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The Portuguese Economy in the Irish Mirror, 1960–2004

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Abstract

The deepening of economic and financial integration in the European Union has led to different responses in the group of ‘cohesion’ countries. Ireland and Portugal stand out as the two extreme examples, as Ireland caught-up to the forerunners after the launching of EMU, in 1992, whereas Portugal lost ground. This paper looks at structural shifts in order to explain different economic performances within Europe. We conclude that Portugal’s labour productivity lag was the outcome of a less favourable structure of employment; that differences in the structure of employment are not clustered in specific industries; and that such structural differences are associated with different factor endowments, namely physical and human capital. Portugal has a rising competitiveness problem in international markets as real wages have increased faster than labour productivity in the 1990s. That has to be changed by policy measures, by the market through higher levels of unemployment, or by a combination of both.

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Notes

  1. Macedo (2000). See also Blanchard (2006).

  2. Honohan and Walsh (2002).

  3. See Blanchard and Portugal (2001).

  4. Krugman and Venables (1996).

  5. Midelfart et al. (2003).

  6. See Barros (2002), Barry (2003) and Cassidy (2004).

  7. Labour productivity growth in Portugal is matched by that of total factor productivity growth, which also declined after 1973. Lains (2003) provides a growth accounting analysis for twentieth century Portugal which shows a sharp decline in TFP growth after 1973. According to Fare et al (2006, pp. 118–19) wider measurement of efficiency, Portugal increased its level from 1965 to 1990, reaching the European average frontier level then, but it dropped sharply in the years to 1998. The authors relate such trends to Portugal’s high level of capital intensity, which may have been inappropriately used in the 1990s (see p. 120).

  8. See the survey by Temple and Voth (1998).

  9. See Dollar and Wolff (1988), Sundrum (1991), Syrquin (1994), van Ark (1996), Doyle and O’Leary (1999), Fagerberg (2000) and Davies et al (2001). See also Temple (1999) and Levine and Renelt (1992).

  10. For Portugal, see also Godinho and Mamede (2004) and Aguiar and Martins (2005).

  11. For example, due to the 1974 revolutionary legacy, Portugal’s labour market is still partially dependent on constitutional legislation, making changes harder to introduce.

  12. See for example Fare et al. (2006).

  13. Figure 2 also shows GNP data for Ireland. GDP growth rates overestimate the growth of the Irish economy because of overpricing of foreign owned firms which had an increasing large share of output. See Birnie and Hitchens (1998). See also O’Leary (1997), Honohan and Walsh (2002) and Barry (2003).

  14. See Honohan and Walsh (2002). The impact of net immigration was also felt in the quality of the Irish labour market, as their levels of education and training were above the average of the Irish resident labour force.

  15. This is not unlike what happened with ECSC and EEC, which led to higher levels of trade but also to the implementation of public policies at the European level.

  16. The 1965 trade agreement followed the creation of EFTA, in 1959, by the UK and other six countries, including Portugal, and the French veto for UK accession, in 1961. The EFTA was geared mainly to industrial trade and Ireland was mainly an exporter of agricultural goods.

  17. Gottheil (2003).

  18. See Gottheil (2003), p. 727.

  19. See Barry (1996), pp. 727–8.

  20. Gottheil (2003). Rates of profit can be inflated by manipulation of internal pricing my multinationals, order to take advantage of the low corporate profit tax in Ireland. See Honohan and Walsh (2002). In 1981, the tax on foreign earnings profits was raised from zero to 10%, below most western European countries.

  21. The 1972 agreement led to significant reduction of trade barriers to the extent that the 1985 Accession Treaty with the EC was concerned mostly with reduction of tariffs across the Spanish border––and of course with agriculture, fisheries and the acquis communautaire.

  22. See Lains (2004).

  23. See Baer and Leite (2003) and Lains (2003).

  24. The shift-share analysis here used has several limitations, including the fact that it measures average instead of marginal productivity and that it only takes into account labour inputs. The three components are not necessarily orthogonal either.

  25. Fare et al. (2006) look at the impact of efficiency, technology and physical and human capital, on labour productivity in a sample of European countries.

  26. We use in this comparison the PPP exchange rates implicit in total GDP. It should be taken into account, thought, that Irish GDP is inflated to overpricing of multinationals. That bias is probably larger at the end of the period amounting to about 15% (see above). This implies that the decline in Portugal’s relative labour productivity level is overestimated.

  27. Barros (2002) also finds that the relation between speed of convergence and ICT-intensity is not significant for the cohesion countries during 1971–1992. Sánchez and Duarte (2006) also find that the contribution to structural change and productivity growth in Spain during 1980–1994 derived from a varied range of industries, including ‘high technology’ industries (i.e. computers, electrical, electronic and optical goods), ‘medium-high technology’ industries (chemical, machinery and automobiles), ‘high-qualification’ services (communications, banking, education and health) and other services (commerce, transport and public administration).

  28. It should be recalled that the analysis does not take into account the interaction between structure and labour productivity levels.

  29. Due to lack of data, it is not possible to relate physical and human capital inputs to productivity at the sectoral level. Fare et al. (2006) conclude that physical capital is the single most important factor explaining labour productivity differentials in the EU-15 zone throughput 1965–1998.

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Acknowledgments

I would like to thank comments from Frank Barry, Luís Campos e Cunha, Francesco Franco, Álvaro S. Pereira, Ester Gomes da Silva, Francisco Torres and an anonymous referee. The usual caveat applies.

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  1. Instituto de Ciências Sociais, Universidade de Lisboa, Lisbon, Portugal

    Pedro Lains

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Lains, P. The Portuguese Economy in the Irish Mirror, 1960–2004. Open Econ Rev 19, 667–683 (2008). https://doi.org/10.1007/s11079-007-9070-4

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