How did Portugal become so Poor?

How Portugal become so poor
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Portugal was once one of the richest countries in the world. It was the first European country to discover the sea route to India and the first European country to establish colonies in Africa. Despite its past colonial conquests, Portugal is now one of the poorest countries in Europe (as of 2022). In fact, Portugal declared bankruptcy in 2010 and had to be bailed out by International Monetary Fund (IMF) and European Financial Stability Facility (EFSF). As per a report published by Statistics Portugal (INE) 18.4% of the population in Portugal are at the risk of Poverty.

Portugal has been in a recession since 2002. There was a glimmer of hope between 2015-19 when Portugal restructured its tourism sector and adopted policies to give a boost to startups. However, the COVID-19 pandemic, the

decline in tourist footfall, and most importantly the inflation in 2022 has ended this hope. The pain of recession is going to be longer in the country and doesn’t seem to end anytime soon.

1. Loss of Portuguese Colonies

Portugal Colonial Empire at its Peak
Areas of the world that were once under Portuguese Colonial Rule

Portugal started colonizing countries in South America, Africa, and Asia in the 15th century. By the 19th century, it started losing control of its colonies. Brazil gained independence from Portugal in 1822.

In the 20th century, there were several massive protests against Portuguese rule in Mozambique and Angola which were Portuguese colonies in Africa. After a 13-year-long fight between Portugal’s military and African nationalists from 1961-1974, Angola and Mozambique gained independence.

Even Portugal lost control of its Indian colonies Dadra and Nagar Haveli in 1954 and Goa in 1961.

Angola and Brazil produced a tremendous amount of Portugal’s wealth. The loss of Angola in the 20th century was a major blow to Portugal. Angola is rich in minerals like crude oil, gold, and diamond. Angola was a Portuguese colony for more than 400 years. After its independence in 1974, Angola was torn into civil war until 2002.

 

However, after 2002, Angola has been growing at an average rate of over 5%. After the 2008 financial crisis, Portugal was so devasted economically that it had to rely on its former colony Angola for investment.  

From 2010 and 2014, Angola’s investments in Portugal went up from €645 million to €1.53 billion. Today, Angola has invested over €15bn in Portugal. Many Angolan business persons like Isabel dos Santos, the daughter of the former President of Angola, have a stake in major Portuguese companies like Impresa (media), Galp (Energy), Sport.TV, real estate, and Banco BPI (banking).  Isabel dos Santos also owns Banco BIC, that started in Angola and now expanded into Portugal. 

Portuguese Colonial War in Mozambique

Between 1961-74, Portugal was fighting several battles in different countries. Portugal lost huge manpower and wealth in these colonial wars. Between 1962 to 1970, Portugal’s population decreased from 8.9 million to less than 8.6 million.

2. Dictatorship Regime

While most of Western Europe was battling World Wars, Portugal was sitting on the sidelines under the dictator Antonio Salazar. The ‘Estado Novo’ or the New State was formed in 1933 when Salazar took power through a military coup.

The economic development during the period from 1933-1960 was mostly stagnant. Although some pro-market developments did take place after 1960 like Portugal liberalizing its economy in the early 1960s and joining organizations like OECD (1961) and European Free Trade Association EFTA (1960), Portugal was still way behind other Western European countries.

The literacy rate of Portugal during Salazar’s authoritarian dictatorship was lower than other Western European countries. In 1950, more than 40% population in Portugal was illiterate. If you look at France, the literacy rate in 1950 was over 90%.

After the fall of the dictatorship regime in 1974, the African colonies also gained independence. Over one million Portuguese soldiers and refugees returned home tired and dejected. This added to the burden of the state.

After becoming a democracy in 1974, Portugal nationalized many companies. This led to a brain drain as several entrepreneurs, technicians and managers left Portugal and moved to richer European countries.

3. Adoption of Euro

Poverty in Portugal

Portugal adopted Euro in 1999. Just 2-3 years after the adoption of the Euro, Portugal went into a crisis. It’s been over 20 years now and Portugal hasn’t been able to recover from this crisis.

Portugal didn’t have a housing bubble burst like Ireland and Spain. It had a very stable government, unlike Italy. It also had a low debt-to-GDP ratio, unlike Greece.

Debt to GDP Ratio of Portugal in the last 35 years

However, the adoption of the Euro meant less flexibility over the monetary policy. Usually, the central bank of a country devalues its currency to boost foreign direct investment and promote exports. It can raise interest rates when it has to curb inflation. 

Since the Euro is adopted by 19 countries and the interest rates and other monetary policies are decided by European Central Bank, Portugal doesn’t really have a say in its monetary policy. The Portuguese government just has control over its fiscal policy like its budget allocation, taxes etc.

What this means is that the Portuguese government can’t print money if it wants to build infrastructure. 

4. Common Monetary Policy of European Central Bank

19 countries in the European Union (EU) that adopted Euro don’t have their own monetary policies. The European Central Bank (ECB) controls the monetary policies of these countries. However, countries have their own fiscal policies.

Monetary Policy basically deals with how much money is in supply, what is the interest rate. In India, the Reserve Bank of India (RBI) sets the repo rate and hence, controls the monetary policy.

Fiscal policy, on the other hand, is controlled by the government. A government decides how much it would spend on infrastructure, how to tax its citizens, the annual budget etc. All this is related to the fiscal policy. On a simplistic term, a government can spend only as much as it collects from taxes.

5. High Debt

Any excessive spending by the government needs to be funded by loans. This leads to Current Account Deficits (CAD).

When Portugal decided to join the Eurozone and gave up its monetary policy, the interest charged on Portuguese loans went down. The cost of borrowing went down. So, Portugal kept on borrowing to build its infrastructure and introduce populist policies like generous pensions. This worsened the CAD for Portugal.

Portugal has had high CAD historically. If you look at the CAD graph below, Portugal had very high CAD from 2001-2013. Portugal declared bankruptcy in 2011 and it was bailed out by International Monetary Fund (IMF). This led to positive CAD for a few years between 2013-2019 until COVID-19 surfaced in the picture.

Current Account Deficit of Portugal (Soirce: CEI Data)

The Current Account Deficit (CAD) of Portugal as of Q1 2022 is nearly -$950 million. With Europe currently in recession and inflation at the highest level in a decade in Europe, the CAD for Portugal is likely get wider. Personally, I don’t see a chance of Portuguese CAD getting reduced until the Q3 of 2023.

As of May 2022, Portugal has a Debt-to-GDP ratio of 117%, meaning the public debt of Portugal is 1.17 times that of its Gross Domestic Production (GDP). Portugal is the third most indebted country in Europe.

The higher the Debt-to-GDP ratio, the less likely will the country pay back its debt.

6. Sovereign Bond Downgrade

S&P 500, Moody’s, and Fitch are the major international rating agencies that assign credit ratings to sovereign debt. A high credit rating on public debt implies a country’s ability and willingness to repay the principal public debt as well as the interests on time.

There are 4 main factors based on which sovereign debt credit rating is assigned:

  1. Macroeconomic Performance:
  2. Government Performance:
  3. External Balance:
  4. Other explanatory variables:

7. Lack of Investment in Technology

After adoption of Euro in 1999, Portugal received massive Foreign Direct Investment (FDI). However, Portugal didn’t invest the capital wisely. It invested this FDI mostly in non-tradable sectors like construction, real estate and public services.

Well, it may seem good to a layman that investing money in these sectors is good for the country. However, here is the catch.

Most economically successful countries invest the taxes they collect in building its infrastructure. They use the FDI to build manufacturing facilities, produce tradable goods and services. Foreign Direct Investment is driven by the idea of profiting from new markets. So, the money invested in these non-tradable services would not lead to profit for foreign investors.

Had Portugal invested the Foreign Direct Investment in agrotech, IT infrastructure or manufacturing sector, it would have made great progress.

The graph below shows the FDI in Portugal over the years. You can see the increase in the inflow of FDI after Portugal became Euro Zone member in 1999. However, the FDI in Portugal has remained largely stagnant between 2001-2022. In the years like 2002 and 2015, Portugal received less than 1% of its GDP as FDI. In fact, in 2015, 2018 and 2020, Portugal received less FDI as it received in 1990.

FDI Inflow to Portugal over years

Just for contrast, FDI inflow in India has been rising over the years since 1992. As of 2020, India received $64.36 Billion in FDI. It was $0.28 Billion in 1993 after the Indian economy was liberalized.

FDI in India. See the rapid increase in FDI from 1992 to 2021.

Again, when unemployment goes up, countries print money to devalue the currency to boost FDI, promote exports and discourage imports. However, after Portugal discarded Esquido and moved to Euro, it had to rely on ECB for its monetary policy.

8. Productivity

An average German worker is twice more productive as an average Portuguese worker. Higher productivity means more output per worker. The higher the output per worker, the lower the cost of manufacturing a product.

9. Low Population Growth

Portugal lost a significant number of people during the Colonial wars in 1960s and 1970s. Here is a graph showing the Portuguese population over the years.

Portugal’s population peaked around 2009 when it had 10.6 million population. However, its current population as of 2022 is 10.27 million. As per the projections by United Nations, the Portuguese population is anticipated to fall to 9.2 million by 2050.

The peak of the population in the above graph also coincides with Portugal’s declaration of bankruptcy in 2010. You can see from the Unemployment rate graph below that the unemployment rate in Portugal went over 10% in 2010, and people started emigrating from Portugal to other countries.

The unemployment rate in Portugal went up from a little over 10% in 2010 to 19% in 2013.

Since Portugal experienced a net emigration (after considering the low birth rates), its population has decreased over the last 10 years.

The 3 major reasons for low population growth in Portugal are:

  • Low Birth Rate
  • High Divorce Rate
  • Lack of stable income source to start a family

10. Undiversified Economy

12. Bad Tax Policy

The Portuguese government continuously raised taxes from 2000-2007 due to generous past promises made for seniors’ pensions. Those higher taxes discouraged work as well as misallocated resources. The Euro-crisis post-2010 led to further increases in taxes to implement the austerity measures imposed by European authorities and the IMF, and this has further stalled the chances for Portugal recovering.

13. Low Wages

The dictatorship in Portugal from 1933 to 1974. It is so far the longest dictatorship in the history of Europe. Currently, the minimum wage in Portugal is €600 per month while it is above €1000 in all the Western European countries.

Keywords: Portugal Economic Outlook, How is Portugal Economy Doing, Portugal Economic Collapse, Is Portugal in Recession, How much is Rent in Portugal,

14. Inflation Management

poverty in Portugal

The electricity bill in Portugal is one of the highest in Europe. As per a report published in 2014, the energy bill in Portugal was the second highest in Europe after Denmark.

 

 

About Post Author

SurajPanigrahi

I started this blog for my love of writing and disseminating my views on things that excited me. I don't have a clear direction with this blog. However, you can find content mostly related to higher education, career development, MedTech, finance, and budget travel hacks. Background: After graduating in Mechanical Engineering from IIT (BHU) Varanasi, India, I pursued a dual degree Master's program in Europe (MS in Biomedical Engineering at RWTH Aachen, Germany and MS in Bioengineering at Trinity College Dublin, Ireland). I am currently working as a 'Manufacturing Engineer' in a MedTech company in Ireland.
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