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Industrial Development Policies Industrial Policy and the Evolution of the Portuguese Economy Since the 1960s Lecture Slides Rui Baptista - 1999.

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Presentation on theme: "Industrial Development Policies Industrial Policy and the Evolution of the Portuguese Economy Since the 1960s Lecture Slides Rui Baptista - 1999."— Presentation transcript:

1 Industrial Development Policies Industrial Policy and the Evolution of the Portuguese Economy Since the 1960s Lecture Slides Rui Baptista - 1999

2 The Portuguese Model of Development in the 1960s Enhancement of trade relations with the African colonies, leading eventually to the establishment of a common market corresponding to what was then the Portuguese political space: Direct involvement in the European economic integration initiatives, becoming a founding member of the European Free Trade Association (EFTA).

3 Main Characteristics of the Estado Novo Economic Policy Price and foreign exchange stability Public sector budget balance Control of international capital movements and restraints to imports, in spite of the progressive opening of the economy to foreign trade and investment Regulation of entry in industrial markets Wage and price controls through corporative mechanisms

4 1970s: Exogenous Chocks and Economic Policy Fractures Progressive liberalisation of trade tariffs and quotas increases pressures on prices Oil crisis increases operational costs across industries, leading to inflation and reducing returns on investments The political changes occurring in 1974-75 lead to a radical modification of the institutional framework for economic activity by an alteration of the system of property rights De-colonisation drastically reduces Portuguese assets held abroad

5 1977-1984 - External Trade Balance and the Increasing Role of Government The main objective of macroeconomic policy was external trade balance, achieved through systematic currency devaluation and the enforcement of import restrictions Price stability and budget balance were deemed secondary to external balance The government controls directly several economic sectors, without a proper definition of an intervention strategy The instability of prices and interest rates hinders private investment

6 1980s: Macroeconomic Equilibrium and European Integration Control of trade balance and inflation Substantial increase in foreign direct investment Greater co-ordination of economic policies Increase in external competition EC structural funds help to finance large infra- structure investments

7 Economic Policy and European Integration Main objectives: control of inflation and the promotion of economic growth Greater control of the budget deficit, although it keeps expanding into the 1990s Major institutional changes brought about by the progressive co-ordination of monetary, exchange rate and competition policies Reduction of distortions achieved through improvements in tax policy, infra-structure investments and privatisation of a large range of industrial sectors

8 Obstacles to Industrial Development During the Estado Novo Lack of a coherent institutional framework as regards market access rules and competition policy Economic policy and tax structure distorted income distribution, favouring the producers of final goods and damaging the producers of intermediate and investment goods Industrial policy and the use of state resources favoured specific sectors, without a coherent strategy, overlooking investment in infra-structure

9 De-industrialisation and the Increase in the Weight of Services from 1975 Policies of job creation in a growing public sector, particularly in healthcare, education, transport and public utilities Progressive growth in trade and tourism sectors and, from the mid-1980s, in the liberalised financial services sector Increasing specialisation and vertical disintegration of industrial activities Lack of external competitiveness of industrial sectors led to an increase of investment in services

10 Market Failure and Trade Barriers

11 Market Failure and Barriers to Entry (Condicionamento Industrial)

12 Trade Policy and Export Promotion

13 Entry Barriers and Export Promotion

14 Internal Efficiency and the Estado Novo Industrial Policy Barriers to entry and to international trade without effective promotion of internal competition: The regulatory authorities failed to act in the public and national interest, limiting competition and allowing incumbents to remain inefficient Government Failure: the insufficiency of corporative organisation and the lack of legislation preventing price collusion led to a situation where incumbents were granted opportunities to grow and were not penalised for failing to take advantage from them.

15 Industrial Policy and EU Structural Funds Incentives to mobility: new entry, internal growth, R&D and environmental investments Criteria for approval based on the candidates financial structure and on the nature of the project The main objective is not the correction of specific market failures, but to increase the competitiveness of national firms, so total market efficiency can improve

16 The Structure of PEDIP Three kinds of investment incentives: physical capital; R&D; quality management and environment R&D and quality/environment investment projects were had higher rates of approval, but received a relatively low percentage of total funds Physical capital projects, the large majority, received the greater share of funds Firm size does not appear to have a significant overall effect on the amount of funding, although it remains clear that some very large firms received a large portion of total funding.

17 Average GDP Growth Rates

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