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.
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