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External Liberalization With Ambiguous Public Response: The Experience of Portugal
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Since Portugal's accession to the European Community in 1986, the government has regarded the completion of the single market as a major political challenge, despite the country's experience of ambiguity towards external liberalization. Some elements of ambiguity have been removed with the adoption in 1988 of development plans incorporating the effect of Community structural funds. Furthermore, the export sector has performed well during the investment boom which has lasted over three years. But ambiguity remains in the implementation of the multi-annual fiscal adjustment strategy, in the commitment to fight inflation, and in the willingness to peg the escudo to a strong currency. In the 1960s, the domestic objective constraining external liberalization was the establishment of a 'fortress Portugal' which included the colonies. Manufacturing comprised a capital-intensive and import-substituting segment, including seven financial conglomerates. Alongside it, there developed, thanks to greater access to European markets, a labour-intensive segment oriented towards exports and the domestic market. After the 1974 revolution, the financial conglomerates were nationalized without compensation and the lay-offs were prohibited, measures that were supposed to help transform Portugal into a 'classless society'. But employers in the export sectors resorted to renewable short-term contracts, which partly offset the newly entrenched public sector jobs and introduced some real wage flexibility. The labour market is as segmented as the product market. In the banking system, arrears and bad debts of nationalized banks accumulated until the government authorized entry in 1985, while credit ceilings discriminated against private firms until 1989. As the new banks avoided holding public debt instruments and the old banks began to be privatized in 1989, the Treasury found it increasingly difficult to use them as implicit tax collectors. The investment boom attracted sizeable capital inflows, suggesting that exchange controls may be eroded well before the extended deadline of 1996. A problem of competitiveness may arise since the crawling peg no longer raises the relative price of tradables.
Yet a passive crawl constrains monetary policy, so that not joining the European Monetary System involves forgoing the benefits of credibility: no risk premium and no inflationary expectations. Since these benefits could not materialize without budgetary restraint, the public response to the single market challenge remains ambiguous - and may therefore become an impediment to meeting that challenge successfully.
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Braga de Macedo, Jorge, External Liberalization With Ambiguous Public Response: The Experience of Portugal (January, 1990). FEUNL Working paper Series No. 138