modern industry on imports of raw materials, machinery, and fuel, the location of processing plants near the two major ports minimized their operating costs.

Industrial Organization

Industrial organization in Portugal reflected three major ownership patterns: private domestic firms were concentrated in traditional, light industries and in construction; public enterprises dominated mining and major heavy industries, mainly iron and steel, petrochemicals, shipbuilding, petroleum refining, and electricity; and subsidiaries of multinational corporations dominated the technically more advanced electronics, automotive, pharmaceutical, and electrical machinery industries. The foreign investor presence was also important in the pulp and paper, chemical, food products, and clothing industries.

In general, the traditional light industries--textiles, clothing and footwear, food and beverages, cork products, and furniture--were labor intensive and technologically backward. Within this group, however, the medium-sized establishments (between 100 and 200 employees) enjoyed superior management capabilities and higher levels of productivity.

The Portuguese construction industry, which was largely unaffected by the 1975 nationalizations, emerged in the late 1980s from several years of recession. Since the mid-1980s, EC and local counterpart funds have financed a variety of infrastructure projects, including roads, bridges, and sewage and water treatment plants. Commercial building and house construction was also on an upward trend after that time.

According to the Economist Intelligence Unit, of the twenty-five largest industrial firms ranked by sales in 1986, ten were public enterprises (including nine of the largest ten), and nine were subsidiaries of foreign-owned firms. Significantly, by the mid-1980s, over one-fifth of Portuguese manufacturing sales were by subsidiaries of multinational firms, with their export share even higher. Seven of the ten largest manufacturing export-oriented firms were controlled by foreign investors.

By the mid-1980s, the large industrial public enterprises faced extremely difficult financial problems associated with earlier errors in investment and pricing policies. After the second oil shock, many of these enterprises borrowed heavily abroad to finance investment projects, which often were poorly conceived and poorly managed. In 1986 operating losses of Quimigal (chemicals), Siderurgia Nacional (steel), and the shipbuilding company Estaleiros Navais de Set�bal (Setenave) totaled 29 billion escudos, or 30 percent of total public enterprise losses.

As a result of their excessive dependence on debt financing, Quimigal and Setenave, as well as Companhia Nacional de Petroqu�mica (CNP), a state-owned petrochemical enterprise, had a negative equity or net worth position (i.e., their debts exceeded their assets). Many of these firms in the mid-1980s were overstaffed and had concluded wage settlements that were generally higher than in the private sector.

The major state-owned industrial enterprises were candidates for ultimate privatization. In anticipation of their divestiture, they underwent financial and managerial restructuring in the late 1980s. As an example, loss-making enterprises such as CNP and Setenave had been operating under private management contracts to make them viable for privatization. Two major privatizations were announced at the end of 1990: Siderurgia Nacional and Petrogal (the largest state-owned petrochemical firm). To assure that the national steel company could operate successfully within the EC's single market, the Portuguese government was considering selling Siderurgia Nacional to a leading European steelmaker, preferably linked to a Portuguese minority partner.

Energy and Mineral Resources

Portugal produced less than a quarter of its primary energy requirements and depended heavily on imported hydrocarbon fuels, mainly petroleum. Although efforts were made to locate domestic petroleum deposits in the early 1970s, none were found. Coal accounted for less than 5 percent of Portugal's primary energy use. Apparent consumption in 1988 was around 2.9 million tons, of which 240,000 tons were mined domestically. Portugal's low-grade anthracite coal, the production of which had stagnated since the mid-1970s, was mined near Porto. The United States had emerged as Portugal's main supplier of metallurgical and steam coal. A 5-million-ton-per-year capacity coal terminal, capable of handling 150,000 deadweight-ton vessels, was scheduled to be completed at Sines early in the 1990s. Because Portugal had no known natural gas reserves, the government as of mid-1988 was planning to build a liquified natural gas terminal at Set�bal and a gas distribution network. Portugal's hydroelectric potential was well developed and provided nearly half of the economy's electricity requirements.

As a result of Portugal's accession to the EC, the country's energy sector was rapidly being deregulated and diversified. The state electric power company, Electricidade de Portugal (EDP), planned to invest US$700 million between 1990 and 1995 on dams and hydroelectric equipment. In 1990 EDP completed its second coal-burning power plant station to reduce its dependency on imported oil. In addition, coal consumption in the cement industry was forecast to grow as more facilities converted to coal from fuel oil.

Portugal's metallic mineral resources were more impressive for their variety than for their contribution to GDP. The most important mines were in the north, in the mountains of Beira, where tungsten, tin, chromium, and other alloy minerals were mined in commercial quantities. Iron ore was mined in Moncorvo in the upper Douro Valley; formerly exported in its entirety, the Moncorvo mine production came to supply the government's integrated iron and steel works at Seixal near Lisbon and its Maia electric steel plant near Porto. Portugal was a significant world source of tungsten concentrate, most of which was exported. The mine had an annual production capacity of 1,400 tons of tungsten concentrate.

Portugal's metallic mineral production was greatly enhanced upon the completion of the US$200 million Neves Corvo copper mine near Castro Verde in southern Portugal--the largest non-coal mining development project in Western Europe. An estimated 33 million tons of 7.8 percent copper were proven at the site as of 1986. The concentrator initially would process one million tons of ore annually, yielding 400,000 tons of concentrate containing nearly 150,000 tons of copper. The Neves Corvo operating company was owned 51 percent by the government and 49 percent by RTZ Metals Group of Britain.

Portugal

Portugal - Tourism

Foreign tourism was an important component of Portugal's services sector. Foreign exchange receipts from tourism income amounted to US$2.57 billion in 1989, compared with US$0.55 billion in 1973 and US$1.15 billion in 1980. This service industry directly employed an estimated 150,000 persons, equivalent to nearly 4 percent of the active labor force that year but indirectly had strong secondary impacts, particularly on construction. From 1973 to 1990, tourism income as a share of GDP was roughly stable, fluctuating between 5 and 6 percent. The mid-1970s proved to be an exception: the brief period of radical politics combined with the global recession led to a halving of foreign arrivals to 2 million in 1975 from over 4 million in 1973 and to a sharp reduction in the receipts/GDP ratio to 2 percent from 5 percent in the earlier year. There were 7.3 million foreign arrivals in 1981, 16.5 million in 1989, and an estimated 18.4 million in 1990.

Of the 16.5 million recorded foreign visitors in 1989, 93 percent were from Western Europe. Spaniards, not surprisingly, constituted three-fourths of all visitors, although most of them were excursionists, that is, visitors staying for a period of less than twenty-four hours. Visitors from Britain, although only 7 percent of the total, contributed about 30 percent of tourism earnings.

Portugal offered many attractions to vacationers from northern Europe and the United States--the medieval castles and other architectural landmarks, a number of which served as government-operated inns; the more than 100 beaches along the southern coast of the Algarve; and the resort area stretching westward from Lisbon at the mouth of the Rio Tejo, notably the famed resorts of Cascais and Estoril. Other attractions included Portugal's mild climate and its relatively low cost.

The major goals of the Portuguese government for this significant export industry were to improve the quality of tourism services, to attract visitors to northern locations, to safeguard the environment, and to encourage investment in tourism facilities.

Portugal