Blog dedicado ao livro A. Mateus, Economia Portuguesa, Editora Principia.

Categoria: English


greek-islands.jpgAt the close of the global financial crises, Greece, Ireland and Portugal, and later Spain, experienced severe economic and financial crises. This paper compares the adjustment programs undertaken by the four countries. The sudden-stop of capital flows led to substantial official assistance by the EU, ECB and IMF estimated at 1.4 Trillion Euros which demonstrated the solidarity among EU countries. The crises established other records: Ireland had one of the costliest banking crises and Greece a depression. We will discuss which factors – program design, structure of the economy, institutional and political capabilities and Government implementation capacity – contributed to the success of Ireland and the difficulties of Greece, with intermediate cases like Portugal and Spain. Contrary to a number of economists, the adjustment programs in these countries were largely in accordance with previous programs or with overall IMF experience, except for Greece. We discuss why this was a special case and the factors that contributed to the failure of the previous two adjustment programs. The lessons drawn for the future are in sharp contrast with most “official” reports, by emphasizing the role of “common factors” versus idiosyncratic factors in the Euro zone, problems caused by procrastination in adopting the programs, lack of program ownership, the difficulties of simultaneous contractionary policies of the core, the importance of expectations formation and the role of targeted credit policies. We also criticize the lack of substantive supply policies, like innovation and resource switching policies that could have speeded-up adjustment and mitigated the impact on potential growth.

Presentation to the DUBLIN CONFERENCE ON ECONOMIC POLICY (17.10.2015)

AM-Euro adjust programs – large

AM-Euro adjust programs – large



Statistical Annex

Statistical Annex B




Innovation, considering the process of accumulation of intangible capital in a society, contributes with 20 to 30% to productivity growth in developed economies. Several European countries, including Portugal, have made a large effort in increasing its effort of State R&D. However, not only it only represents about 12% of the innovation effort, but its efficiency has been low. There is a need to increase the capability of the universities and large state laboratories to link with enterprises and increase the rate of patenting and creation of better products and markets and improve organizations. Based on an extensive array of best-practices around the world, the paper identifies a large spectrum of policies required to modernize universities, revitalize state laboratories and mainly launch a set of initiatives to increase innovation at enterprise level. This comprises building a decentralized network of design and technological centers closely linked to industry and services clusters, revitalizing cities and technological parks with incubators and financing of venture capital and start-ups. We identify a major role for multinationals in the process of upgrading to high-tech exports and inserting the country into the value-chains of global trade and ideas.Innovation Policies

Politicas de Estimulo da Oferta para Acelerar Potencial de Crescimento

Supply-side Policies for Increasing Growth Intervenção no Conselho da Industria Factory Merkel

Portugal está a sair do Programa de Ajustamento pelo que é fundamental reorientar a visão da Politica Economica de uma optica de curto para o longo prazo. Acabou a possibilidade de estimular apenas a Procura devido aos nossos elevados níveis de endividamento. A procura será estimulada pelo aumento da produção e criação de rendimento.

Por isso, é necessário que as políticas se virem para o estimulo à Oferta e crescimento da Produtividade Total dos Fatores. Entre os Países Desenvolvidos o fator Inovação contribui com cerca de um terço para o crescimento do PIB. Mas a política de Inovação não se reduz a financiar o I&D, mas é uma política mais vasta virada para a acumulação do “capital intangível” das empresas. Em Portugal o Estado já financia o I&D a níveis comparáveis à média europeia e temos um numero de investigadores per capita razoável, o problema é que temos o I&D mais ineficiente da Europa, se olharmos para os resultados na produtividade. É necessário uma nova estratégia de Inovação orientada para o desenvolvimento tecnológico a nível empresarial, maior entrosamento entre Universidades-Laboratórios e Empresas. É necessário criar centros de excelência de tecnologia e design a nível setorial-regional. Temos que reorientar os recursos do ensino superior para melhorar a sua performance e para darem uma resposta mais eficaz às necessidades da sociedade e economia. Temos que melhorar e estender o ensino dual e a aprendizagem.

Aqui ficam dois documentos sobre o tema. A nossa intervenção no Conselho da Industria de 2 de Fevereiro de 2015 e a apresentação de slides que a acompanha.Intervenção no Conselho da IndustriaSupply-side Policies for Increasing Growth

Deleveraging in a small economy of the euro



Deleveraging is essential for restoring financial sustainability and avoid recurring financial crisis. After one of the highest credit booms, Portugal as all Euro crisis countries is experiencing a substantial deleveraging of all economic agents, which limits GDP growth potential. The process only started in 2012 for enterprises and intensified for households, but is expected to be initiated in 2015 for the Public Sector. According to our estimates, in a base scenario, it will take up to 2030 for the economy to return to sustainable leverage ratios. In this scenario, enterprises will have to make most of the deleveraging until around 2020, while the public sector will take longer, with households already well in the way for stabilizing the debt ratios. The total debt ratio will have to be cut by 80 pp over 15 years, approaching the 2007 level. In a more stringent scenario, the overall debt over GDP will have to be cut by 130 pp, about the level of 2003, pre-crisis. Both these scenarios will impose a strong restriction on the expansion of the economy, which is expected to grow below its long-term historical path, and will require a major adjustment in corporate finance policies. We show that this challenge is of a heightened intensity than for the public sector. Finally, the paper summarizes policies can play a role in the deleveraging process.

FED supported much more massively banks than the Eurosystem and Bernanke on low interest rates

Bernanke has started a new blog at Brookings Institution that can be accessed here

It is interesting the way that Bernanke justifies the policy of the FED (similar to the ECB and BoE) by reference to the “equilibrium interest rate”, a concept introduced by Wicksell at end of 19th century. Basically he argues that real interest rates need to be kept low to lift economies out of recession, over the medium term. What Bernanke has not yet answered is why long-term real interest rates have decreased since 1981: but he promises to do it in an upcoming blog.

In the Euro area short-term real interest rates were close to zero before the global financial crisis, increased to 1-2% during 2007 to 2009 and turned negative in the Euro crisis: -1% on average. Now they are again close to zero. The QE responds in large part to the preoccupation that deflation was increasing the real rates since mid-2013, as the figure attached shows Euro-interest rates.

But what Bernanke fails to show is the the dramatic increase in the FED interventions to support both the banks and US fiscal policy. This was unprecedented by any account.

Although interest rates are the transmission mechanism from monetary markets to the real sector, it is interesting also to measure the amounts of intervention of Central Banks.This analysis is rarely conducted by both Central Banks.

The attached file compares the balance sheets of the FED and the Eurosystem (ECB plus all Euro area Central Banks) FED and EUROSYSTEM INTERVENTIONS.To compare both systems we normalize by GDP.

Some pointers:

1- Interventions in money markets by the FED were much higher than the Eurosystem: the stock of Treasury securities and Asset Backed Securities was 24% of US GDP at end of 2014 compared with only 5% of the Eurozone.

2-Only in 2012, at the height of the Euro crisis the Eurosystem had an intervention close to the FED (10.5 against 17.1%).

3- The Quantitative Easing (Asset Purchasing Program) of 60 Billion Euros, to be implemented until September 2016, introduced by the ECB in March 2015, is just a drop in the ocean compared with the QE of the FED – it will increase holdings of Government securities to around 7% of GDP while the FED has holdings of 14%..

3-The balance sheet of the Eurosystem shows a much larger stock of gold and foreign reserves than the FED continuing to show the dominance of the Dollar as world currency.

In conclusion, the FED will have a much more difficult problem in winning out the US banks and Government than Euro zone countries.




Portugal had the largest increase in graduation rates at doctoral level among OECD countries in the last two decades, THE EXPLOSION OF DOCTORAL DEGREES IN PORTUGAL, and reached a position among the top rates in the last 4 years. This is odd when viewed in the context of most human resource and development indicators. This “inflation” of degrees was observed mainly in diplomas granted domestically, which represent about 90% of total, but also in degrees of Spanish universities. When decomposed by field of knowledge, there was a large decrease in the Exact and Natural Sciences and an increase in Humanities. The share of foreign graduates dropped significantly, which in part limits the improvement in the competence of faculties. Moreover, the number of Science and Technology and Economics and Management degrees given by foreign universities, which are crucial to increase the technological capabilities of the economy, has not increased in the last four decades. We identify some distortions in educational policies, make some brief recommendations and need of further research.

The Slump and Crash of the Portuguese Economy

This is a study on the origins of the crisis of the Portuguese economy by Ricardo Reis of Columbia University worth reading, published in March 2013. Reis-Slump-Crash

Reis explains the slump in the Portuguese economy from 2000 to 2007 as a result of two shocks: (i) large capital inflows that followed the entry of Portugal into the Euro zone with the “underdeveloped” financial markets of the Portuguese economy, and (ii) the increase in taxes due to past commitments to old-age pensioners. He dismisses three other causes sometimes given for the slump: (a) trade shocks associated with the expansion of China, (b) discretionary state spending in goods and services, and (iii) labor market rigidity.

In our view, there was a boom after the entry of Portugal to the EU with large capital inflows that fuelled housing and general credit boom starting with the accession to the EU (1986), and ending in 2000. A model that captures the boom was built by Fagan and Gaspar (see footnote 2). The boom was also fed by large expenditures taken or sponsored by the state. All indebtedness levels increased dramatically in 1986-2000. The stop of the real estate boom and the high level of household level led to a stagnation in consumption and house investment after 2000. The slump was seriously aggravated by a massive misallocation in the continuing capital inflows channeled to nontrabales with low productivity (construction of infrastructure and other state sponsored expenditures as well as retail and wholesale trade). Why? The main reason was that they were sheltered from international competition, regulated with secured high margins or the loans were guaranteed by the state (zero weight in the solvability ratio of banks). The sudden stop that started with Greece and then extended to Ireland and Portugal was a result of the heightened awareness by investors of the levels of indebtedness in these economies and the threat that they would not be able to pay their debts.

Our main criticism of the paper is that the periodization that Reis adopts is arbitrary, and to better comprehend what really happened in the country we should extend the analysis at least to the 1990s. In this case, the traditional model of boom and slump of large capital inflows explains most of the facts. Presenting rates of change of several indicators starting in 2000 without a judgment about its levels can lead to erroneous interpretations.

Another common mistake is to say that there was no housing boom in Portugal. Using AMECO data, Spain had a boom in 1999 to 2008 with the accumulated investment in dwellings over GDP of 77%, Ireland had a boom in 1998 to 2008 with 113%, and Portugal had a boom in 1987 to 1999 with 89%. In all cases the investment ratio collapsed after the boom to levels below the pre-boom numbers. Most commentators use house prices to document the cycle, but there are no reliable price statistics to follow these phenomena, at least for Portugal. When the house construction boom stopped in Portugal there were about 400 thousand houses unoccupied (for a 10 million population).

Reis builds a model with two sectors: tradables and nontradables. Credit is allocated to the nontradables sector through the banking sector that collects funds domestically and abroad and allocates them subject to collateral constraints, typical of a financial frictions model. Because capital is misallocated and taxes increase, the exchange rate appreciates and the nontradables sector expands with the economy slumping. Otherwise there would be a boom like in Ireland and Italy.

Capital inflows resulted from the reduction in the risk premium to the economy. The large inflows from North to South Europe (plus Ireland) were a Euro phenomenon, not specific to Portugal. The differentiation of risk across Euro countries is yet not well understood. A number of policy makers from these countries continue to insist that interest rates for all Euro countries should be the same (common currency area). If short term interest rates in money markets should be similar, credit rates should reflect the risk and liquidity associated with each debtor. Thus, a government bond of a high debt state should have a higher risk premium. The inverse that prevailed from around 1997 to 2008 is abnormal.

The author proposes some evidence, based on TFP estimates of the KLEMS data base, that there was misallocation of resources because the sectors that expanded (community services, real estate and wholesale and retail trade) had the largest decrease in TFP and rising markups. But all sectors show a decrease in TFP: the misallocation was more widespread. E.g. the high rents in energy and telecommunications was documented by the Portuguese Competition Authority. Our book “Economia Portuguesa” gives evidence of the extremely low rates of return of the PPPs.

Both in Greece (with the Olympics of 2004)[1] and Portugal (with the World Expo of 1998 and Euro soccer championship of 2004) there were also large public expenditures with evidence of high costs and low returns. See “Economia Portuguesa” (chapter 11) for evidence.

The role attributed to tax increase seems overplayed since the ratio of taxes over GDP only increased by 1.7% in 2000-2007. It also looks overplayed the increase in 3.3% of the pensions of old-age. More important was the increase in discretionary spending through the public enterprises and infrastructure construction (Mateus A., Boom and a Long Slump in a Small Economy of the Euro Zone: the Portuguese case, 2012[2]). The author refers “en passant” the role of PPPs saying that the impact on public debt will come in the future. But here we study real economy impacts (not financial flows) and the impact of these investments was high. The numbers in this table are difficult to ignore (from Mateus above):

Table 4: Total Public Investment (GFCF in percent GDP)

  1985 1990 1995 2000 2005 2008
In the budget 2.5 3.0 3.8 3.8 3.3 2.2
PPPs 0.0 0.0 1.2 3.5 7.0 12.6
   Total 2.5 3.0 5.0 7.3 10.3 14.8

Source: INE, National Accounts and author’s estimates

On labor market rigidity the author argues that the marginal worker affected by the slump is a fixed-term contract which is quite flexible. According to Reis, the permanent contracts of the average worker are substantially rigid but they contribute to the (level!) of low productivity of labor force in the country. However, the contribution of this factor vis-à-vis others like the low level of human capital needs to be investigated.

The literature on sudden stops of capital inflows explain a boom in consumption followed by a crash, but the country did not have a consumption boom in the 2000-2007 period. AS we documented above, both levels of consumption and construction in housing (particularly stock of houses) were quite high in the starting year, thus, the increases afterwards were modest. From 1986 (date of entry to the EU) to 2000 private consumption increased at an average annual rate of 7% compared with 1.4% in the 2001-2007 period. Similarly, public consumption also increased much faster in that period (4.3% against 1.4% in the 2001-2007). The large investment in housing was fuelled by the large increase in household indebtedness (debt over disposable income increased 4.2 times to 77%, and further to 114% in 2010).[3] In fact, it was common for Central Bank and governments of the late 1990s up to the crisis to dismiss the existence of any disequilibria saying that that indebtedness had a counterbalance in the raising assets of households and that external deficits did not matter in the context of the Euro area. We think that a better story is the traditional boom slump model, with a long delayed bust (should the sudden stop not have happened already at the beginning of the 21st century?) and the sudden stop was delayed to after the global crisis of 2007-2009, like in the other Euro crisis countries.

There are systemic and idiosyncratic factors for the Euro and Portuguese crisis. Reis models some specific factors that contributed to the slump. It is particularly interesting in Reis model that the low net worth of Portuguese firms deepened the slump. Similarly, it would be an increase in net worth that would lead the country out of the crisis. The same would need to happen in the household sector. The problem is how net worth will increase since it is clearly an endogenous variable.

The existence of a large mass of inefficient firms in operation in all sectors of the economy and the financial constraint on other small and medium enterprises that operate below the optimal scale because of lack of collateral for borrowing is attributed to underdeveloped capital markets. These characteristics of the Portuguese statistical distributions of enterprises are well known, but we think that the reasons for these distributions are also due to lack of labor and capital mobility, as well as typical family enterprises in developing economies. We also think that bureaucratic, regulatory and fiscal factors (a la Sotto) linked with informality are crucial to explain those distributions.

Is the credit channel to SMEs really that important to explain the slump? Let us look at the distribution of loans by use. Comparing credit allocation by sectors in 2007 compared with 2000 there was a 10 pp increase in the share of construction and real estate, and 6 pp in manufacturing and 4 pp in trade. It confirms the movement away from tradables, but not for the expanding sectors he identifies. Those movements were even more pronounced if we compare 2010 with 1987 with a decrease of 28 pp in manufacturing and increase of 21 pp in construction and real estate, which is consistent with the housing boom of 1987-2000 magnified with the infrastructure and other public sector expansion in the same period and intensified in 2000-2010.

According to Reis the crux of the matter was that the massive capital inflows in the Euro area were intermediated by the banking sector into inefficient firms in the nontradable sector. But there is even no increase in output and employment in nontradables because the raise in taxes leads to a fall in supply of labor. Is most of the increased in unemployment due to the destruction of firms lacking demand/credit/competitiveness or because workers do not want to work as hard (the supply side effect)? The author distinguishes the Portuguese economy from Greece, Spain and Ireland stating that it has a more undeveloped capital market, an assumption which we question. First, Greece never had an intermediation level similar to Portugal, and Spain had a similar financial system. The Irish market is clearly more developed due to the influence of the City of London and the large presence of multinationals, but instead of searching for some structural factors it can be simply argued that the housing boom was a decade later in the cases of Spain and Ireland, relative to Portugal, and that the expansion of the state sector as well as the state sponsored projects were larger in the case of Greece and Portugal. Moreover, there were also large capital inflows in the 1990s to Portugal, if the same structural characteristics prevailed in the economy, why there was a boom and not a slump?

This is an interesting work that represents a serious work for rationalizing the slump of the Portuguese economy and worth studying in detail. It makes a contribution to the study of capital market imperfections and its macroeconomic impact. But we think that the origins of the crisis in Southern states should be searched in political economy, combined with risk misperception factors that are common to a number of financial crisis (not alone the 2007 global crisis).

Two external factors

Portugal entered the Euro with the first group of countries – the founding members. The exchange rate had been almost fixed since 1994, but the irrevocable rates were determined in about one year previous to the start, although the last rates (rounded to the last digit) were determined in the eve of January 1st, 1999. These were the years of the peak of the credit and investment boom, culminating in the Expo of 1998. The last priority of the government was to question the exchange rate of entry, although this was a major decision for the country. But there were two clear signs of overvaluation. The first was the climb in unit labor costs since the late 1980s, the second was the increasing current account deficit.[4] According to our estimates we entered with about a 10-15% overvaluation.[5] This was very serious because it was a once for all effect. Reis dismisses this factor in the slump of the first decade of the 21st century, saying that the economy would have adjusted. However, it is not quite that easy. It is right if we have a fully flexible model with rational expectations. However, there are important rigidities in the product and labor markets well known by economists that will make the adjustment long and generates significant unemployment in the medium term. This adjustment was delayed because of the discretionary investment and current expenditures sponsored or undertaken by the state, plus the continuing capital inflows. Just to refer one rigidity: the collective bargaining of wages that take place still nowadays in large sectors, with a zero bound nominal wage change. Since inflation rates were quite low, it was difficult for real wages to adjust. It is interesting that there were other mechanism at work to adjust the labor market. In the 1990s there was a large influx of illegal emigrants from Eastern Europe (mainly Ukraine and Moldova), and also from Portuguese speaking Africa, probably in the order of tens of thousands, a large part to the construction sector. These flows reverse themselves in 2000-2010 period as labor market conditions deteriorated relative to the originating economies.

Another important factor was the enlargement of the EU to Eastern Europe that coincided with globalization, rise of China in world markets and liberalization of trade in textiles. Reis also dismisses this factor because it affected also other countries that did not have the slump. However, if we believe that there are rigidities in capital and labor markets, capital is immobile in the short to medium term, and it takes time for labor to readapt its skills, then the shock that started in the 1990s would reverberate throughout the 2000-decade. All estimates done of the impact of the enlargement to the East pointed to Portugal as the country that would lose more (See Economia Portuguesa the chapters on integration and spatial economy). One example was the automobile sector. When Ford-Volkswagen signed the contract for building a factory of Auto-Europa in the late 1980s the plans were to produce 400 thousand vehicles. When it started to operate in the 1990s it never went above 150 thousand. I still remember a conversation with the head of the research of the Central Bank of Austria telling me around 1994 that Auto-Europa would be the last automobile factory built in Portugal. Most of the future investment in this sector would take place in the square of Czech Republic, Slovakia and Hungary because of agglomeration economies, proximity to the German markets and availability of skilled labor at low wages. He was right.

What is the relative contribution of the capital inflows, discretionary spending by the state, overvaluation of exchange rates and value chains in FD? It is difficult to disentangle. That is way we need general equilibrium models, preferably dynamic and with some disaggregation, in the footsteps of Reis contribution.



Abel Mateus

April, 21st, 2014




[1] The Olympic park and staging of the games cost 9 Billion Euros (Bloomberg Business Week, August 2012). A new airport (a PPP with the state and German construction companies) and metro system linking the airport to the city were also built, to a total cost of about 20-30 Billion Euros, equivalent to 10 to 15% of GDP. Greece also carried out a large road construction program: they absorbed about 60% of the structural funds.

[2] Please see some of our papers on the Social Science Research Network (SSRN) at:

[3] A model capturing the boom was built by Fagan and Gaspar, Adjusting to the Euro Area: Some Issues inspired by the Portuguese Experience, European Central Bank, 2005. See our comments on this paper in Economia Portuguesa, pg 382.

[4] The deficit was dismissed as relevant by the authorities because we were in a currency union, (who bothers about the deficit of Texas or Alabama? Was frequently said by the highest officials) and because changes in statistical methodologies obscured the right numbers.

[5] It is difficult to disentangle the impact of the excess credit growth in that number.

Seminar to London Global Banks (October 2013)

This is the Power Point Presentation used in several seminars to London based Global Banks about the recovery of the Portuguese economy.Conj Oct 2013

Reform of the State

One of the main items of the Adjustment Program is the Reform of the State. The IMF has already produced a report on the subject. IMF-Expenditure review And OECD has also contributed to the same theme. OECD – Portugal Reforming State

The reports of IMF and OECD on Structural Reforms of the Public Sector are important pieces for studying the issue with a view to improve efficiency and equity of the expenditure side of the Government budget. These documents complement the Memorandum of the Program. Here are some of the issues covered and comments on these reports.


Comment: Most of the issues of structural reforms had already been addressed in our book Economia Portuguesa, 3rd edition, 2006 and 4th edition, 2013, in the chapter “Convergência Real e Reformas Estruturais”.


The Report of the IMF can be systematized in two areas: general measures/principles and specific measures:


General Measures/Principles


1. On the efficiency of the Portuguese education system, as an example of inefficiency in some public services:


“the state has been falling behind in providing quality education: of the 50 top schools, 44 are private, 4 are charter schools, and only 2 are public schools.” (pg. 13)


What are the fundamental functions of the state? Example for the education sector:


“the Portuguese state still attempts to do (almost) everything: it provides education, sets standards, evaluates (its own) performance, and enforces standards”, while “In many countries, the state has moved away from being a provider of services (or the sole provider of services) and toward being a setter and enforcer of service standards, while service provision itself is [may be] handled by the private sector”. (pg. 13)

Comment: We would add that the state does not need to be the sole provider of public goods, but it should ensure and efficient and equitable provision of public goods. On the functions is important to emphasize that they need to be entrusted to different institutions: a provider of a service cannot at the same time be a regulator (set standards and enforce those standards).


2. “Public sector pay and employment policies need to emphasize competitiveness and providing value for money to the population” (pg 13)


Comment: this requires that remuneration combined with other employment benefits should be in line and competitive with the private sector. But any comparison needs to be done by matching job to job in the different departments of the public sector with the private sector. This is a result of detailed job comparison survey. Some of the work that has been done on aggregates is misleading (by the ECB and others).


A recent study by the European Commission, Government Wages and Labour Market Outcomes, Occasional Paper 190, April 2014, shows that Portugal had in 2010 one of the highest wage premiums in the public sector vis-à-vis the private sector, but it differed substantially with the level of education (and wage scale): it was 18.6% for low level, 8.2% for medium and only 4.5% for high level. With the 5% wage cut and suspension of one month-subsidy there was a cut of 14%, which turned the premium in favour of the private sector for the medium and high level. The trade-off between concerns for equity and efficiency led to the postponement of adjustment in the low level of education. Another interesting conclusion from the study is tha Portugal was one of the countries were a 1% increase in government wages led to a high response from the private wages (1.6 impulse, with Italy the only case with a higher response). The moderation of wages by the public sector is fundamental to maintain competitiveness in the tradables sector, as the study demonstrate.


3. Need to look at the systemic impact of policies and its impact on short term and long-term impact on incentives of economic agents:


“For example, unemployment benefits need to link automatically to retraining and job search support to facilitate finding employment. Child benefits need to be designed to enable, rather than hold back, mothers that wish to return to work and increase their incomes.” (pg. 14)


Comment: There is an urgent need to analyse the major programs using an integrated approach, but there is a need of highly qualified experts to carry out these studies. Should external experts and university research teams be hired for these studies? For example, no in depth study has been carried out of the efficiency and impact of training programs using EU funds that have spent a large share of the structural funds totalling billions of Euros spent every year.


4. Need to target social programs:


“The problems faced by the young—both in entering the labor force and in facing greater income and employment insecurity once they get there—imply a growing distance between those entering the labor market and the more mature population. The issue of intergenerational equity is already important but is likely to increase dramatically in the next decade.” (pg. 15)


Comment: Besides the targeting of programs to fight poverty in a country with one of the highest levels in the EU, the problem of youth unemployment is of a major importance. Another issue that has not been paid enough attention has been the intergenerational equity (in pension reforms and in public debt and public investment issues)


5. Pensions: sustainability and automatic mechanisms


Comment: This is one of the worst analyses of the IMF report. First, it infers that the replacement ratio in Portugal is about 27% above a sample of countries. However it does not take into consideration the characteristics of each system, mainly if it is a mandatory public system or is a mix of public-private systems. Second, there is a contradiction in their statements that the system is quite inequitable when about half of this difference was due to the increase in lower pensions in the last decade. Third, they compute the distribution of old age pensions by income group to conclude that is inequitable because 41.6% accrues to the upper quintile. But the old age pension system should reflect the lifetime income of workers. No pension system around the world is equalitarian! And surprisingly, this reasoning has prevailed in the analysis of the IMF/EC/ECB and government.


Where equity comes in is in ensuring that all participants of the social security system have a minimum pension that allows the person/family to live with dignity. This is the principle of solidarity that prevails in all modern systems from Chile to Sweden.


The main instrument to reduce income inequality is the income tax structure. A flat rate system with a basic deduction is already a corrective system and is used in several countries. Introducing an increasing rate of tax with income levels makes the system even more progressive. If on top of such a system pensions are cut according to the income level then there is even more than “double progressivity”.


The intergenerational and across sectors inequality problem in Portugal is the large differential between public sector pensioners and pensioners of the general regime, to the extent that they receive a pension that is higher than their respective contributions.


Finally, all social security systems – pay-as-you go or capitalization – have to be actuarially balanced, otherwise they would need to be financed by general taxation, which raises inequality problems across generations. In order to avoid discretionary interventions by governments, these systems should have automatic balancing mechanisms like the Swedish system or the recent reform of the Spanish system.


To ensure that the systems remain fully funded they need to be periodically simulated to determine their actuarial balances by and independent body.


Moreover, because the reforms of social security systems are necessarily of a long-term nature, they should be studied by by-partisan or politically independent committees (like in the US or in the recent Spanish case).


Finally, the construction of any old age pension system must take into consideration its impact on incentives to work and to save by the different generations and classes of workers.

6. Project analysis of investment projects

This is an area totally missing from the review of the IMF. In the Portuguese case it is extremely important because of the large amount of resources allocated to state investments and PPPs with an extremely low (may be even negative) rates of return, with serious consequences on the capacity of the economy to grow.

In our view, all projects above a given amount of investment, e.g. 100 Million Euros, should be subject to a rigorous cost/benefit analysis, and in the case of investments above 1 Billion Euros subject to analysis by an independent international team of experts of reputed competence. These studies should be afterwards open to democratic scrutiny by academics and Parliament.

7. Budget unity: quantification of all liabilities of the state, including contingent liabilities. Multiannual planning of maintenance and investment expenditures.


Specific Measures Proposed to Reduce Expenditures:

Reform of Public Administration

“This could include three main elements:

(i) reforming public pay rates—including basic salaries bonuses, working hours and overtime compensations, with a view of encouraging meritocracy;

(ii) targeting a permanent reduction in the number of employees while opening space to attract skilled younger workers; and

(iii) increasing shared services and technology in order to limit duplications and overlaps.” (pg. 23).


Concrete measures:


Reduction in wage bill


(1)   “To avoid the temporary nature of past measures (the 5 percent reduction introduced in 2011 and the suspension of the 14th month pay), starting in 2014, a permanent cut in base salaries could be introduced across the board, that would aim (at a minimum) to attain the same savings generated by the wage cuts of the 2013 budget.” (pg. 23) This measure should affect mainly the lower pay scales where there is a wage premium vis-à-vis the private sector (savings of 350-700 ME). Moreover, “The relative flat wage structure is costly and impairs talent attraction”, “the wage premium is explained by the relatively high pay provided to workers with low qualifications”, and “pay reductions have focussed on high earners which have further flattened the wage structure”. (pg. 22-23)   Extension of the pay cut to salaries between 700 and 1200 Euros: done, but implementation of the new salary scale delayed to the course of 2014.

(2)   Reduction in wage supplements (200-300 ME). Partially done.

(3)   Extend work week of government employees from 35 to 40 hours. Cut overtime pay to a flat 15%, affecting largely the health sector – doctors (150-300 ME). Work week extended, reduction in overpay partially achieved.

(4)   Reduce the workforce of public sector by between 10-20% (795-2700 ME) [From 2010 to 2013 there was a reduction of 8%, mainly by attrition] by

  1. Enhanced use of the Special Mobility Pool. Not effective.
  2. Voluntary separations programs. In place for the last 2 years, but very low results.
  3. Reduction by attrition. Implemented (replacement ratio of 1:3 increased to 1:5 would achieve a 2% reduction in employment). (300-500 ME). Implemented [generated about 45 thousand reduction]
  4. Merge similar services (like inspections) of different ministries or establish consolidated departments providing services to different ministries. Not implemented
  5. Reduce the number of non-teachers in public schools (presently 70 thousand for 160 thousand teachers) and increase the ratio of students per teacher from 8 to close to 14, leading to a cut in staff in primary and secondary education of 50-60 thousand. Reallocating students from schools with low number of students to larger ones will contribute to this objective. (1,070-1,280 ME). Partially implemented ?? How much??
  6. Reduction in security forces, bringing them more in line with European averages (e.g. about 20% would generate savings of 3.4% of wage bill equivalent to 300-450 ME). Not implemented.

Implementation: Portugal was the country with the highest reduction in the wage bill from 2008 to 2014, according to the data of the European Commission (Data base Ameco). It decreased by 3.3 pp of GDP: The top five decreases, after Portugal, were: Latvia (2.8), Lithuania (2.7), Romania (2.7), Ireland (2.2) and (Estonia (2.1). Greece comes next with 1.8.

Increase in fees for public services

  1. Increase in fees in tertiary education (100 ME). Not implemented
  2. Increase in fees in health system (100 ME). Not implemented


Total budgetary impact of IMF proposed measures: 1895 to 4400 ME.

PPPs and Public Enterprise Reform

According to the Ernest Young audit to the PPPs, required by the Program of IMF/EC/ECB, there were seven concessions ex-SCUT, implying a cost of 5.5 Billion Euros, at 2012 prices, to the State. The rates of return for shareholders varied from 8.2 to 17.4%, with traffic usually much lower than projected and with a large bank debt. The sub-concessions amounted to 7.2 Billion Euros, with rates of return for shareholders varied from 7.3 to 11.6%, also with large bank debt and high bank debt over EBITA. The Program required the renegotiation of the PPPs given the high rates of return that the State gave to shareholders, taking the traffic risk and with over-estimated demand, culminating in a system that gave a certain and sure monthly payment “to reward availability of the infrastructure”. It is surprising how representatives of taxpayers (state officials) could agree these contracts with concessionaires.

Implementation: Renegotiations started in May 2012. In May 2013 the state reached an agreement with 7 out of 9 concessions, except Euroscut (Norte-Litiral and Algarve), in which concessionaires accepted a reduction of the rates of return from an average of 14 to around 8%. The savings, when Euroscut accepts would be around 311 ME per year. (Negocios, 21/4/2013). According to the 12th Report of the IMF the savings accumulated over the lifetime would be about 2.8 Billion Euros of a total of 12-18 BE expected liabilities (around 30% if the lower limit is taken). Not all the reductions will be real savings since part of that cut in revenues to the concessionaires are in the form of reduced maintenance and improvement costs. However, the other contractual agents also need to agree on these negotiations: the EIB has in principle agreed, but the consortia of financing banks have yet to agree. According to Negocios the Government expects a final agreement in June 2014.

Pension Reform

A rapidly aging population and stagnation of the economy for two decades, after four decades of strong growth, in a benefit defined pension system is a recipe for disaster. Solutions adopted so far have been cuts in medium and high pensions and imposing special taxes on pensions, which have been required to rapidly cut the public deficit lead to the loss of confidence in the system. If the social security system is not actuarially balanced either contributions increase or benefits have to be reduced, there is no alternative. But the system needs to be reformed and embodied with automatic correction mechanisms to reach long-term balance. And, as we pointed above, this is not a measure to be taken by a given government, but needs to be undertaken in a bi-partisan context.

The reforms undertaken in the last twelve years (Decreto-Lei 277/1993, Decreto-Lei 329/1993, Lei 32/2002, Decreto-Lei 35/2002, Lei 60/2005, Lei 4/2007, Decreto-Lei 187/2007, and Lei 52/2007) have decreased substantially the unsustainable deficits of the two main regimes of the old age pension systems, but current projections continue to show a deficit of about 30% of GDP of the GCR and about 120 to 160% of GDP (for 15% of the total pensioners!) of the CGA of the civil servants. There also substantial problems in the short to medium term because the measures for savings have been back loaded. The large deficit of the CGA is due to a regime that guaranteed a pension equal to the last wage, granted generous anticipated retirement.

What are the solutions proposed? To solve the short-term deficit the IMF proposes three options: 10% cut of pensions across the board (savings of 2.25 Billion Euros), cut of 15% of pensions above 1500 Euros (savings of 1.5 Billion) and reinstitute the 13th and 14th month pension contingent on GDP nominal growth of 3% (savings relative to full restoration of 500 Million to 1 Billion depending on the level of pension reinstituted).

Structural reforms for future pensioners are: the increase in retirement age from 65 to 66 years (400 Million Euros). Implemented

Convergence of the regimes of the CGA to the GCR. Currently under implementation for future pensioners. The convergence was applied for all civil servants joining after 2002.

Additional structural reforms:

(i) apply a “sustainability coefficient” to all pensions starting in 2000 and afterwards of 4% (savings of 500 to 800 Million Euros depending on the starting level);

(ii) to restore the excessive deficit of the CGA requires a 20% cut in public servant pensions relative to 2012 (600 Million Euros)

(iii) other measures like imposing a pension cap for existing or future pensioners only make sense for new entrants in the system, in our view, and as part of a system moving towards a capitalization system.

Education Reform

The IMF Report identifies three main problems: (i) reduce the number of teachers and non-teacher personnel per student by increasing class size, increasing the workload of teachers and concentrate small schools, at primary and secondary levels, (ii) rationalize the school network due to major shifts in demand for education and population migrations, (iii) increase autonomy of schools, reward good performance through the financing system, increase mobility of teachers and make the remuneration system rewarding good performance.

The Report also advocates more private managed schools in detriment to public schools, which has been considered a highly charged ideological problem by the political parties. There is statistical evidence that they are more efficient, but there are serious limitations in any comparison. E.g. there are quite a number of private universities that have a very low quality of education with dismal record in the labour market. But it is also true that private secondary schools are usually the best performers. More autonomy, differentiation in financing and better control of quality by parents may increase substantially the quality and efficiency of the public school.

The OECD Report touches four other important problems: (i) lack of balance between supply and demand of skills: in a recent survey Portugal had one of the highest rates of young workers declaring that they were over-qualified for the job but it did not translate into over-skilling, which means that the educational system does not give the right skills to the students and there is a large waste of educational resources, (ii) there is too much waste by repetition in the obligatory system, instead of putting the required resources for students that fell behind, (iii) a greater focus on progress in the evaluation and assessment system, as initiated for the 2012-13 school year; collecting information over time on individuals and cohorts; instituting development appraisal to complement the current assessment appraisal for teachers; and shifting resources towards a system-wide analysis of outcomes, (iii) need to develop and improve the vocational training, by programs that provide both basic business skills and preparation for self-employment, and help to cope with the demands of new industries and technologies. This needs more integration with enterprises through internships and participation of industries in the program, and (iv) improve the link between research conducted in universities and public laboratories and enterprises to increase innovation.

Implementation: In 2012 compulsory education was extended from 9th to 12th grade (up to 18 years old).

In the last three years savings reached 1 Billion Euros. Reform of curricula increased the times of Portuguese, Mathematics, History and Geography and Sciences and Physics-Chemistry. New national exams have been introduced in the 4th and 6th years of school, New programs, more demanding, have been introduced by subject. The work week of teachers increased from 35 to 40 hours (but without impact, so far, on the teaching hours). A new exam for a 4-year cycle of evaluation of teachers was introduced in December 2013, but it has been opposed by unions. 610 primary schools with less than 21 students were closed and a reorganization of the school system was reorganized by creating organic groups of schools. There has been no increase in the autonomy of schools because the imposition of strong centralization of budgets, but in February 2013 the government announced that would start a contract with 212 schools for increasing autonomy. Vocational training is given high priority and a two-year technical program is going to start in September 2014. Creation of 120 centres for qualification – vocational training.

The average number of students per class increase by 1 student from 22.3 to 23.2 in the basic education and from 23.2 to 24.7 in the secondary. The number of teachers in the primary and secondary schools decreased from 150 to 122 thousand and the number of non-teaching personnel from 59 to 54 thousand.

There have been significant improvements in the performance of the education system. The drop-out rates between 18 and 24 years old decreased from 28.7% in 2010 to 19.2% in 2013 and the grades in Math in the secondary increased from 100.6 tp 108.2 and in Portuguese from 97.6 to 104.4, although the grades in biology, geology and history have deteriorated.

The schools of reference have not yet been created and the contracts between schools and enterprises for internships are difficult to implement.

Health Reform

The IMF identified, by comparing with other countries and rest of civil servants, the high costs of overtime with doctors (60 million hours in 2011, representing between a third and half of overtime paid by the state). The spending in health is also tilted towards doctors and nurses could play a larger role. Decentralization of administration and the corporatization of major hospitals was a step in the right direction but still needs to bear more fruits in terms of efficiency. “Reforms are needed to achieve a more efficient input mix (e.g., more tertiary care/less hospital care); better economies of scale (e.g., by integrating into the National Health Service (SNS) the health system of the security forces); and greater cost recovery” not at cost of universal coverage (p. 8). Other important measures were the reliance in more tertiary care facilities instead of primary care and also non-emergency care instead of over-burned emergency care. The different health care systems should be further integrated.

The Memorandum stipulated measures in three areas: (a) cuts in pharmaceutical spending, (b) reduction in operational costs of hospitals, and (c) increase in co-payments. More specifically: (i) reduce government spending with pharmaceuticals to 1% of GDP, in line with OECD average, by 2013, (ii) reduce the benefits of civil servants in ADSE, ADM and SAD and cut budgetary costs by about 50%, (iii) increase “taxas moderadoras” (health fees) and index them with inflation, (iv) cap the price of generics to 60% of branded products and change the system of reference-price of medicines to the 3 EU countries with lowest prices, (v) use the core substance for prescriptions, monitor closely the use of medicines and expensive diagnostics and incentivize the use of generics, (vi) change the system of profit margins for pharmacies based on a regressive mark-up and a flat fee, encouraging the use of less expensive pharmaceuticals, and if it does not reduce distribution costs introduce a “pay-back” contribution by pharmacies and wholesale companies, (vii) centralize procurement and purchasing, (viii) increase coverage of primary health care units, and (ix) improve management and cost control of hospitals and establish a program for clearing up arrears.

Implementation: (i) negotiations with wholesalers, use of generics and other measures led to a reduction of 900 M Euros from 2010 to 2013 (500 public and the remaining for private agents), (ii) the central government transferred 1.9 B Euros to settle arrears of the hospitals and to pharmacies. The accumulation of further arrears has stopped in 2013 and the government will set a program for its clearance, (iii) the working hours of doctors have been extended from 35 to 40 in line with the rest of the public servants, and reduction in other operational expenditures reached 400 M Euros in 2010-2013, (iv) the government is currently negotiating a further reduction in distribution costs and threatening to use the payback contribution in case it does not materialize. No measures have been taken on the revenue side, so revenues have decreased by 9% in 2010-2013. Measures on prescriptions have all been implemented. Progress has been achieved in centralizing procurement and purchasing. However, further structural measures are still needed.

Reforming the Judicial System

Neither the IMF nor the OECD Reports address problems in the Portuguese Judicial System. However, the Memorandum of the IMF/EC/ECB that started the adjustment program has detailed recommendations for reform.

The Memorandum set: “Improve the functioning of the judicial system, which is essential for the proper and fair functioning of the economy, through: (i) ensuring effective and timely enforcement of contracts and competition rules; (ii) increasing efficiency by restructuring the court system, and adopting new court management models; (iii) reducing slowness of the system by eliminating backlog of courts cases and by facilitating out-of-court settlement mechanisms.”

The main problems identified were the slow judicial process and consequent backlog of processes and courts weak management practices. Reforms should focus on reducing backlog of processes especially in debt and tax enforcement cases, streamlining civil case processing and promoting alternative dispute mechanisms.

Proposed solutions were: (i) to establish special teams to solve the backlog, (ii) speed up the implementation of the new map of the judicial system with an improved personnel management system, (iii) present a law on arbitration and make arbitration a fully operational form of resolution of debt cases, (iv) review the Code of Civil Procedure, and (v) develop an workplan of allocation of resources based on court performance, among others.

Implementation: The 12th Review considered that all the measures under the adjustment program had been taken. Pending procedures relating to debt cases had been cut by half. The Code of Civil Procedure was revised (entered into force in 1/9/2013) and the Code of Administrative Procedure is currently under revision. Most observers say that is still too early to evaluate the impact. The new map of the judicial system will start implementation in September 2014, with around 26 courts been extinguished and another 26 created in more populous counties. In the last 4 years the budget was cut by 24% from 1.7 BE and costs with personnel were also cut by 19%. The freezing of bank accounts can now be implemented without the intervention of a judge. The number of bankruptcies by mutual agreement has increased but the last IMF report says that the overall process for solving these cases has not produced intended results (mainly the process for recuperation of firms).


The Memorandum establishes “The Government will accelerate its privatization program. The existing plan, elaborated through 2013, covers transport (Aeroportos de Portugal, TAP, and freight branch of CP), energy (GALP, EDP, and REN), communications (Correios de Portugal), and insurance (Caixa Seguros), as well as a number of smaller firms. The plan targets front-loaded proceeds of about €[5.5] billion through the end of the program.” (p. 13). The aim of a privatization program is: (i) to maximize Treasury revenue in the short-term, and stop budget dependency for loss-making firms, (ii) improve efficiency over the medium and long-term of the firm, and (iii) contribute to the construction of competitive and efficient markets.

Implementation: In terms of revenues the government has exceeded the expectations. According to the following table, up to April 2014 the privatization program generated 8.7 Billion Euros. The only case that failed so far was TAP, and one of the reasons is the requirement by the EU laws that the majority be held by EU citizens. It is remarkable that the program was accomplished in times when the country was considered of high risk with few FDI flowing towards South Europe. However the program was less successful in reaching the other objectives. About half of the capital was given to China which so far is not considered a technological or managerial leader globally and especially on an EU scale. Institutional investors took about 500 B Euros. But it has been argued that in the large privatizations the premium paid was around 50% or higher.


Update to Tableau de Board

Do you want to compare the economic performance of the different governments since 1985?

The Statistical Annex of the book Portuguese Economy has 140 spreadsheets in Excel with statistical data for the Portuguese and European economies, covering the period 1910-2013. You can order a CD with the data from Principia Editora.

Here you can find an update of the spreadsheet Tableau de Board which contains the latest update (April 2014) of the main economic indicators of the Portuguese economy in the context of the European Union, aggregated by the different governments, since 1985, with projections up to 2015. These projections use the latest published data of the European Commission.


See references: