Portugal has changed immensely over the past 30 years. The revolution of 1974, the decolonization, the negotiation and finally accession to the European Union and, most recently, the adoption of the Euro, have profoundly marked the past three decades and changed the entire structure of the country. But the final balance has been positive. Throughout this period, the Portuguese economy has evolved substantially and modernized rapidly. The standard of living, measured as per capita income, has risen by 2 per cent per year, and is converging with the Community average: it now stands at 65% of the average, five points up on 1973. At the same time, social cover has expanded to an extraordinary extend; working hours have fallen, social indicators improve at a steady pace and education rates have risen impressively and are now at European levels.
With time, the economy has become more open to the outside world, and Portuguese entrepreneurs are beginning to invest abroad. The government has raised spending on education and health, with a consequent rise in public consumption in domestic expenditure. At the same time, Portuguese people have begun to adopt new lifestyles more typical of countries with a higher standard of living. The principal «victim» has been the rural world, which has been replaced by a more urban, consumer society. The household savings rate fell by 24% to around 9% of disposable income, and indebtedness has risen substantially, in particular during the past three years. There have also been sweeping changes in the structure of the economy. The share of services has risen, whilst industry, construction, agriculture and fisheries have all lost ground. In employment terms, too, the services sector has grown at the expense of the rest.
Traditional industries are beginning to be replaced by sectors with a higher level of technology, such as transport equipment and machinery, which is now the largest single sector in Portuguese industry.
Portugal's economy successfully adapted to negative impacts such as the two oil crises and the effects of decolonization. This was done without serious falls in living standards or rises in unemployment, although it was real earnings which bore the brunt of the adjustments. It has been far more difficult, on the other hand, to adapt to the current world crisis. At the same time, it is important to stress that the process of reducing inflation, needed to join the single currency, met all its aims. Joining the European Community was a success, and the country was able to benefit well from Community funds, in particular as regards infrastructures. This was notably the case with highway construction, which made for substantial cuts in road transport times, contributing to improved communications between regions and lower transport costs.
However, the great changes in Portuguese society also brought major imbalances and further widened the gap between the younger generations, with a high level of education and easy access to computing, and the older generations with low levels of education and a still high rate of illiteracy. Another divide which has deepened over the years is that between the coastal regions - principally the metropolitan areas - and inland areas of Portugal, which are in economic and demographic decline. Neither the new highways, nor the generally dynamic democratic local government, established since the 25 April 1974 revolution, have been sufficient to counter this process. Agriculture, forestry and fisheries continue to show low levels of productivity yet still employ 11.6% of the total labour force. With a relatively elderly workforce whose level of education is below the national average, it will be hard to shift these workers to any other sector of activity, and this represents a serious social problem.
The gap between Portugal's productivity and the Community average remains wide. Despite the substantial investments in physical and human capital, Portuguese productivity growth has been weak and as a result external competitiveness is low.
Finally, Portugal's traditional trade deficit has worsened over recent years, although 2006 saw a recovery with a substantial rise in exports. However, the profile of exports - mostly to the rest of the EU - has changed significantly over recent years, with an increase in the weight of sectors such as machinery and vehicles, and a decline in the more traditional sectors such as clothing and footwear, which has fallen from 30% to 13% of total exports over the past 15 years.
In services, tourism accounts for around 5% of GDP and is a dynamic component of exports. Together, tourism and the travel sector bring in a net contribution to the current balance of around 2.7% of GDP.
The other external sources financing the deficit on the current external balance over this period « migrants» remittances and community funds ?are becoming less significant in terms of the economy as a whole.
As in other EU Member States, Portuguese society is ageing rapidly. The percentage of the population aged over 65 has doubled in the last 30 years, and this is putting great pressure on the social security system. Measures have recently been adopted which will ensure the sustainability of the system for some decades, but the ageing of the population remains a serious challenge to the Portuguese economy, principally because it overlaps the problems of competitiveness mentioned earlier.
In this context, the main factors are the deregulation of world trade, the fact that Portugal does not have its own macroeconomic policy, the lesser weight of the traditional sources covering the trade deficit (remittances and structural funds), and the polarizing effects of European integration, strengthening the centre at the expense of the peripheral regions.
Even so, the Portuguese economy has shown an impressive ability to surmount the difficult challenges it has had to face over the past 30 years. This gives good reason to believe that it will be equally capable of doing so with these new challenges.
Source: «Retrato de Portugal», adapted text from "A Economia", by João Ferreira do Amaral
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