Portugal - Overview of economy

In 2000, Portugal's economy was to a large degree modern and market-oriented, enjoying steady, although not spectacular, economic growth, decreased interest rates, comparatively low unemployment, and improved living standards. Nevertheless, it remained Western Europe's least developed country with a per capita gross domestic product (GDP) of US$15,975, or approximately two-thirds that of the large Western European economies. Portugal's GDP was the second lowest in the EU after that of Greece, which was estimated to have the lowest production on the basis of market exchange rates in late 2000. Portugal also continued to have a large trade and balance of payments deficit.

Following its past glory as an influential world power and the leading maritime and colonial nation in the 15th and 16th centuries, Portugal experienced economic decline, particularly after the loss of its Brazilian colony in 1822. After more than 6 decades of oppressive dictatorship, economic stagnation, and international isolation during the 20th century, Portugal was considered by many to be the laggard of Western Europe by the early 1970s. Following the country's return to democratic rule in 1974, the economy grew by an average of 5.3 percent annually during the period from 1975 to 1980.

Portugal joined the EU in 1985, and its GDP growth slowed down to less than 1 percent annually during the period of EU adjustment. After 1990, it achieved a satisfactory annual growth average of 2.1 percent, reaching 2.7 percent in 2000. In 1998, Portugal successfully qualified for the European Monetary Union (EMU) and joined with 10 other European countries in launching the European currency, the euro, on January 1, 1999. The euro will fully replace Portugal's currency unit, the escudo, in February 2002. EU and EMU membership should be considered a major success, given the condition of the Portuguese economy in the early 1970s.

EU membership has been particularly beneficial for Portugal, allowing the country access to development funds and creating favorable conditions for its economy to compete, integrate, learn from, and get closer to the advanced economies of Western Europe. The government is working to modernize the country's economic capacity and increase its competitiveness in the increasingly integrated European and world markets. Improvement in the education sector is critical to this process.

These successes notwithstanding, industrial development and restructuring in Portugal generally has been slower than in other EU countries. Its industrial base is still quite limited, often facing hardship from having to compete in the single European market. But driven by the pressing competition of lower-cost East and South Asian imports, some traditional Portuguese exporting industries, such as footwear, clothing, and textiles, have rapidly modernized since the 1990s. Growth has been also strong in services, especially in the financial and retail sectors, and in construction. Tourism has also been historically important, with its focus in the late 1990s moving from traditional mass-market beach holidays to high-end, quality, cultural tourism.

Portugal, like its EU neighbors, has developed a service-based economy, while agriculture and fishing— once major sectors—have become much less important. Although the agricultural sector represented just 3.3 percent of GDP in 1998, it still accounted for 13.5 percent of total employment, much higher than the average for EU countries. The slowness of farmers to adopt more productive agricultural technology has led to a loss of market share to the more efficient producers of Spain and France.

An important factor setting Portugal apart from the leading EU economies is its lower labor costs, with an average annual cost of US$13,084 per worker, compared, for example, with US$33,196 per worker in Germany. Cheap labor has attracted substantial foreign investment in several new industry projects, particularly in the automotive and electronics manufacturing sectors. A new technology park outside of Lisbon has attracted several high-profile computer software and hardware companies. However, alternative low-cost manufacturing locations are also growing across Central and Eastern Europe, at locations often better suited geographically to supply the main European markets. They too are becoming increasingly attractive for investors, and Portugal is aware that it can no longer rely on low wages alone to attract new investment. Preparations for EU enlargement in 2001-02 and beyond will be of crucial significance to Portugal. The country will have to strive to protect its interests in accessing the EU's development funds and protecting its market shares in competition with the new, poorer, and sometimes smaller EU members.