World Bank Document · 2016-07-14 · World Bank Reprint Series: Number 164 Bela Balassa Portugal in Face of the Common Market Reprinted with permission from 2.7 Conferencia International

World Bank Reprint Series: Number 164

Bela Balassa

Portugal in Faceof the Common Market

Reprinted with permission from 2.7 Conferencia International sobre Economia Port uguesa, 26 a 28de Setembro de 1979 (Lisboa: FundagAo Calouste Gulbenkian/The German Marshall Fund ofthe United States, 1980), vol. 2, pp. 637-77.

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PORTUGAL IN FACE OF THE COMMON MARKET *

BELA BALASSA

* The author is Professor of Political Economy at the Johns Hopkins Univer-sity and Consultant at the World Bank, He is indebted to Portuguese governmentofficials and academicians for helpful discussions on the subject areas covered in thepaper on a visit to Lisbon in May 1979 as well as to participants at the IInd 1nteima-tional Conference on the Portuguese Economy organized by the Gulbenkian Founda-tion and held in Lisbon on S>tember 26-28, 1979, wvhere the preliminary version ofthe paper was presented. He is also thankful to Michel Noel for competent researchassistance,

The paper expresses the author's view alone and should not be Interpreted asreflecting the opinions of the World Bank or the Gulbenkian Foundation.

Introduction

It is not generally recognized that Portugal was one of the countrieswith the most favorable growth performance in the decade precedingthe oil crisis and the 1974-75 world recession. Per capita incomes inPortugal increased at an average annual rate of 7.1 percent during thisperiod; apart from some oil-exporting countries, this growth rate wasexceeded only in Japan (8.7 percent) and in Korea (7.5 percent) .

Portugal's growth performance was predicated 71u large part on theexpansion of exports, in particular manufactured exports, after the gra-dual opening of its national economy and the conclusion of associationagreements with EFTA and, subsequently, with the EEC. Other impor-tant contributing factors were the growth of tourism and of immigrants'remittances. In 1973, merchandise exports amounted to $1843 million,of which 70 percent were manufactured goods; tourist receipts wereestimated at $550 million; and private transfers, mainly workers' remit-tances, were valued at $1097 million (INMF, International Financial Sta-tistics, October 1979 and Bank of Portugal).

High GNP growth rates, however, disguised considerable incomeiinequalities in the cities, and, in particular, between the cities and thecountryside. Low income levels in the countryside, in turn, reflected theslow progress made in Portuguese agriculture that was the most back-ward in Westerni Europe in 1973.

1 Here and thereafter, all growth rates have been derived by regressing annualdata on time. The GNP and population figures originate from the data bank of theWorld Bank.

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The April 1974 Revolution set out to change instiLutional arrange-ments in political as well as in economic life. Section I of the paperwill review the experience of the Portuguese economy during the post--Revolutionary period that coincided with the loss of the African colo-nies, the quadrupling of oil prices, and the 1974-75 world recession,followed by relatively slow growth in the European countries whichprovide Portugal's principal export markets.

Sectionls II and Ill will examine policy measures In agriculture andindustry, respectively, which may be taken to prepa-e Portugal for entryinto the European Common Market. This objective would also be servedby measures aimed at encouragir.g investment and savings and impro-ving the allocation of investment in Portugal. Proposals for the intro-duction of such measures will be made in Section IV oi the paper.

I. The Portuguese Economy in the Post-Revolutionary Period

The Aftermath of the Revoluitionl, 1974-75

In the South of Portugal (the Alentejo) the Revolution of April1974 was followed by land reform and, subsequently, by land seizures,leading to the virtual disappearance of latifundia that had earlier cha-racterized the economy of the region. No major changes in ownershiprelationship occurred in the North, where small and medium-size farmshad been dominant. At the same time, while the events in the Alentejoled to disruptions in production, few measures were taken to increaseagricultural productivity in Portugal.

The Revolution further led to the nationalization of banks, insur-ance companies, public utilities, transportation, and the petrochemical,fertilizer, beer, tobacco, pulp anid paper, cement, steel, and shipbuildingindustries. Through the nationalization of banks anid insurance compa-nies, the state also took over their equity holdings of about thirteenhundred firms in a wide variety of areas. As a result, publicly-ownedfirms came to account for 10 percent of manufacturing output whilefirms with partial state ownership accounted for another 5 percelt.

The Institute for State Participation (IPE), representing the govern-ment's interest in about 300 fir ns with partial state ownership, mostlyin the industrial sector, declar_,d its intention to exercise close supervi-sion of the activities of these firms. In conjunction with its providingcredits to private firms in a situation where rapid wage increases without

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a commensurate rise in prices led to substantial losses, the governmentalso intervened in the management of about 80 private firms 2, And,under conr. wiions of political uncertainty, there were fears of furthernationalize .;mn on the part of private firms.

The workers' commissions establislhed immediately following theRevolution, too, sought to influence management decisions and, in sever-al cases, seized factories from their owners. Furthermore, newly enactedlabor legislation made it well-nigh impossible to discharge workers,whatever the circumstances of the case. These regulations contributedto the decline of labor disripline and to the practical cessation of newhiring. Together with uncertainty as regards the treatment of foreigninvestments, they also hampered the operat.on of foreign firms inPortugal.

At the same time, increased government interventions, and thedesire to find employment for repatriates from the former colonies, ledto rapid increases in the size of public administration. Despite substan-tial reductions in military spending, expenditures on public administra-tion (including defense, health, and educationi) grew rapidly as a result,with a rise of 14.6 percent in 1974 and 20.8 percent in 1975 in termsof constant prices. In 1974 and 1975, respectively, these increases added1.4 and 3.1 percentage points to the rate of growth of GDP as measuredin national income statistics, without materially augmenting the amountof goods and services available in the economy (Table 1).

Correspondingly, the share of puolic consumption in the currentprice value of GDP rose from an average of 13.7 percent in 1968-73 to14.5 percent in 1974 and again to 15,4 percent in 1975. Parallel withthese changes, the rise in wages mandated after the Revolution led toincreases in the share of private consumption in GDP from 74.5 percentin 1968-73 to 76.1 percent in 1974 and to 80.7 percent in 1975. In 1975,private and public consumption combinled totalled 96.1 percent of GDPas compared to 88.2 percent in 1968-73 (Table 2).

The resultinig fall in savings was accentuated by the 7.4 percentdecline of GDP, excluding public administration, between 1973 and:t 1975(Table 1). This decline extended to all productive sectors. It was thelargest in the construction industry as a consequence of the 17 percentfall in capital formation, expressed in constant prices, between 1973 and1975 (World Bank, 1975a, p. 38).

In practice, this meant the governrnent taking over the management of the.firms in question.

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In the manufacturing sector, the constraints imposedi by the newlabor legislation adversely affected production, with labor productivityfalling below the 1973 level in 1975. In the same period, rapid increasesof nominal wages in the face of price controls led to a 14 porcent risein real wages (Table 3) and to a 70 percent increase in wage costs perunit of output (Table 4) 1. In turn, profit margins declined; this is indi-cated by the difference between increases in production costs 6 (48 per-cent) and in wholesale prices (35 percent) as well as by the differencebetween increases in wage unit costs and in the GDP deflator for themanufacturing sector, which later rose by 40 percent during the period.And, the data underestimate increase in production costs as they do notinclude the rise in fringe benefits mandated by law.

The escudo was devalued more-or-less in line with increases in whole-sale prices relative to the United States and Portugal's other majortrading partners. This comparison, however, gives a misleading iidica-tion of changes in Portugal's inlternational competitiveness, since firmswere not permitted to raise prices in proportion with cost increases.Using instead an index of production costs in the manufacturing sector,it appears that between 1973 and 1975 Portugal's real exchange rateappreciated by 9.7 percent vis-a-vis the U. S. dollar and by 8.2 percentvis-a-vis the currencies of its main trading partners (Table 5).

The deterioration of Portugal's competitive position, together withdisruptions in production, led to a decline in Portugal's share in themarkets of the developed countries. Between 1973 and 1975, the dollarvalue of Portuguese manufactured exports to these countries increasedby 11 percent as compared to increases of 49 percent for both Greeceand Spain (Table 6). Exports declined in absolute terms to the UnitedStates and increases were small also to the EEC and EFTA, with whichPortugal has an association agreement. Taking further account of thedecline in Portugal's share in the markets of developing countries other

Wag,,e data refer to simple averages of wages in industry and transportatior.in Lisbon and Porto that have been considered representative of otlher areas as well.In calculating wage costs per unit of output, data on production and employment inthe manufacturing sector have been used,

4 The index of production costs has been calculated by xveighting the Index ofwage costs, the Index of the price.s of purchmsed inputs, represented by wholesaleEslce index for home and import goods, and the cost of capital goods, representedby a weighted average of price indices for machinery and construction. The relevantweights have been derived from the 1970 input-output table for Portugalh G. E. B. E. I.Sistema de ITltrice.s Multisectoriais para o Cantinente Portugitus, Vol. V, Lisbon, 1975.

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than Portugal's former colonies anid in centrally planned economies, wefind that the dollar value of PorL!.'uese manufactured exports (exclu-ding exports to the former colonies) rose by only 15 percent between1973 and 19T75 as compared to increase of 87 percent for Greece and 68percent for S)ain.

If we take the growth of Spanish exports to individual market areasas the inoiin->, the shortfall in Portugal's manufactured exports due tolower rates of export growth is estimated at $420 million. This compareswith an absolute decline of $87 million in manufactured exports to theformer Portuguese colonies. Agricultural exports fell, too, while mineralexports increased.

Political uncertainty also led to a decline in tourist receipts, from$550 thousand in 1973 to $360 thousand irt 1975, contributing to a fallin the exports of goods and services combined from $3.1 billion in 1973to $3.0 billion in 1975. In the same period, the imports of goods andservices increased from $3.8 billion to $4.8 billion. With imniigrants'remittances remaining practically constant at about $1.0 billion, thedeficit in the current account of the balanice of payments reac:hed $0.8billion in 1975 as compared to a surplus of $0.3 billion in 197130 (Inter-vat'ional Finunciftl Statistics, October 1979, and Banco de Portugal).

The Period of Normalization, 1976-78 5

Steps towards normalization were taken in Portugal following thechange in the political situation in Novenmber 1975. The progress wasthe slowest in agriculture. where the situation remained unsettled in theSouth. After several aborted attempts, a comprehensive agrarian reformlaw was enacted in September 1977 but its application has been slowedby political opposition. Moreover, only the beginnings were made in pro-viding support to farmers to raise productivity levels.

More pr-ogress was nade in the maniufacturing sector. Governmentinterventions in private industry practically ceased. Also, labor legisla-tion enacted in February 1977 circumscribed the role of the workers'commissions and provided some, albeit limited, possibilities for employers

5 Unless otherwise noted, the data used in the remainder of Section I orlginatein Banco de Portugal, Rclat6rio do Coimelhlo de AdiiziistraCUo. - The author is indebt-ed to Mr. Jose de Silva Lopes, the. Governor of the Bank of Portugal for providingan advance copy of the relevant tables of the 1978 volume of the report.

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to lay off workers. In the same year, the scope of the public and theprivate sectors was delimited by law; the government committed itselfnot to undertake further nationalizations; it established rules on com-pensation for nationalized assets; and the foreign investment law wasrevised, providing grealer assurances to foreign i21v'stors. Finally, thegovernment imposed ceilings on wage increases and, after mid-1977, theescudo was devalued more raDidly than the rise in production costs anda crawling- peg system was irntroduced in the place of inteimittenit deval-uations that had createcl coiisiderable uncertainty for exporters.

The policies applied helped to rebuild confidence in the economy.Also, in mid-1978, the government strengthened its anti-inflationarypolicy. This involved moderating the growth of the money supply andcredit, raising interest rates, and slowinig down the rate of expansionof public administration. While public administrationi increased by 17.8percent in volume terms in 1976, the increases moderated to 7.0 percentin 1977 and 6.0 percent in 1978. And, with wage increases falling behindthe rate of inflation, th, share of the public coinsunmptioni in GDP declin-ed from 15.4 peercelnt in 1975 to 14.1 per cenit in 1976 and remainedapproximateiy at this level tlhereafter (Tables 1 and 2).

Real w%ages in industry and transportation fell by 7.7 percent in1976, 10.5 perceiit in 1977, and 5.2 percent in 1978, and decreases werenot much smaller in agriculture (Table 3). Correspondingly, the shareof private consumption in GDP declined from 80.7 percent in 1975 to74.2 percent in 1978. During the same period, the combined share ofprivate and public consumption in GDP fell from 96.1 percent to 88.5percent, i. e. to approximately the 1968-73 level (Table 2).

Increases in nominal wages between 1975 and 1978 (38 percent)exceeded the rise in labor productivity in the manufacturing sector (25percent) by a relatively small margin G, leading to a 10 percent increasein wage costs per unit of output. Taking account of chaniges in the costof purchased inputs and capital equipmen.t, production costs in Portu-guese manufacturing increased by 84 percent. In the same period, whole-sale prices for home-produced goods rose by 119 percent and the GDPcleflatoir for maiiufactuLring by 89 percent, indicating a substantial widen-ing of profit margins (Table 4). And while, after the depreciation ofthe esculdo in 1976 and 1977, the real exchange rate calculated in refer-enice to the wholesale price index appreciated again, between 1975-1978

6) Increases in labor productivity, however, partly reflect the increased share Ccapital-intensive industries.

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it depreciated by 12.0 percent vis-a-vis the U.S. dollar and 18.2 percentvis-a-vis the currencies in Portugal's trading partners if changes in pro-duction costs are used as tLe benchmark (Table 4).

Man.ufactured exports, however, reacted to improvements in compet-itiveness with a time lag. Thus, the dollar value of these exports roseby only 3 percent between 1975 and 1977 as compared to increases of34 percent in both Greece and Spain (Table 5). In 1978, however, thedollar value of manufactured exports rose by one-fourth 7, contributingto an increase in the volume of total exports by 13 percent as against6 percent in 1977. And, export growth accelerated again in the first halfof 1979.

Various reasons may be adduced to explain the slow reaction ofPortuguese manufactured exports to the improvemelv of Portugal's com-petitive position. Apart from the time needed for expansion, there wasreluctance on the part of private industry to increase output becauseof the continued existence of political uncertainties. Also, little privatein vestment took place in the manufacturing sector, so that the expansione.itailed utilizing excess capacity. Furthermore, devaluations occurringin discrete intervals until the adoption of the acrawling peg>> in mid-1977created uncertainty for the exporter. Finally, protected domestic marketsprovided a profitable outlet until the adoption of an anti-inflationarypolicy and reductions in import surcharges in 1978.

Increases in tourist receipts too were slow, reaching only $403million in 1977, as political uncertainty continued to discourage tourismin Portugal. Correspondingly, the share of the exports of goods andservices in GDP in 1977 was below the 1975 level, which itself repre-sented a substantial decrease compared to the pre-Revolutionary period(Table 2). The share of exports rose again in 1978 however, reflectingincrease in merchandise exports as well as in tourism ($592 thousandin 1978).

Portugal in the 1973-78 Period: A Balance Sheet

Along with other oil-importing countries, in 1974 Portugal sufferedthe shock of a quadrupling of oil prices. Rather than effecting the trans-fer implicit in the oil price increase, representing about 2 percent of

7 Approximate figures based on the produ st conmposition of exports providedby the Banco de Portugal.

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GNP, through an increased export surplus, in the years immediatelyfollowing the Revolution the volume of exports declined more than thatof imports. With reduced tourist receipts and unchanged workers' remit-tances, the current account deficit reached $0.8 billion in 1975, equallinag5.1 percent of GNP and much exceeding the cost of increased oil pricesin Portugal.

Policy improvements in 1976 and 1977 resulted in only modestincreases in exports that remained below their 1973 level in volumeterms. In 1977, the shortfall of manufactured exports to destinationisother than the former colonies is estimated at $1.0 billion on a 1973basis if export growth in Spain is taken as the norm. This figure severaltimes exceeds the shortfall of exports to the former Portuguese colonies($0.3 billion), estimated on the assumption that these would haveincreased at the same rate as exports to other areas. With slow increas-es in tourist receipts, the stagnation of workers' remittances, and thecontinued rapid growth of imports, the share of the curreint accountdeficit reached 7.8 pernent of GNP in 1976 and 9.3 percent in 1977.

As confidence was rebuilt and stronger anti-inflationary measureswere applied, the current account dleficit declined to 4.2 percent of GNPin 1978. Still, in the same year, the volume of exports exceeded thelevel reached in 1973 by only 5 percent whereas imports were 6 percenthigher. Furthermore, although the 1973 level of per capita GNP wasregained in 1978, an approximately 6 percenit decline in per capita incomesis shown if we exclude public administration. And, while much of thisdecline was due to the repatriation of Portuguese from the former colon-ies, in the same period GNP per cal)ita rose by 14 percent in Greeceand by 8 percent in Spain.

Nor have the workers enjoyed lasting benefits following the April1974 Revolution. After temporary increases, by 1978 real wages in indus-try and transportation were 10 percenit below the 1973 level while inagriculture a decline of 6 percent is shown for men and only womenexperienced a rise of 6 percent as a result of the applicationi of equalwage provisionis (Table 3). Thus, although the share of wages and sala-ries, includinig fringe benefits, in GNP surpassed the 1973 level (51.6percent) in 1978 (56.4 percent) 8, with rapid increl.vses in the labor force,the average worker is apparently worse off in Portugal today than hewas before the Revolutioni. By contr,aist, real wa,iges inicreased by 47 per-

8 Tho data originate from the Bank of Portugal.

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cent in Greece and by 57 percent in Spain between 1973 and 1978 (Inter-national Finiacial Statistics, October 1979).

In 1978, the share of gross fixed capital formation in GDP exceededthe 1973 level by a small margin (Table 2). However, with the price ofinvestment goods risinig more rapidly than the average, the volume ofinvestments did not regain the 1973 level by 1978. And, the share ofgross fixed investment in Portugal is below the average for the CommonMarket as well as for Greece and Spain.

In the same period, investment by the private sector declined pre-cipitously and the public sector carried out the bulk of new iinvestments,some of which - in particular, the large Sines complex - are of doubtfulefficiency. The decline in private investment, in turn, had much to dowith the problem of confidence. Although there have been considerableimprovements in this regard since 1976, leading to increased productionand exports, this has not sufficed to stimulate a substantial volume ofprivate investment. The same conclusion applies to foreign direct invest-ment which shlowed little change between 1976 and 1978 and is belowthe pre-Rexolu tion level.

Apart from improving confidence, a variety of measures would needto be taklen in order to increase the rate of investment in Portugal.Recommendations to this effect will be made in Section IV below, fol-lowing an analysis of desirable policy measures in agriculture (SectionII) aind in industry (Section III). The proposed measures should be con-sidered as part of a development strategy, aimed at increasing Portugal'scompetitiveness in the European Commonl Market and reducing theincome gap vis-a-vis the presenit and the prospective future member'sof the DEiEC. Estimated at purchasing power parities, real per capitaincomes in Portugal are about two-fifths of incomes in France and Ger-many and two-thirds of incomes in Greece and. Spain (European Commun-ities, 1978a, p, 21).

Tlhe acloption of the proposals made in this paper would representa shift from the government's preoccupation with short-term policies togreater emphasis on policics for the medium term. Neverltlheless, short--term objectives could not be neglected. In particular, there is need toreduce the deficit of the public sector that rose frorn 1.4 pericent in1973 to 6.9 percent in 1977 and to 8.7 percent in 1978 (OECD, 1979,pp. 32-34). This inicrease has occurred, notwithstanding a decline in therate of growth of public conisumption in recent years, as a result of therapid expansion of subsidies, tranlsfers and public investment. And, the

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deficit of the public sector appears to have increased again in 1979,thereby contributing to inflationary pressures and reducing the resourcesavailable for private investment.

II. Agricultural Policies in Portuigal

The Present Situation

As noted in the introduction, agriculture made slow progress inPortugal and it was the most backward in Westem Europe prior to theRevolution. In fact, during the postwar period, Portugal increasiliglyfell behind other European countries as far as agriculture is concerned.Between 1960 and 1975, per capita GDP in Portuguese agriculture decliii-ed from 31 percent to 27 percent of the Common Market average.During the same period, this ratio rose from 26 to 43 percent in Greeceand from 31 to 44 percent in Spain (Europejin Communities, 197Sb, p. 22).

With production rising at an average annual rate of 0.9 percentduring the two decades preceding the Revolution (World Bank, 1978b,p. 3), Portuguese a-riculture was increasingly less able to satisfydomestic needs. Correspondingly, Portugal's trade balance in agricultur-al products (defined to incluse SITC categories 0, 1, 22, and 4) turnednegative aruund 1970 and showed a deficit of $175 million in 1973 (Uni-ted Nations, Yearbook of Inticrnaflonal Trade :Statistics, 1976).

A variety of influences conspired to maintain Portuguese agricul-ture in a backward state. TRhey included an antiquated tenure systemin the South; the fragmentation of holdings in the North; the lack ofa coherent agricultural devolopnmelnt strategy; a complex and inefficientsystem of administered pr-ices and subsidies; fragmented agriculturalinstitutions; and the lack of adequate credit facilities and extensionservices.

In the post-Revolutionary period, the events occurring in the Alen-tejo have disrupted production while little progress has been made toimprove pr oductivity in Portuguese agriculture. These conisiderationslargely explain that agricultural output in 1978 was below the 1973 leveland that Portugal experieniced a continuing deter ioiratioii in its tradebalance in agricultural products. Agricultural exports declined fionm $336million in 1973 to $315 million in 1977 wvliile imports rose from $511million to $888 million, giving rise to an agricultural trade deficit of$573 million in 1977 (Ibid., 1976 and 1977).

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Much of the increase in the trade deficit in agricultural productsoccurred in cereals. With grain ou1.put. St:Lgnant. during the period pre-ceding the Revolution, the share of imnports in dlomestic requirementsrose from 18 percent in 1963-65 to 44 pie-cenllt in 1972-74. rTis shareincreased fLurtlher after the Revoluition and, if present' trends continue,At is expected to reach 10 percent by 1985 anid 65 percent in 1980 (WorldBank, 1978b, p. 138).

Similaar considerations aj.pply to livestock. In particuilar, imports ofbeef and veal ,ere $32 million in 1977 and are expected to double by19s0 and to triple by 1985. Also, from a net exporter, Portugal becamea net importer of dairy products and substantial increases in importsare projected for the decade ahead (p. 141). The slhare of imports indomniestic requiremients is expected to rise in vegetable oils and pulsesas well (p. 152).

It appears, then, that agricultture has increasingly become a dragon the Poritguese ecionomy. At the sa-nme time, while Portugal's naturalresource endow% menL is Ino(lest, considerable possibi lities; exist for improv-inig the prodIulctivity of land, labor, and capital in agricuilture. In par-ticular, if appropriate policies are followvedl, Portugal should be able toapproach yields in cereal production reached in Greece and Spain thathave similar a-ricultural environments 9, develop its livestock sector, andsubstantially expand the production of fruits and vegetables. We willconsider the policy measures that may contribute to this outcome fol-lowing a comparison of agriculture in Portu,gal and in the EEC.

Porti:g-ueset Agriculture and the Dirolpan Commiiion Market

Apart from the period of high world prices in 1973-74, the variablelevies applied in the framework of the Common Agricultural Policy havemraintained prodiucer prices in EEC ag-riculturefW substantially above worldlevels. In 1975, the latest year for which comparisons are available,domestic prices cxeceaedd world market prices for maize and beef in Por-tuigal hliile an approximate equality was maintained for wleat, and pri-ces in Portugal were lower than the world market price for rice and

I, In 1974, yields in Porthui:il, vxpres.qeld as a perceniage. of yields in Greece and

Spain were 48 and 79 percent for wheat, 35 and 44 percent for barlvey, 40 and 50 per-

cent for oats, 39 and 41. percenl for maizo, and 78 and 65 pvercent for rice (WorldBlank, 1978o, p. 3I).

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olive oil (Kim, 1978, pp. 73-87). At the same time, in view of Portugal'simpending entry into the Common Market, comparisons with prices pre-vailing in the EEC are relevant for evaluating the prospects for Portu-guese agriculture. This will be done in the following by utilizing theresults of a study prepared by the Instituto Financeiro de Apcio ao Desen-volvimenito da Agricultura e Pescas 'i.

Table 7 compares prices received by Portuguese producers and theindicative prices "1 established under the Common Agricultural Policyfor the years 1972-73 to 1976-77, by utilizing the EEC agricultural unitof account expressed in terms of U. S. dollars and the escudo-dollarexchange rate for conversion. The data show a continuing decline in theratio of producer prices prevailing in Portugal to the indicative pricesof the Community for wheat, beef, veal, red and white wine and, apartfrom the year 1975-76, milk. In turn, increases in the years 1973-74 and1974-75 were followed by a decline of the price ratio in the case of bar-ley and maize while pork and olive oil prices in Portugal exhibit anupward trend as compared to the EEC inidicative price.

In the latest years for which data are available, producer prices ofcereals, beef and veal, olive oil, and wine were all lower in Portugal tlhanthe EEC indicative price and only pork, and milk prices were higher.Moreover, relative prices in Portugal appear to have declined subsequent-ly by reason of the depreciation of the escudo.

Further interest attaches to comparisons with prices received byproducers in Portugal and in the individual Common Market countries.Prices received by producers in the EEC countries tend to be lower thanthe indicative price, in' part because of tL'ansp)ortationl costs and in partbecause the indicative piice sets an upper limit to national prices. Pro-ducer prices in the individual countries are also affected by nationalsubsidies and by differences between the official exchange rate and the<«green rate>>, derived by adjusting for M.Toinetary Compensation Amounts(MCAs) that represent levies and subsidies applied at the border .12

1f) I am indebted to Mr. Fernando Van-Zeller Gomes da Silva, the President ofthe Institute, for making this study available to rne.

" In the case of beef, veal, and wine, the orient.Ltion price, in the case of pork,the base price is relevant.

12 On i.fay 14, 1979, the MC were 10.8 pereent in Germany, 3.3 percent forthe Benelux conntries, nil for Denin:trk and Ireland, -5.3 percent for France, -15.7percent for Italy, and -20.0 percent for the United Kinfudorni (The Ecoizomiist, May19, 1979). For the caleculations, the assumption was made that the MCA for Portugalwould be set at zero.

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As the data of Table 8 indicate, in the latest year producer pricesin Portugal were substantially below prices in the EEC countries cover-ed (France, Ireland, Italy, and the United Kingdom) for cereals, theexception being maize where an approximate price parity was observed.The rang-e of the relevant price ratios was .63 to .96 for wheat, .76 to.89 for barley, .65 to .87 for oats, and .58 to .63 for rice. However, theprices of milk (1.18 to 1.61) and beef (1.13 to 1.51) were higher inPortugal thn,in in the Commoni Market countries while for veal the resultsvary depending on the country concerned (1.33 vis-a-vis Ireland; .85 to.99 vis-h-vis the other three countries).

The profitability of agricultural production is also affected by theprices of agricultural inputs. The price of fertilizer was generally lowerin Portugal than in the Common Market countries under considerationwhile gasoline prices were uniformly higher. And whereas feed concen-trates for livestock were the cheapest in Portugal, straw was moreexpensive.

Conmparisons of value added, defined as the difference between theproducer price and the cost of material inputs, provide an indication ofdifferences in produiiction costs among the countries concerned. Amongcereals, the calculatiolns made for alternative production methods showPortugal to be a low-cost producer of rice. Irn the latest year for whichdata are availhble, Portugal also produced barley and oats at a lowercost than the EEC countries other than Ireland. This conclusion appliesalso to wheat, except that production costs were about the same as inFrance and the United Kingdom. Finally, for maize, production costs inPortugal were approximately the same as in France and Italy, the twoCo-immon Marlket countries for which comparable data exist.

The situation is different in regard to livestock products. Portugal isat a considerable disadvantage in milk prodtuction vis-a-vis the EECcountries covered in the comparison. In the case of beef and veal, Por-tugal is at a disadvantage vis-a-vis France and Ireland; it is at par withItaly; anid it is at an advantage compared to the United Kingdom. Inparticular, grain-fed beef would be adversely affected if the subsidiesgranted through lower iniput prices were abolished. Howvever, Portugalhas good po.Essibilities for exporting lamb and mutton that utilize pasture.

It should be ad(led that there are considerable differences in produlctionicosts amon- farms in Portugal. The results indicate that the least effi-cient farms often have production costs much exceeding Common Marketlevel in the case of cereals where, on thle average, Portuguese productionappears to be competitive (Kim, 1978, pp. 79-81).

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Intrafarm differences in production costs indicate the need for im-proving productivity in Portuguese agriculture. This conclusion is strength-ened if we consider that cereal production would have to expand inorder to reduce imports following entry into the Common Market andcost in livestock raising would have to be lowered to compete with EECproducers. At the same time, the expansion of the livestock sector wouldhave favorable effects on agricultural employment and provide possibili-ties for further processing for export.

Increasing cereal yields would also be necessary in order to shiftland into the production of fruits and vegetables that are high-valueproducts, generate more income and employment, and serve as a basisfor agro-industries. The development of this sector is crucial for themodernization of Portuguese agriculture.

Among fruits and vegetables, price increases in real terms havebeen projected for the European Common Market up to 1985 for melons,peaches, onions, potatoes, lentils, and dry peas, decreases for apples,apricots, avocados, grapefruit, mandarins and tangerines, asparagus,carrots, cucumber, green pepper, broad beans, and dry beans, and littlechange for the remaiinder (Hunt, 1979, p. 32). At the same time, givenits favorable climate, Portugal will benefit from the elimination of theCommon Market tariff on a number of these commodities. In particular,Portugal has excellent possibilities for the exportation of citrus fruits,dry fruits, and vegetables, in fresh as well as in processed form.

In its efforts to expand fruit and vegetable exports, Portugal wouldhave to meet competition from Greece and Spain. The same conclusionapplies to olive oil and wine where expansion possibilities are excellentin Portugal and prices are lower than in EEC (Table 6) but Greece(olive oil) and Spain (olive oil and wine) are strong competitors. Meet-ing this competition would again necessitate increasing productivity.

M%od- .rnizing Portuguese Agriculture

We may conclude that raising productivity levels in Portugueseagriculture would be necessary in order to improve the unfavorabletrade balance of the sector, to exploit the possibilities offered by parti-cipation in the European Common Market, and to increase the livingstandards of a large proportioni of the population. At the same time,the expansion of livestock raising and the production of fruits and vege-tables would increase employment and provide a basis for agro-indus-tries in Portugal.

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A variety of measures may be taken to pursue the objective of rais-ing productivity in Portuguese agriculture. To begin with, there is needto reform the existing system of price supports and agricultural subsi-dies. As shown in a recent study <«price policies and accompanying subsi-dies generally did inot achieve either the objective or price stabilization,resource allocation toward more efficient production, or income dis-tributionn (World Bank, 1978b, p. 6). A particularly undesirable resulthas been the change in production technology in livestock raising fromlow-cost pasture to high-cost imported feedgrains sold at subsidizedprices that led to the depletion of the breeding herd by providing incen-tives for fattening young calves to heavy weights at an early age (Ibid).

The elimination of the subsidy to the use of feedgrains in livestockraising may be considered an urgent task. More generally, in prepara-tion for entry into the EEC, agricultural prices in Portugal shouldapproach Common Market price relationships. This would involve raisingthe relative prices of cereals other than maize as compared to livestockproducts. Such a change would also bring Portuguese prices nearer toworld market price relatioins (Kim, 1978), and contribute to greaterefficiency in agricultural resource use.

Additional measures conducive to increases in productivity includeregularizing ownership conditions, encouraging the establishment ofefficient size farms, increasing agricultural investments, improving cre-dit facilities, expanding agricultural research anid extension services,and undertaking various supplementary actions. These measures willbe briefly conisidered in the following.

The agricultural refoim law of September 1977 established the con-ditions under which land may be expropriated in the South and called forthe voluntary consolidation of land holdings in the North. As regardsthe former, the application of the law would entail the return to formerowners of land illegally seized. The Assembly has postponed the enact-ment of implementing legislation, hLowever, thereby lengthening the pe-riod of unicertainty in the region that has had adverse effects on agri-cultural development.

In order to avoid further decapitalizationi and to restore pre-1974production levels in the South, it would be iiecessaiy to fully implemenitthe provisiolis of the September 1978 law on expropriation and reformthe collective sector. Ln turn, in the North, measures would need to betaken to encourage the consolidation of fragmenited land holdings andland transfers to younger farmers.

653

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There would also be need for substantially raising t .e level of invest-ment in agriculture that has declined to 5 percent of total investment inrecent years. This volume of gross investment, equal to about 7 percent ofagricultural value added, hardly covers the depreciation of non-landassets and it does not provide for future growth.

Increased investment in agriculture would be requiied in the publicas well as in the private domain. For public investments to be efficient,a project identification and evaluation capability should be establishedin the Ministry of Agriculture. And, apart from providing appropriateincentives, greater private investment would necessitate improving agri-cultural credit facilities. This would entail increasing the amount avail-able for agricultural credit, reforming the sysstem of agricultural creditinstitutions, and redirecting credit towards productive uses 3.

There is a further need for reforming and expanding agriculturalresearch and extension services. As regards the former, the establishmentof a new central research center and the strengtheniing of regional cen-ters would be desirable, together with the incruased involvemen-t of for-eign specialists and an expanded training effort. As regards the litter,the newly-established regional agricultural services should be sirclg[lhen-ed, with a view to encouraging the application of impiroved seed andfertilizers, multiple cropping, and modern production methods in general.Fuirther supporting measures include increasing the area under irriga-tion; improving agricultural marketing and management; setting stan-dards for production and packaging; and expanding facilities for storageand processing, in particular refrigerationi and stockyards.

The implementation of these measures would presuppose improve-ments in the institutional structure and the development of a coherentstrategy for agriculture. But, more fai±damentally, there is need for achange in governmental attitudes towards agriculture. Thus, it shouldbe recognized that balanced economic developmenit in Portugal requiresthe parallel development of agriculture and manufacturing industries.

13 Data from the municipatlities of Pvora and Viana show that in the collectivesector of farming 72 percent of crediL goc.s for salaries whlile in the private sector(mainly small farms) only 4 percent is so used (Heady, 1978, p. 9).

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1M1. Policies for the Manufacturing Sector

Prospects for Portuguese Inloustry in the European Commnon MAarket

As shown inl Table 5, the current dollar value of Portuguese manu-factured exports to the EEC increased by only 18 percent between 1973and 1977 as compared to an increase of 12.3 percent for Greece and 141percent for Spain. This shortfall cannot be explained by the import limi-tations imposed on a few Portuguese products since Greece and Spainhave been subject to similar limitations and Spain does not even enjoyduty-free treatment in the Common Market. Rather, as noted earlier,the shortfall is related to the economic conditions existing in Portugalfollowing the Revolution of April 1974.

At the same time, Portugal has considerable possibilities for expan-ding the sales of manufactured goods in the Common Market. For onething, Portuguese exports of manufactured goods to the EEC are verysmall, accounting for only 0.3 percent of the imports of manufacturesby the Common Market countries. For another thing, Portugal has aconsiderable wage advantage over these countries.

According to World Bank estimates, in the textile industry for whichcomparable data are available, the average cost per labor hour in 1976-77was $1.45 in Portugal as compared to $6.90 in Germany and $5.15 inItaly. Portuguese wages were also substantially less than in competingcountries, such as Ireland ($2.88) and Greece ($2.23). And, with thedevaluation of the escudo, since 1976-77 the dollar equivalent of wageshas increased less in Portugal than in other European countries.

Portugal's wage advantage is reflected by the pattern of its trade inmanufactured goods with the Common Market countries. According toDoenges and Schatz (1978), Portugal's comparative advantage vis-a-visthe EEC, as <revealed» by trade data, was in labor-intensive industries,such as yarn and fabrics, clothing, and footwear. At the same time, indus-trial developmeint would require increasing value added per man in Por-Wuguese exports by upgrading existing exports and developing newskill-intensive exports that utilize the coulntry's manpower resources '.

In the textile industry, efforts may be concentrated on high-qualityyarns and fabrics, including mercerized and dyed products, corduroyand velvet. In the case of clothing, the proximity of markets, togetherwith good design capabilities in Portugal, provide possibilities for expan-

14 For a useful discussion, see Pintado, 1979.

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sion in fashion clothing, especially for women and childr n. Fashion itemsalso hold promise in the case of shoes and travel goods.

New exports have been developing or show potential for the futurein the engineering industries, where the availability of skilled labor anddesign capabilities provide advantages to Portugal. Expanisioii possibi-lities are particularly favorable in regard to relatively simple metal pro-ducts (e.g. castings) and machinery (e.g. agricultural and textile machin-ery) as well as for custom-made items (special purpose machinery andequipment, heavy machine tools).

In machinery production, the lack of Portuguese brand-names pointsto the need for cooperative arrangements with manufacturers in themore advanced European coui,.tries. There are also possibilities for themanufacture of parts, components, and accessories for the forei.il assem-bly of automobiles, machinery, and other equipment, as well as forassembly whenever these operations are relatively labor-intensive.

It would further be desirable to expanid the exports of resource-based products. According to result of Doenges and Schatz, Portugal hasa <<revealed>> comparative advantage in wood and cork products and innon-metallic mineral products. As regards the former, design skills andthe quality of Portuguese maniufacture would permit further transfor-mation in the form of particle board and furniture. As regards the laLter,the introduction of new techniques could lead to the expansion of theexports of ceramics, glazed tile, and glass products. Finally, as we haveseen, possibilities exist for the exportation of fruits and vegetables inprocessed form.

In order for these export possibilities to be realized, Portugal wouldneed to follow appropriate policies in regard to the manufacturing sector.The relevant policy measures concern the public and the private sectorsas well as investment and savinigs. They will be considered in the following.

Policies in the Public Sector

As noted e&rlier, since the 1cV4 Revolution the bulk of manufactur-ing investments in Portugal took place in the public sector. Thlis reflectsthe slow rebuilding of confidence in the private sector as well as thevirtual lack of financial control of public investments. Among the latterthe Sines complex, reportedly accounting for 13-14 percent of total grossfixed capital formation in Portugal, deserves separate consideration.

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The integrated heavy industrial complex in Sines, comprising a sea-water port capable of receiving large vessels, an oil refinery, and plantsfor the production of petrochemicals, fertilizer, caustic chlorine, steel,railway wagons and ior the processing of pyrites, was initiated underSalazar. It was continued after the Revolutio i, although changing con-ditions in world markets will hardly permit the exportation of refineryproducts, petrochemicals, fertilizers and caustic chlorine that had origin-ally been assumed. In particular, investments undertaken or planinedin the oil-producing countries of the Middle East, which enjoy the bene-fits of the availability of both energy and capital, will add to oversupplyin the world market. By contrast, Portugal has practically no energyresources and it is scarce in capital. At the same time, capital require-ments per job in petroleum refining, petroThemicals, and fertilizers arefive to ten times higher than in Portugal's actual and potential exportindustries 1,.

In May 1977, the establishment of the fertilizer plants, the causticsoda plant, the steel mill, and the second stage of the petrochemical com-plex was postponed, and doubts were raised about the desirability ofproceeding with the pyrite processing plant. Indications are that someof these investments will nevertheless be carried out. Yet, the investmentsin question have not been subject to rigorous economic project appraisaland the commision appointed in the summer of 1979 to undertake there-evaluation of the entire Sines complex has since been disbanded.

An economic appraisal of proposed investments at Sines in terms ofworld market prices would be necessary in order to avoid continuinghigh costs for the Portuguese economy. Other investments in the publicsector, too, should be subject to economic project evaluation. In this way,one may correct the import-substitution bias that has characterizedinvestments by public firms in the recent past and has become increas-ingly inappropriate as the date of entry into the Common Marketapproaches,

In this connection, it should be recognized that once Portugal entersinto the Common Market, high-cost plants could not compete with importsfrom other EEC countries and would require large subsidies to survive.

15 U.S. data for the year 1975 show capital expenditures per job in thousanddollars of 126 for petroleum refining and products, 75 for other petrochemicals, and40 for fertilizers, as compared to 9 for textiles, 2 thousand for clothing, 6 for leatherand leather products, 12 for stone, clay and glass products, 9 for fabricated metalproducts and 7 for electrical equipment and supplies (Balassa, 1979).

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In fact, government subsidies have increased rapidly in recent years, reach-ing 4.0 percent of GNP in 1978 as compared to 1.0 percent in 1973(OECD, 1979, p. 35). While these subsidies in part cover the losses ofpublic utilities where prices have not been raised commensurately withcosts, a substantial part covers the losses of publicly-owned manufactur-ing enterprises, including firms located at Sines.

The government has, provided benefits to public firms in otherways as well. These include substantial capital transfers (nearly 10billion escudos in 1978); debt guarantees; delayed payments of socialsecurity contributions and indirect taxes; and investment in inlfrastruc-ture that grew at an average ainnual rate of 40 percent between 1973and 1978 (ibid.).

It appears, then, that the public sector involves a considerable costto the Portuguese economy. In order to reduce this cost and to ensurethat public firms in the manufacturing sector can stand up to competi-tion in the European Common Market, the economic project evaluationof public investments should be complemented by a reform of the man-agement of existing public firms. Such a reform would entail transform-ing public firms into selfmanaged units and making them responsibleto a supervisory board independent of government administration. Atthe same time, the firms in question would need to prepare financialplanls for phasing out subsidies over a predetermined period.

As regards the establishment of self-managed public firms, refer-ence may be made to the experience of Western European countries.In these countries, successful public firms in the manufacturing sectorhave generally acted independently from the government. They haveoperated on the basis of market principles and competed with privatefirms in the same industry at home and abroad. Public firms also oper-ate in a market setting in Hungary and Yugoslavia, where the profita-bility of the firm to a considerable extent depends on its ability to com-pete in foreign markets 1".

The preceding discussion pertains to publicly-owned firms in manu-facturing industries that have been designated by law as being in thepublic domain. As we have seen, the Portuguese government has alsoacquired participation in firms outside these industries through thenationalization of banks and insurance companies. These participationsrange widely across industries and sectors, with the government's sharevarying from 5 to over 50 percent.

1( On the Hungarian experience, see Balassa, 1977.

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There is little reason to maintaini participation in firms wshere thegovernment is a minority shareholder. And even in cases when the gov-ernment has a majority share, the task of supervision makes it onerousto retain such, mostly small, firms in the public sector. Apart from theinefficiencies involved, the reprivatizatioin of thvs' firms would increasebusiness confidence in Portugal.

Policies in the Private Sector

The private sector offers excellent possibilities for expansion as itis concentrated in industries where Portugal has a comparative advantageand since successful exporting requires the operation of the lrofit motive.At the same time, various measures would need to be taken to createappropriate conditions for the further development of the private sector.

To begin with, one would need to ensure that private and publicfirms receive equal treatment. This applies in particular to the grantingof credits and the treatment of tax and social security obligations. Asnoted above, one should also phase out subsidies that benefit public firms.

Moreover, there is a need to further liberalize regulations on lay-offsthat continue to discourage hiring and contribute to uncertainty in firmdecision-making. This is of especial importance as Portugal enters theCommon Market. For one thing, exporting firms will require flexibilityto vary the size of labor force in response to market conditions. Foranother thing, competition from imports may necessitate the restructur-ing of firms, when the alternative to raising productivity through re-ductions in the labor force may well be bankruptcy.

Existing regulations on wage rates and on income taxes, too, wouldneed to be changed, so as to provide adequate remuneration to managers,technicians, and skilled workers. Wage differences among skill classesdeclined to a considerable extent as minimum and maximum wages wereset after the Revolution. Furthermore, the marginal tax rate was raisedto 93 percent for annual incomes above 900 thousand escudos, i.e. about$18,000 a year; the marginal tax rate is 50 percent above annual incomesof $12,000.

Low after-tax incomes also discourage the return of expatriatemanagers and other skiNled personnel and provide incentives for emi-gration. Yet, as noted above, industrial development in Portugal requir-es the expansion of skill-intensive industries. At the same time, withentry into the Common Market, improved treatment as regards social

659

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benefits will make employment in the other EEC countries increasinglyattractive.

Confronting competition in the EEC would further require indus-trial concentration in Portugal, wlhere small, inefficient firms accountfor a substantial segment of manufacturing industry. On the exampleof France, Greece and Spain, industrial concentration may be encouragedby the use of fiscal and credit measures (Balassa, 1977, pp. 238-39).While certain fiscal measures have since been taken, additional measur-es would be necesary in order to bring about the kind of industrialtransformation that occurred in France following the establishmentof the Common Market.

Last but not least, there is need to clearly define the role of 'thegovernment in the Portuguese economy. While proposals have again beenmade for <dndicative>> planning, government interference with firmdecision-making will become increasingly inadvisable as Portugal becom-es a full member of the Common Market. This is because, under freetrade conditions within the EEC, firms would need to take the risksand reap the rewards of their actions.

In this connectioin, r efeirence may be made to the experienlce ofFrance, where indicative planning had been undertaken prior to theCommon Market's establishment. The government had provided produc-tion targets to French industry and it could ensure the fulfilment ofthese targets by imposing restrictions on imports and subsidizingexports. But planning could not be efifective once import restrictionswere abolished and tariffs were eliminated in the framework of the EEC.In the new situation, firms had to orient their operations towards inter-national competition rather than government-determined production tar-gets. Correspondingly, indicative planning has lost raison d'etre andhas been discontinued. Nor has any other EEC country, or the CommonMarket itself, adopted indicative planning I-.

At the same time, in order to ensure that private decisions conformto the national interest and to prepare for entry into the Common Market,there is need to reform the system of incentives in Portugal. Such areform would entail lessening tariff disparities and reducing the biasagainst exports.

Reforming the system of tariffs would require switching from spe-cific to ad valorem tariffs and rationalizing their structure. In order to

1T Balasa, 1973. For a more detailed discussion of issues relevant to planningin Portugal, see Balassa, 1978.

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SESSAO N.0 9

avoid having to carry out another full-scale tariff reform a few yearslater, this should be done by using the EEC common external tariff as abench-maxrk. But, higher tariffs may apply to products where this iswarranted by infant industry considerations. Infant industry tariffsshould provide a modest margin, say 10-15 l)pcent, on value added inworld market prices (net foreign exchange earnings), with provisionsmade for their gradual reduction and elimination.

As long as Portuguese industries are protected against imports fromthe EEC, reducing the bias against exports would require direct or indi-rect export subsidies. Following the examples of Greece and Spain, onemay examine the possibility of granting a subsidy on world market valueadded in exports (net foreign exchange earnings) during the transitionalperiod of entry into the Common Market. Alternatively, one may extendthe scope of preferential credits for export sales and provide such creditsfor export production and export-oriented investments as well.

Investment incentives as an export promoting device have the advan-tage of contributing to the creation of new ca)acity. More generally,increasing the rate of investment is of particuilar imp)oitance in Portu-gal that has devoted a smaller share of its gross domestic prooduct tofixed capital formation (19.6 percent in 1976-77) than the EuropeanCommon Market as presently constituted (21.1 percent). The differencesare even larger if comparisons are made with Greece (22.2 percent) andSpain (22.8 percent) (International Fia neial .Statistics, October, 1979).

The rate of investment may be increased by attracting foreign invest-ment and by increasing domestic ilivestnienit and savings. The measuresthat may be taken to pursue these objectives will be considered in Sec-tion IV belowv, with further attention given to the need for improvingthe allocation of investment funds anmong economic activities.

Il. The Volhune of Invesitmiernt and Its AlWocationi

The Tre.atrnent of Foreign Direet Investment

The Foreigrn Investment Code, promulgated in August 1977, repre-sents considerable improvements over the earlier code as it providesincrease(] assurances to foreign investors. Neveltlheless, as noted above,there has been little subsequent increase in foreign direct investmentin Portugal. Apart from political uncertainty, this may be explainedby the continued existence of certain disincentives to such investments.

661

SESSAO N." 9

They include the contentious issue of compensation for nationalizedforeign assets; the cumbersome legal procedire on lay-offs and the lackof consistency of its application 1"; the delays experienced in the author-ization of foreign investments and the bureaucratic I)locedules apl)lie(lby the Foreign Investmenit Institute; and the possibility provided by lawthat limitations would be imposed on the transfer of dividlends, profits,and the proceeds of sale or liquidation in the event of a <serious dis-equilibrium>> in the Portuguese balance of payments.

Apart from removing these sources of disincentives, there would beneed to provide positive incentives to foreign direct investment so asto make locating in Portugal sufficiently attractive. This is becausePortugal has to compete with alternative investment possibilities in thepresent and the prospective EEC member countries.

In this connection, reference may be made to the experience of Ire-land, where incentives provided to foreign investors led to a quadru-pling of foreign direct investment between 1973 and 1977. As a result,Ireland was able to take advantage of the opportunities offered by theEuropean Common Market and experienced a 142 percent increase inthe dollar value of manufactured exports during this period. With con-tinued increases in the following year, the volume of total exports roseby 53 percent between 1973 and 1978 (Yearbook of ntercnutionul TradeStati-stics, 1978 and Intcrnaltional Financial Stati stics, October 1979).

As in *the case of Ireland, foreign direct investment in Portugalwould permit utilizing the opportunities offered by entry in the CommonMarket. Foreign capital brings technological and managerial know-howas well as marketing expertise that are in short supply in Portugal.Also, the inflow of capital adds to the volume of investment and toforeign exchange receipts, thereby contributing to higher incomes andemployment directly as well as indirectly by easing the foreign exchangeshortage.

On the example of Ireland and several other countries, tax holidaysmay be used to attract foreign investment. Tax holidays are preferableto accelelated depreciation provisions that favor capital-intensive indus-tiies and production methods. At the same time, tax holidays may becomplemented by l)referential credits for new investmenit.

18 For instance, an ag,r-rment reoachd in early 1979 permitLing the Portuguesesubsidiary of IIT t) dischar-e 270 worker.s was ov-ortirnemd by the subsequent gov-ernment.

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Incentives to Domestic Investment and Savings

In order, to encourage investment activity in Portugal, tax holidaysand preferential investment credits should be provided to domestic pri-vate investment as well. With the equal treatment of foreign and domes-tic private investment, one may exploit the advantages offered by jointventures that permit drawing on foreign capital and expertise without100 percent foreign ownership.

At the same time, savings would need to be generated in order toprovide funds for domestic private investment. Private savings may beencouraged through higher real interest rates and the provision of alarger array of financial instruments to savers. These measures wouldalso contribute to the repatriation of the savings of Portuguese wor-kers abroad and discourage the clandestine outflow of funds.

The experienlce of recent years indicates that domestic savingsrespond to higher real interest rates in Portugal. However, with anacceleration of the rate of inflation since mid-1978, real rates of interesthave declined again. Thus, interest rates on time deposits for 90 daysand longer vary between 12 and 21 percent while consumer prices roseby 24 percent betveen the third quarter of 1978 and the third quarterof 1979 (Banco de Portugal, published data).

Negative real interest rates and the limited choice available amongfinancial investments provide incentives for investment in real estatearnd in consumer durables as well as for tself-investment> in lower pro-ductivity uses "'. They also discourage the repatriation of the savingsof Portuguese workers abroad and give inducement to the clandestineexportation of savings.

Taking account of the depreciation of the escudo, interest ratesabroad exceeded the rate obtainable in Portugal by about 10 percentagepoints in the fourth quarter of 1979 and the differences were even largeraveraging 15 percent, in 1977 and 1978 2') While the existence of thesedifferences has contributed to the channelling of savings abroad, theimpositioni of ceilings have led Portuguese firms to bn! i-ow abroad at

19) Self-investment wiU be privately profitable and socially unpr-ofitable if its rateof return exceeds the rate obtainahle on savings deposits but falls short of returns inalternative investments.

,o For the relevant data, see Barbosa and B3eleza (1979, Table 6). This paper, aswell as the paper by Maxwell Pry (1979) also provide a good analysis of the adverseeconomic effects of low interest rates in Portugal.

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high interest rates. This circular flow of savings, in turn, has entaileda cost to the Portuguese economy.

Real interest rates may be increased by raising nominal rates orby reducing the rate of inflation. In view of the adverse economic effectsof a high rate of inflation and Portugal's prospective entry into theCommon Markert, it would be advisable to reduce inflation rates. Asmonetary policy cannot alone bear the burden of the fight against infla-tion, this would necessitate reducing the budgetary deficit. A smallerbudgetary deficit would simultaneously decrease the dissaving of thepublic sector.

The budget deficit may be reduced by curtailing the size of govern-ment administration that now accounts for 10 percent of the total laborforce, having doubled between 1968 and 1978 (OECD, 1979, p. 34). Andwhile decreasing the size of government administration will take time,more immediate measures may include reducing the government's invest-ment program and its subsidies to public firms. Also, the introduction-of rigorous project evaluation is bound to lead to a reduction in thesize of the public investment program in Portugal. In turn, subsidiesto public firms may be reduced by streamlining the operations of thesefirms and raising the prices of public services.

Improving the Allocation of Investment

Reductions in public investment would increase the availability offunds to the private sector where higher returns may be obtained andmore employment is created. Increases in real interest rates would fur-ther improve the allocation of investment as one may thereby avoidthe <<undesired effects from credit rationing, performed under a lot ofpolitical and other pressures by slow working, incompetent bureaucra-cies>> (Lundberg, 1978, p. 21). At the same time, higher interest rateswould lessen existing incentives to capital-intensive industries and pro.cesses. The extent of these incentives would further be reducee and theburden of higher interest rates on producers offset, if labor costs werelowered through reductions in social changes.

The application of these measures would tend tor encourage labor-intensive production and exports, thereby contributing to the efficientallocation of investment while improving Portugal's competitive positionin the Common Market. The described measures would also contribute

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to increased employment in a situation where the excess supply of laboris not fully reflected in its cost.

At the same time, as noted above, industrial development in Portu-gal would necessitate the expansion of skill-intensive industries. In orderto increase the availability of skilled and technical labor, one may envi-sage expanding technical education and encouraging in-plant training.As regards the latter, tax benefits to training, provided e. g. in theframework of social security legislation, would reduce the risk to thefirm that the workers it has trained move to other firms at home orabroad.

Finally, the efficient allocation of investment would be servedthrough the revitalization of the moribund stock and bonrd markets andthe creation of new financial intermediaries in Portugal. In this connec-tion, particular importance attaches to the enactment of proposed legis-lation on the establishment of private investment companies, whichwould be able to issue bonds with one-year maturity or longer.

Apart from improving investment allocation, the revitalization offinancial markets would encourage domestic savings and reduce incen-tives to channel savings abroad. Settling compensation claims for nation-alized property would also increase the availability of funds forinvestment.

Sumimary and Conclusions

In this paper, recommendations have been made for policy measuresthat may be taken to prepare Portugal for entry into the CommonMarket. The recommendations aim at raising efficiency in agricultureand industry, increasing investment and savings, and improving the allo-cation of investment. Their implementation would also have beneficialeffects on employment.

In agriculture, there is need for a coherent development strategy.The elements of such a strategy include reforming the system of pricesupports and agricultural subsidies, regularizing ownership conditions,tencouragin- the establishment of efficient size farms, increasing agri-cultural investments, improving credit facilities, expanding agriculturalresearch and extension services, and undertaking various supplementaryactions aimed at agricultural modernization.

In manufacturing industry, public in-vestments should be made sub-ject to economic project evaluation carried out in terms of world market

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SESSAO N.,, 9

prices. This is of particular importance for the Sines complex, the econ-omic efficiency of which has been queried. There is further need fortransforming public enterprises in the manufacturing sector into self--managed units, to be operated on the basis of market principles.

Rigorous projects evaluation may be expected to lead to reductionsin the size of the public investment program, thereby freeing resourcesfor the private sector that promises higher returns and more employ-ment creation. At the same time, it should be ensured that public andprivate firms receive equal treatment as regards credit allocation, taxa-tion and social security. Also, there is need to further liberalize legis-lation on lay-offs, to increase wage differentials according to skills, andto reduce high marginal tax rates.

The successful participation of Portuguese industry in the EuropeanCommon Market would also necessitate encouraging concentration bythe use of credit and fiscal measures. Furthernore, it would be desirableto limit government interference in business decisions. One should relyinstead on the system of incentives to ensure that private decisions con-form to the public interest. This would entail reducing tariff disparitiesand increasing export incentives.

A variety of measures may be taken to increase the rate of invest-ment and to improve its allocation. Apart from reducing existing disin-centives to investment, foreign as well as domestic private firms wouldneed positive incentives in the form of tax holidays and preferentialcredits. In turn, raising real interest rates and improving the functioningof financial markets would provide inducements to domestic savings andreduce existing incentives to channel savings abroad. Higher real inter-est rates would also discourage capital-intensive investments while theburden of higher interest costs could be offset by reducing social chargesthat, too, would favor employment.

Several of the proposedc measures, including the actions to be takenin agriculture, the lowering of marginal income tax rates, reductionls insocial charges, export subsidies, tax holidays for new investment, andthe preferential tax treatment of industrial concentration would re"re-sent a burden on the government budget. Higher taxes on consumptionwould appear to be an appropriate measure to provide the necessaryfinancing, since such taxes do not adversely affect savings. At the salmetime, reductions in the public investment budget, decreases in govern-mental subsidies, and the curtailment of the size of public administra-tion would permit lowering the budgetary deficit, thus reducing thedissaving of the public sector.

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With emphasis on increasing investment at the expense of consump-tion in general, and reducing unproductive expenditures in the publicsector in particular, the policy recommendations made in this paperentail a choice in favor of the second of the two alternatives - restric-tive policy measures and a positive, stimulative approach -consideredby Lundberg for purposes of short-term stabilization in Portugal (1978,p. 13). In this way, short-term measures are oriented towards thelonger-term objective of preparing Portugal for participation in theCommon Market.

Table 1: Growth Rates of GDP and Selected Sectors (Percent)

1973-78 1974 1976 1976 f 1977 1978 1 1'68-73

Agriculture . . ., -0.8 - 2.1 -- 6.5 - 1.5 -10.0 4,0 4.1Industiy (a) . . . 10.0 3.7 - 8.8 4.3 10.A : 2.2Construction . . . 12.5 3.5 -15.7 5.0 11.0 5.0 0.9Public Administra-

tion lb) . , . . 8.8 14.6 20.8 17.8 7.0 6.0 12.8Other Services . . . 5.9 -2.4 - 5.3 7.9 5.9 1.3 1,9

GDP at factor cost 6.9 2,2 - 4.7 6.6 6.5 3.4 2.8GDP at factor cost

without publicadministration 6,6 0.9 -7.8 4.7 6.4 2.9 1.3

$Iourrcs: World Bank, Portugal: Current anid Prospective Ecato,nic TrenLds, November 1978.Banco de Portugal, Relat6rio do Conscllia de AdmilistraC'do, Ocre'ncia, d 1978, Vol. 1,

179.

Notes: (a) Includes manufacturing, mining and electricity, gas and water.(hI) Includes defense, health and education.

667

SESSAO N, 9

Table 2: The Structure of Domestic Expenditure in Portugal(Current Prices)

1968-73 174 1975 197J 1977 1978

Total Consumption(private and public) 88.2 90.6 96.1 92.6 89.8 88.5Private Consumption . . . 74.5 76.1 80.7 78.5 75.6 74.2Public Consumption . . . 13.7 14.5 15.4 14.1 14.2 14.3

Gross Investment ........ 18.8 24.9 16.4 20.8 25.4 23.1

Gross Fixed CapitalFormatiox, ........... 18.8 19.7 19.7 19.0 20.2 20.0

Variation of Stocks . . (0) 5.2 - 3.3 1.8 5.2 3.1Exports of Goods & Services 24.1 25.9 19.7 16.8 17.8 20.0Imports of Goods & Services - 31.1 -41.4 - 32.2 - 30.2 -33.0 - 31.6Gross Domestic Product . 100.0 100.0 100.0 100.0 100.0 100.0

Sources: Departamento Central de Planeamento, Situacdo Econ6mica Portuguesa, May 1976 andBanco de Portugal, Relat6rio do Caonsello de Adrin7i.stracdo, Gcr6ncia de 1978, Vol. 1.

1979.

668

SESSAO N.° 9

Table 3: Nominal and Real Wages in Portugal (Base 1973r-100)

1973 1974 1975 1976 1977 1978

Agriculture

Me-nNominal Wages . . . . 100.0 132.9 165.2 189.1 217.0 255.1Cost of Living . . . . 100.0 126.0 151.7 179,4 227.5 271.7Real Wages . . . . . 100.0 105.5 108.9 105.4 95.4 93.9

Noninal Wages . . . . 100.0 140.5 189.3 214.8 255.6 288.3Cost of Living . . . . 100.0 126.0 151.8 .79.4 227.4 271.7Real Wages . . . . . 100.0 111.5 124.7 119.7 112,4 106.1

Industry and Transportation

LisbonNominal Wages 100.0 132.3 157.0 175.7 196.8 218.5Cost of Living . . . , 100.0 125.1 144.2 174.7 216.6 246.9Real W:'a-es . . . . . 100.0 105.8 108.9 100.6 90.9 88.5

PortoNominal Wages . . 100.0 138.5 177.1 197.3 221.4 242.2Cost of Living . . 100.0 126.8 149.4 176.4 223.0 263.8Real Wages . . . . . 10.0 109.2 118.5 111.8 99.3 91.8

Average for Lisbon and PortoNominal Wages . . . 100.0 135.4 167.1 186.5 209.1 230.4Cost of Living . . . . 100.0 126.0 146.8 175.6 219.8 255.4Real Wages . , . . . 100.0 107.5 113.7 106.2 95,1 90.2

Ratio of Average Wages toPer Capita Net NationalProduct . . . . . . . . n. a. 1.45 1.82 1.83 1.61 1.49

Share of Labor Income in theNet National Product. . 51.6 56.9 69.3 68.7 60.7 56.4

Per Capita GNP in 1973 pricesIncluding Public Adminis-

tration . . . . . . . 100.0 106.8 96.9 103.1 108.7 111.4Excluding Public Adminis-

tration . . . . . . . I.100.0 105.4 92.6 96.7 101.8 103.9

So0trces: Unless othervise Indicated, Bancoxde Portugol, Relat6rio do Consedho det .Admbiiisrtracw6v,GNP Data; World Bank Data Base.

Note: Consumer price index for rural area-s calculated by the Bank of Portugal.

669

02

Table 4: Cost of Production in Portuguese 'Manufacturing (Base 1973=100) t

I 02

2) Lbr 4 Wage Wholesale (7) () Wholesale GD

Period Producton Employ- Producti- Nominal Prot pies P f duction P s for DeflatorProucion met vty Wags Jnit of (Home and Investment Cots Home- foMau

Output Import Goods -Produced I():()(4) :(3) Goods) G oods fatrg

1973 . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

1974 . . . 102.3 99.4 102.9 135.4 131.6 129.0 114.9 129.0 125.7 124.1

1975 . . . 96.9 98.7 98.2 167.1 170.2 144.9 139.0 149.0 135.1 140.2

1976 . . . 102.1 99.3 102.8 186.5 181.4 172.5 165.2 173.8 163.5 166.8

1977 . . . 113.4 99.2 114.3 209.1 182.9 223.2 213.9 216.0 210.8 213.7

Q I . . 110.1 99.4 110.8 198.4 179.1 205.S 203.4 201.2 194.6 n. a.

2 . . . 115.3 99.5 115.9 208.3 179.7 226.1 206.2 217.6 213.5 n. a.

Q3 . . 108.5 99.0 109.6 213.1 194.4 220.3 218.5 215.8 205.4 n. a.

119.6 98.4 121.5 216.9 178.5 240.6 227.7 229.6 229.7 n. a.

1978 . . . 121.1 98.8 122.6 230.4 187.9 292.8 265.6 274.0 295.9 265.0

Q, 121.6 08.8 123.1 218.6 177.6 258.0 237.8 243.6 254.1 n. a.

124.1 99.0 125.4 225.8 180.1 276.8 253.8 259.6 273.0 ni; a.

3 . . . 113.3 99.1 114.3 229.5 200.8 298.6 280.6 281.3 304.1 n. a.

Q4 125.5 98.6 127.3 248.8 195.4 339.1 290.1 313.1 352.7 ! n. a.

Sources: Production: 1973-75: Boletim Mensal de Estatfsticas Industrials; 1976-78: Boletirn M1ensal de Estatistica.Employment: Banco de Portugal.Wholesale prices: IMF. International Financial Statistics.Wages, Prices of Investment Goods and GNP Deflator for Manutacturing: Banco de Portugal, Relatorio do Cotnselho de Adnmi-nisl raCdo.

Note: The index of production costs has been calculated by weighting the Index of wage costs, the index of the prices of purchas-ed inputs, represented by wholesale price index for home and import goods, and the cost of capital goods, represented by a

weighted average of price Indices for machinery and construction. The relevant weights have been derived from the 1970 Input-

-output table for Portugal: G. E. B. E. 1. Sistema de Matrizes Multisectoriais pMara o Continente Portugues, Vol. V. Lisbon, 1975.

Table 5: Real Exchange Rates in Portugal, 1973-1978

Index of the Real Exchange Rate vis-h-visExchange Index Index of Relative Prices vis-a-vis TPeid Rate of the Prices vis-&-vis PortugalreTradin

PendexPrtu alf Tredlativ T eU Dollar_________ of___ Portugal's___Escudo/ Exchatnge the United States Partnerli The US Dollar of rtul's/Dollar Rate Maaes Lin Trading Par-tners

(A) (B) (A) (B) (A) (B) (A) (B)

1973 . . . 24.673 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.01974 . . . 25.408 103.0 105.8 108.6 105.6 108.4 97.4 94.8 97.4 95.01975 . . . 25.553 103.6 103.9 114.7 102.2 112.8 99.7 90.3 101A 91.81976 . . . 30.223 122.5 120.4 128.0 124.0 131.8 101.7 95.7 98.8 92.91977 . . . 38.277 155.1 146.3 149.8 145.9 149.4 106.0 103.5 106.3 103.8

34.561 140.1 138.0 142.7 139.0 143.7 101.5 98.2 100.8 97.538.744 157.0 147.7 150.6 146.4 151.2 106.3 104.2 107.2 103.8

Q, 39.289 159.2 141.9 149.1 141.8 149.0 112.2 106.8 112.3 106.840.514 164.2 156.8 156.7 153.6 153.4 104.7 104.8 107.0 107.0

j 1978 . . . 43.940 178.1 190.4 176.2 177.4 164.2 93.5 101.1 100.4 108.5QI 40.376 163.6 169.5 162.5 159.9 153.2 96.5 100.7 102.5 106.8

. . . 44.106 178.8 176.8 168.1 169.5 161.2 101.1 106.4 105.5 110.9Q3 . . . 45.430 184.1 193.8 179.4 178.8 165.4 95.0 102.6 103.1 111.3Q4 * . .45.849 184.4 220.1 195.2 198.0 175.6 83.8 94-5 93.1 105.0

Sources: Table 4 and IMF, International Financial Statistics.

Notes: The Index of the real exchange rate has been calculated by adjusting ani index of the nominal exchange rate for changes Inwholesale prices at home and abroad (Variant A) and for changes In production costs and the forelgn wholesale prices (VariantB). Calculatlons for Portugal's main trading partners, covering 6:3.5 percent of Portuguese exports and 70.0 percent of Portu- 0guese imports in 1973 (The United States, Japan, Belgium t rance, Germany, Italy, Netherlands, Sweden, Swltzerland, United >Kingdom and Spain) have been made by weighting with the sum of exports and Imports combined In the year 1973. 0

SESSAO N., 9

Table 6: Portugal, Greece and Spain, Manufacttring Exports: 1973-77(in t1lousand US$)

lortug,al Greeee Spain

Developed Countries, Total 1973 1 019,.14 122,516 2,211,7311974 1,2S2,72.1 6,Z..O.54 3,2M2,0601975 1.126,i36 ': 1 t; .-3,348,4601976 1.'.1,319 '768,959 3,875,3581,77 1,130,880 S :,so2;143

EEC 1973 60Q1,390( i37,i'1w I 1,287,1061974 7LI.3S7 -0A5,747 1,819 ,741.19g75 t6 ', *!04 4142,992 2,010,4461976 629,328 626,386 2.4-% 2171977 707,866 6-11,194 3.0o95, 91A6

EFTA 1073 2231,682 36,831 242,5261974 289.2._1 50,122 ::I ,9611975 258,2777 46,437 :M59, 031976 26I7, ,89 39,276; 42,7 I1977 2(;6,7R1 3?3,386 4'65,298

Other Eturope 19'13 26,352 35,'952 S6.8A21974 34t,171: 95,165 161,3!6197,5 40,212 . '12 145.-1517l6 29, 023 2j,966 1 G2,8521977 :1,603 :1I, I S) 132.3M),

North Arrerica li73 1 18,917 59, 3 1 Z3 ,4291974 177,9I 0 67,791 656,7091375 lts,6l1( 5:;,35 7 t;6, 31 r)1976 hi,737 66,60-1 723, 7971 977 98,22- 6.1,148 767,775

Other Developed CouLntries 1973 24,14 3,985 K,2881r974 39,837 11,529 1-19, 7961975 27,303 7,578 14, &911976 2:3,442 6,727i 121,7611977 23,401 7.643 13U.778

Developing Couintries. other than Portugal's former 19I73 50, 289 S9,58;J 880,407colonies 11)74 Iltr732.5 228,533 1,194,653

19757 5,22 312,024 1.R25,58S197,; 7. ,9;1, 399,301 1,915,6S91977 90,646 458,048 2,392,813

Centrally Planned Economies and Others 1973 7,256 2'i,020 77,8361974 12,437 45,974 134,1181975 16,896 6:1,645 1 95,-12S1976 32,1S 59,939 247,5911977 50,91 I 81,971 218,000

World Total, excluding the former Portisguese co- 1973 1.077,045 537,121 3,199,974oGles 1974 1,102 -1Sl; 904,861 4,581,422

1975 1,238.75-1 1,002,985, 5,372,1731976 1130,71-I 1,282'199 ti, 6 I I197 1,271,717 1.34i.3S5 7.202.1i2

Portuguese Colonies 1973 201,241 (a (a1974 189,096 (a 'a1975 116,787 (t (a1976 67,22f (El (a1977 113,286 (a (n

Source: United Nations, C'omminodity Trade Statistics.

Note: (a Negligible.

672

Table 7: Ratlo of Prices in Portugal to Indicative Prices in the EEC for MajorAgricultural Products

'Wheat Barley Maize WMlk Beef (a Veal (a Pork (b) |Olve Oil Wine Wine

1972-73 . , 1.10 .82 .91 1.16 .99 .96 1.06 .63 1.32 1.39b 1973-74 . . 1.04 .95 .92 1.10 .96 .93 1.16 .74 1.22 1.25

I 1974-75. . 1.04 .99 1.19 1.10 .94 .93 1.07 1.03 .80 .741975-76. . 1.00 .84 1.19 1.23 .85 .86 1.35 .83 .94 .94

,1976-77.. .77 .72 .91 1.06 .82 .81 - - - -

Source: Instituto Financeiro de Apoio ao Desenvolvimento da Agricultura e Pescas, .AnIlise das ConsequCncias. Resultantes da AplicaChode Prewos Comunitarios a ProduCAo Agrlcola Naclonalh Lisbon, February 19Y7 (mimeo).

Notes: a) Orientation price.b) Base price.

U2

2

to

SESSAO N.° 9

Table 8: Ratio of Price,i in Portugal to Producer Prices in the Principal AgriculturalProducing Countries in the European Conunon Market for Major Agricultuiral ProdTcts

Countrn' of Cor p:r Isoni 1972/73 I-.374 1974 '75 19,s!7G 1976/7 1977 78

Wheat |France . . 1.24 1.35 1.23 1.19 .88Italy . . . . 1.18 .97 1.09 1.05 .63UJnited Kingdom 1.80 1.09 1.34 1.40 .90'reland . . . . 1.78 1.15 1.61 1.34 .96

BarljijFrance . . . . .93 1.2.5 1.06 .97 .77Italy . . . , .94 1.00 .94 .95 .76United Kingdom 1.36 1.01 1.15 1.08 .78Ireland . . . 1.45 1.16 1.33 1.16 .89

OatsFrance . . . . .97 1.10 .98 .90 .65Italy . . . . .83 .88 .81 .86 .68United Kingdom 1.25 .99 1.04 .99 .72Ireland . . 1.19 1.14 1.24 1.20 .87

Maize IFrance . . . . 1.03 1.11 1.17 1.33 1.01Italy . . . .* .97 1.05 1.18 1.39 1.02

RiceFrance . . . . .89 .59 .63 .93 .65 .63Italy . . . . .93 .73 .83 .88 .71 .58

MilkFrance . . . . 1.22 1.23 1.41 1.42 1.44Italy . . . . 1.33 1.09 1.05 1.16 1.18United Kingdoml 1,77 1.56 1.59 1.59 1.61

BeefFrance . . . . .88 .93 1.14 .94 1.16 1.13Italy . . .79 .80 .91 .78 .95 1.21United Kingdom 1.51 1.29 1.65 1.58 1.67 1.36Ireland . . . . 1.59 1.35 1.85 1.55 1.60 1.51

VealFrance . . . . .65 .66 .89 ,75 .83 .85Italy . . . .74 . .74 .92 .75 .88 .97United Kingdom .86 .72 .95 .87 .82 .99Ireland 1.32 1.11 1.45 1.53 1.04 1.33

Soouree: Instituto Finaneeiro de Apoio ao Desenvolvimento da Agricultura e Pescas, Andlisedas Coxisequ6ncias Resultantes da AplicaC'ao de Preqws CumunlLfirios a PrudriCao AgricolaNacionah Lisbon, February 1979 (mimeo).

674

SESSAO N.' 9

References

BALASSA, BELA, «Planning and Programming in. the European Common Market»,EPuropean EconOn4vic Review, Decemnber, 1973, pp. 217-33.

-, <Industrial and Trade Policy in Portugal», Confer(9ncia intertad1nal sobre Econio-inia Portuguesa, Lisbon, 1977, Vol. 1, pp. 225-52.

-, «Proposals for Economic Planning in Portugal», Eco-iomnia, January, 1978,pp. 117-24.

-- t «A 'Stages' Approach to Comparative Advantage>, to appear in the Proceedingsof the 5th <i orld Congress of the International Economic Association held inTokyo in 1977, London, Macmillan, 1979,

BARBOSA, MANUEL P. and LUIS MIGUEL P. BELEZA, <<External Disequilibriumin Portugal: 1975-78>, paper prepared for the lEnd International Conference onPortuguese Economy, Lisbon, September. 1979.

DONGES, JUERGEN B. and KLAUS-WERN13R SCHATZ, <«Growth and Trade Aspectsof the Proposed Enlargement of the European Community>>, Kie7er Arbeitspapiere,No. 79, October 1978.

EUROPEAN COMMUNITIES, COMMISSION, «Opinion on Portuguese Applicationfor Membership>), Bulletin of the European Communities, Supplement- 5/78 (Citedas 1978a).

-, Economic anud Sectoral Aspects; Comnmission Analyses Supplementintg its View.on Enkargementt, COM (78) 200 final, Brussels, 1978 (Cited as 1978b).

FRY, MAXWELL, J., «:Money, Interest and Growth»>, paper prepared for the lIndInternational Conference on the Portuguese EoDnomy, Lisbon, September 1979.

HEADY, EARL O., <<An A:nalysis of Agricultural Development and Agrarian ReformPossibilities in Portugal>>, Lisbon, 1979 (mimeo).

HIUNT, R. D., «Fruit and Vegetable Exports from the Mediterranean Area to the EEC»,World Bank Staff Working Paper, No. 321, March 1979.

INSTITUTO FINANCEIRO DE APOIO AO DESENVOLVIMENTO DA AGRICUL-TURA E PESCAS, <<An.lise. das Consequencias Resultantes da Aplicaacdo dePregos ComunitArios a Produq&o Agrieola Nacional>, Lisbon, February 1979(mimeo).

KIM, HYUNG M., <<Agricultural Prices and Subsidies - Portugal Case Study:>,Washington, D. C. World Bank, 1978 (mimeio).

OECD, Portugal, Paris, Organization for Economic Cooperation and Development,July 1979.

PINTADO, V. XAVIER, <«Portugal: A Suggested Model for Industrial Development»,EF-TA Bulletin, January 1979, pp. 12-16.

WORLD BANK, Portugal: Current and Prowpective Ecoiion0 ic Tren?ds, Washington,D. C., November 1978 (Cited as 1978a).

WORLD BANK, Portugal: Agr(ii7tural Sector Sitrury, Washington, D. C., November1978 (Cited as 1978b),

675

SESSAO N., 9

ResIunIo

Nesta comunicagdo fazem-se recomendag6es quanto 4 tomadta demedidas de ordem politica stsceptiveis de preparar Portugal para a squaentrada no Mercado Comum. As recomendap6es tem por objectivo aumen-tar a eficiencia na, agricultura e nta ind"stria, fomentar o investimnentoe a poupanga e melhorar a afectapao do investimento. A sua implemen-tagdo teria tamb6n efeitos ben6ficos sobre o emprego.

Na agricultura existe a necessidade de uma estrat6gia cc-rente dedesenvolvimento. Os elementos de uma tal estrat6gia incluem a reformado sisteoma de subsidianmento de prepos e de subsidios a agricultura, aregularizaqdo das condig6oes de detenQdo da propri,edade, o fomento dacriagdo de propriedades aqricolas com dimensoes eficientes, o aumentodos investimentos agricola t, o aperfeigoamento das facilidades de cr6dito,o desenvolvimento da investiga~gao agricola e dos servigos de extensdorural e a realiza~io de vdrias accoes suplementares com vista 4 moder-nizagao agricola.

Na ind'gstria tran4formadora os investimentos ptTblicos deviam sersubmetidos 4 avaliagdo econ6micct dos projectos realizada em termos dospregos internacionaci de mercado. Isto 6 particularmente importante parao complexo de Sines, cuja efici6ncia econ6mica temr sido posta em ques-tdo. Al6m disso, existe a necessidade de trantsformar as empresas puibli-cas do sector transformador em unidades auto-geridas de forma a qoefuncionoem na base dos principios de mercado.

i, de esperar que a rigorosa avaliaacdo dos projectos determine 7-edu-poes na dimensdo do programa de investimentos puiblicos, logo libertandorecursos para o sector privado, que promete rendimentos mais elevadose a criagdo de mais emprego. Simultaneamente, deveria garantir-se queas empresas publicas e privadas recebam igual tratamento no respeitante4 concessdo de cr6dito, tributagdo e segutranga social. Existe tambd?n anecessidade de liberalizar nais a legislagdo sobre despedimentos, de aumen-tar os diferenciais salariais de acordo com as aptid5oes o de reduzir aselevadas taxas marginais de tributcazo.

Para o 6mito na participagdo da induhstria portutguesa no MercadoComnum Europeu seria tambem necessdrio encorajar a coicc7trai-gio pelorecurso a medidas de cr6dito e fiscais. Al6m disso, seria desejdvel limitara interferencia do governo nas decisoes sobre negc7ios. Deveria antesconfiar-se no sistemra de incentivos para garantir que as decisoes privadassejarn conformes com o interesse publico. Isto teria como resultado a

676

SESSAO N., 9

redu.go das d,isparidades nos direitos aduaneiros e o aumento dos incen-tivos ds exportag5es.

Pode tomar-se uma variedade de medidas para aumentar a taxa deinvestimento e melhorar a sua afectag4o. Al6m de reduzirem os existen-tes desincentivos ao investim,ento, tanto as empresas estrangeiras comoas empresas privadas necessitariam de incentivos positivos sob a formade iseng5es fiscais e creditos preferenciais. Por seu turno, a sutbicla. dastazas de juro reais e o aperfeicoamento do funcionamento dos mercadosfinanceiros incentivaria as poupan,as internas e reduziria os incentivosexistentes para se canalizar as poupangas para o estrangeiro. Taxas dejuro mais elevadas tamb6m desencorajariam os investimentos capital-inten-sivos enquanto que o encargo dos custos dos juros mais elevados podiatser compensado pela redu•4o dos encargos sociais que tamb6m. favoro-ceriam o emprego.

Vdrias das medidas pro post as, icli.clndo as acgoes a serem tomadasna agricultura, a diminui•4o das taxas do imposto sobre o rendimentomarginal, as redug5es nos erc2argos sociais, os subsidios a exportagdo,as isenpoes fiscais para novos investimentos e o tratamento fiscal prefe-rencial da concentragdo industrial representariam um encargo para o orga-mento do Estado. Impostos mais elevados sobre o consumo parecem cons-tituir uma medida apropriada para fornecer o necessdrio financiamento,dado que tais impostos i&o afectam desfavoravelmente a poupant,a. Simul-taneamente, as redug6es no orgamento do investimento pztblico, as dimi-nu'ig6es nos subsidios governamrentais e a redugdo da dimensdo da admi-nistra•4o publica permitiriam a dimrnui!gdo do defice orgamental, reduzindoassim o desaforro do sector pzib7ico.

Acentuando a importdncia do aumento do investimento a custa doconsumo em geral e da redu•4o das despesas improdutivas no sectorptblico em particular, as recomendag6es politicas feitas nesta comunica-•do impoem a adop•4o da segunda de duas alternativas - medidas depolitica restritiva e uma, 6ptica positiva e estimulante .- tomadas em con-sidera•do por Lundberg com vista a estabilizia•4o a curto prazo em Por-tugal (1978, p. 13). Desta forma, as medidas a curto prazo sdo orientadaspara o objectivo, a prazo mais longo, da preparagdo de Portugal para asua participagao no Mercado Comum.

677

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World Bank Document · 2016-07-14 · World Bank Reprint Series: Number 164 Bela Balassa Portugal in Face of the Common Market Reprinted with permission from 2.7 Conferencia International