Why is Portugal’s economy so sluggish?

Mom and I enjoyed our recent visit to Portugal. In many ways the lifestyle of people who live in Lisbon is superior to what Americans enjoy. People are out socializing, dining, and dancing until 11:30 pm on weekdays. The weather is certainly a lot nicer than here in Boston. It is much rarer to see people alone than in the U.S.; usually a Lisboan will be in a group of at least 2 or 3.

On the other hand, based on direct observation Portugal seems to be a tough place to earn a living. Unlike in the U.S. or the U.K. where an Uber driver will be a recent immigrant with a tenuous command of both the native language and the skill of driving, our drivers in Portugal were native-born college graduates who spoke English pretty well. Examples:

  • a guy who graduated with a political science degree three years earlier and was unsuccessfully seeking a government job
  • a 27-year-old who’d gone back to school and was living with her parents; she already had a business management degree and a lot of graphic design training
  • a fully trained architect who also had experience teaching AutoCAD to prisoners (!)

On the one hand it seems that there is economic opportunity for people who want to invest a little, e.g., buy a car, and work hard (drive for Uber 10-12 hours per day). One of our drivers was a successful entrepreneur with a fleet of Uber cars and some tuk-tuks. On the other hand, people are often grossly overeducated for the jobs that they have.

What accounts for Portugal doing so badly?

One thing that I noticed was a lack of competence with Internet. The EU (i.e., German taxpayers) funded beautiful roads in the Azores and Madeira as well as a lot of physical infrastructure throughout Portugal. But I think the Portuguese had to fend for themselves with telecommunications. You’d think that they would try to relieve some of the isolation of their island provinces by saturating them with high-speed Internet. However, whenever I tested municipal WiFi the service was absurdly slow, e.g., 30 kbps. Restaurants, museums, and hotels did a little better, but seldom more than 2 mbps (contrast to 50 mbps or more in Scandinavia or Asia) and service was intermittent. LTE phone service was also poor, but I think it might have been due to the Verizon Travel Pass system interacting with foreign towers. It would work pretty well then stop altogether. If I placed the phone into Airplane Mode and then restarted it would work normally again for a while. Our hotel in Lisbon had great WiFi, with speeds measuring 30-50 mbps to local servers, but a FaceTime video chat to the U.S. was not sustainable (satellite Internet on Royal Caribbean actually worked better). I’m wondering if small countries that aren’t great with Internet pay a big economic price. If people are going to be in a geographical fringe area they would at least like to feel that they’re in the center of the Internet.

Maybe it is the tax environment? On the International Tax Competitiveness Index, Portugal ranks near the bottom (#33 out of 35). But how can that be the whole story? France is at the very bottom and they are doing a lot better, I think. Portugal’s labor force participation rate is only 59 percent (Trading Economics) while France is at 72 percent (same source, but maybe a slightly different metric?). The headline unemployment rate is about the same in the two countries.

[The U.S. is also near the bottom for competitiveness, just above Greece, but that might not matter because (1) we’re not part of an EU where someone can easily move a business into a more favorable tax jurisdiction, and (2) our most successful companies don’t bother paying any of these taxes because they have offshore structures (see Apple, for example).]

France has historically had a better education system, but the PISA results for Portugal show that Portugal has recently caught up in the K-12 arena. Maybe the elite French universities are responsible for generating more wealth?

Portugal now has debt that is 130 percent of GDP, a level that, prior to 2008, would have been considered crippling (Estonia is at about 10 percent, for comparison to a country that is at the top for tax competitiveness; New Zealand is at about 25 percent; the U.S. is just over 100 percent).

“Why Portugal could be Europe’s next economic disaster,” 2016:

the socialist minority government that came to power in November 2015 raised the minimum wage, increased the number of public holidays and reversed some key reforms, all which could make it harder for the country to meet its EU fiscal targets.

“The Mystery of Why Portugal Is So Doomed,” Atlantic, 2013:

In 2001, Portugal seemed set to embark on a brave new economic future. The previous quarter-century had seen it move from dictatorship to democracy, from a managed economy to markets — and the results were positively startling. Paul Krugman was among the cadre of MIT grad students advising the newly-free government in the late 1970s… [uh oh!]

Between 2000 and 2012, Portugal’s economy grew less on a per capita basis than the U.S. during the Great Depression or Japan during its lost decade. This wasn’t a case of the bust erasing the boom, because there was no boom.

Portugal has real structural problems (which we’ll get to), but so do Spain and Greece, neither of which slumped before the slump.

Businesses choose to stay small, because it makes sense to just deal with people you personally trust when you can’t reliably appeal to the authorities sans-kickback. Businesses can stay small, because the laws make it hard to get big and achieve economies-of-scale. It’s a mom-and-pop nightmare of low productivity.

And it’s gotten worse since 2008. Not only do small-and-medium-sized enterprises (SMEs) play a, well, outsized role in Portugal’s economy, but now even they are in retreat.

I’m wondering if the EU structure magnifies small differences among countries. By worldwide standards Portugal seems like a pretty good place to run a business, but other countries within the EU are slightly better and so there is a massive talent and capital drain.


9 thoughts on “Why is Portugal’s economy so sluggish?

  1. For a guy with a decent education and a lot of travel behind him, you still don’t know much about the world. Not everyone lives to work.

  2. High debt doesn’t matter as much as long as interest rates are in the basement. We can of course wonder how long that will last.

    Portugal is considered a good place to retire by rich Swedes, because of their low or non-existent taxation of pensions (perhaps just foreign pensions). Somewhat ridiculously, Sweden still demands taxes from those who take their pension savings abroad. It’s like the purpose of retirement savings is to generate revenue for the state rather than provide for the retiree.

    I think the real problem is not tax competitiveness (which I think you can usually handle with a sprinkling of lawyers), but globalization. Instead of having a local cluster for competence in, say, IT, the cluster is formed in another country and attracts talent to there. For IT the cluster even forms outside the EU. Well, we still have some local clusters for various reasons, but they are dominated by the US. Anyway, Portugal should thus find some areas where they can become top dog, or close enough, and nurture the hell out of those.

  3. Portuguese are known for their road builders. Portuguese workers do much of road work in New York. Portuguese companies routinely win large road construction and maintenance contracts abroad, including managing US pay roads

  4. If it’s anything like the rest of Southern Europe then it’s likely to be:
    1) The old are eating the young (not retiring, borrowing and building up debt, only offering short contracts with no benefits to the young to keep costs down). If you are ‘in’ you get all the benefits of employment , eg multiple paid parent leaves of 2+ years each, 30+ days vacation, job protection via unions, etc etc. If you are ‘out’ you get to drive Ubers or be a barista.
    2) The government makes hiring (and firing) people so prohibitively costly that any business that dares to expand hiring can only afford to open one position and screens the candidates like their are applying to be NASA astronauts on a 20 year mission to Mars, unless of course they are a friend/relative of the owner or manager.
    3) Because of 1+2, the smartest ones leave to other countries, leaving behind the mediocre, so productivity is lower as a result (more insular workforce, lack of fresh ideas, etc).

  5. Being a Portuguese who lived several years in the US (but never in Boston), I think I may be qualified to answer some of the questions in this post. First, I’m happy you had a nice time in Portugal and write nicely about the experience. I think some of your findings reflect a superficial view — if you experience the society a little deeper, you’d find things rather different.

    I don’t agree that people in Portugal have a better lifestyle than in the US. True, they are much more likely to be out socialising until late and in larger groups. But I think in general people are less happy and more depressed. The late night eating and drinking is just a social norm that’s been like that for a while (as in e.g. Spain). I think ultimately it is a catholic vs. protestant thing. People in Portugal take a lot more holidays than in the US. August in Lisbon is devoid of locals, whereas August in the US is just like any month. However, Portuguese people work much longer hours on average and are a lot less efficient per hour than their American counterparts. The reason they are unproductive is because they are forced to work longer hours (note: not always counted on paper, but businesses often expect a little extra work at no extra pay). Because of the crisis, purchasing power has gone way down, youth unemployement is still very high, people in late 20s and early 30s still forced to live with parents (as you note). This puts pressure on society, a lot more than currently exists in the US. So people are depressed.

    Why is Portugal doing so badly economically? To put it shortly, because the culture is against entrepreneurship. The roots are probably still from the dictatorship period, where only a few select enterprises had the approval from the state. Failure at entrepreneurship is seen as a very bad thing, and so investors tend to stay out of risky and more lucrative ventures, many times focusing on the short-term profit instead of long term vision. During the 1980s and 1990s Portugal’s industry was based on cheap labour — shoe factories, clothing, etc. When the Eastern block joined the EU, Portugal’s labour was not so cheap anymore, so factories relocated to Poland, Slovakia, etc. (before eventually settling in China). So that industry was gone, and the country never really recovered. Instead, it became almost exclusively a service economy, with people just selling foreign-made goods and services to each other and not really generating wealth. EU membership brought structural funds that were squandered in useless motorways (Portugal must have one of the best motorway network per capita in the whole EU), that while very good to bring trucks with goods from Germany, did not help the industry grow. Also a side-effect from EU membership was the CAP and the destruction of some native cultures like almonds in the Algarve (due to oversupply, the EU paid farmers to rip their mature trees). Farmers took the easy money, squandered it, and didn’t really think about the long term (financial ruin). So the Portuguese history repeats itself: that of one of the worlds largest empires with lots of gold and resources that were never invested in itself but squandered in foreign goods, leading to financial decay.

    Portugal has a great education system and lots of very qualified people, who are now exported for free to support industry in other EU countries.

    Finally, about the internet. I don’t know about hotels or council wifi. But in terms of private offer, in metro areas the internet in Portugal blows away most offerings in the US. To start, there’s real competition (not Comcast/Verizon only serving their own areas), plans for 20-200 Mbits and fibre to the home have been a reality for quite some time now. Still not at Scandinavian/Netherlands scale, but much much better than the US. Wireless coverage is much better than in the US, with many phone data plans inexpensive. Rarely have had any missed calls, and LTE is widespread. Portugal doesn’t have the best internet connections to the US, with most going through the UK or Netherlands. But still, not much reason to complain as far as the main private operators are concerned…

  6. I think a country’s economic competitiveness boils down to having a favorable balance of trade.

    By that I mean, if you produce goods that foreigners want to buy, *and* you can produce them at a profit, then that country’s economy will be in good shape. There will be money for social services, a high standard of living, and so on. Witness Japan, Germany, and Switzerland. Or Norway and Saudi Arabia.

    This assumes the country in question requires imports, and therefore you need to be able to pay for them. I suppose this is not as important if you don’t import anything, but I can’t think of any countries which have virtually no imports. Or if there is, there isn’t much of an economy, anyway.

    Trained economists will scoff at this mercantilist viewpoint, but the economists and government officials in Korea, Japan, Singapore and Taiwan know better. See Lee Kuan Yew’s writings on the subject.

  7. Short answer: Portugal is in the euro zone. If they had their own currency, they could use monetary policy to compensate for productivity issues (like lack of entrepreneurship, say). The central bank would lower interest rates, causing the Portuguese currency to float downward (making exports from Portugal cheaper), and increasing demand for Portuguese labor.

    But because they’re tied to the euro, the only way to bring down Portuguese labor costs is for wages to come down. Which is grindingly slow.

    Other examples of currency rigidity causing high unemployment: East Germany following reunification; Britain in 1992, when it was using a “crawling peg” to try to keep the pound stable against the Deutschmark. In both cases, the problem was that the German central bank was keeping interest rates high, to keep West Germany from overheating; but unemployment was already high in East Germany and the UK, and tight monetary policy made it even higher.

    The Economist, 1998:

    How well the euro-zone functions will depend on how closely it resembles what economists call an “optimal currency area”. If Finland and Portugal, say, are to share a currency, they should not, in an ideal world, be exposed to different sorts of shock. Their business cycles need to be broadly in line, and the structures of their economies alike. And if they are affected differently by an economic shock—if a recession in Latin America hits Portuguese exports more than Finnish ones, say, or if Finnish productivity rises relative to Portugal’s—they need to be capable of speedy adjustment.

    One way to deal with such “asymmetric” shocks is for capital and labour to move out of a depressed region (Portugal, say) and into a flourishing one (Finland). Another is for wages—and thus prices—to fall in Portugal and rise in Finland, boosting the demand for Portuguese products at the expense of Finnish ones.

    … the risk is that some regions may overheat, while others face periods of stagnation.

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