Portugal's membership in the European Community

Portugal's Membership In The European Community

An evaluation of the economic impact of Portugal's entry into the European Community can be completed only several years after its accession. Several studies have been made to assess the effects of integration on specific sectors, but a comprehensive overview indicating the global impact and taking into consideration the social, economic, political and institutional factors, and more importantly, their compounded effect, will be possible only "ex post,' or toward the end of the transition period, which will phase-in the so-called "acquis communautaire,' or the Common Policies, the regulations and the general institutional framework. Past experience indicates that in a small, open economy like that of Portuagal, EC membership will bring market enlargement, domestic liberalization and deregulation, and structural reinforcement interaction, which will amplify the impact and contribute to a positive adjustment.

Given the natural space limitations here, it seems preferable to focus on a certain number of effects that are likely to translate into increased business opportunities and an improved foreign investment climate.

Portugal became a candidate for accession to the European Community for both economic and political reasons. Negotiations for accession began in 1978 and are now coming to an end. Only last October, the Portuguese government and the Community signed a general agreement (Constat d'Accord) which makes accession irreversible. It now seems most likely that Portugal will gain full membership by Jan. 1, 1986.

Even before Portugal requested membership status, it already had some experience in European free trade. In 1972, Portugal signed a trade agreement with the EC according to which all industrial products would be given duty-free treatment by both parties. Quite some time before that, Portugal was engaged in another trade liberalization experience --the European Free Trade Association (EFTA). Portugal was among the founding members of EFTA and has belonged to that organization ever since. The success of these experiences contributed to the decision to apply for full membership in the European Community.

Under the EFTA and EC agreements, Portugal enjoyed two decades of rapid growth. Real GDP grew at an average annual rate of 6.3 percent throughout the 1960s and 4.8 percent from 1970 to 1977. Industrial development in Portugal peaked after the creation of EFTA, and it has been acknowledged that access to the expanded market played a major role in GDP growth. During that same period, there was also a sharp rise in productivity and foreign investment. Although the total volume was not very significant, the increase in relative terms was fairly spectacular. Some 240 foreign companies are presently operating in Portugal. They employ about 12 percent of the industrial labor force and account for nearly 20 percent of industrial production. These firms are concentrated in industries such as chemicals, rubber, non-ferrous metals, electrical engineering, automobiles and industrial tools, and participated in the development process, exploiting the comparative advantages and growing with the economy.

The same pattern can be found in the early 1970s when Portugal entered into a free trade agreement with the Community. The oil shock, the international recession, and the democratization process initiated in 1974, however, diminished somewhat the benefits of free trade. Nevertheless, while most Western economies were practically stagnate, annual industrial growth in Portugal averaged 4.6 percent between 1970 and 1978. In fact, Portugal has been for the past two decades one of the most rapidly industrializing countries, and all evidence indicates that this was essentially a consequence of free trade.

The industrial base of Portugal is today made up of four principal groups. The traditional industries --textiles, footwear, cork, and wood--employ nearly 40 percent of the industrial work force and are mostly export-oriented. These are of course the oldest industries in the country.

The second group is made up of the basic industries such as steel, chemicals, oil refining, paper, cement, tobacco and beverages. These are capital-intensive industries, most of which were established in the 1950s, and except for paper are mostly domestic-oriented. They employ nearly 20 percent of the industrial labor force.

The third group is composed of mostly export-oriented industries established in the 1960s and 1970s under the inducement of free trade. They are more capital-intensive than the traditional industries; have higher productivity; and because they are export-oriented, have been growing very rapidly. Foreign companies play a major role in this group, which employs nearly 20 percent of the industrial labor force.

The last group, and as clearly identifiable as the other three, includes industries which, although they did not grow as fast as the third group, have nevertheless enjoyed significant growth in the 1970s. They are concentrated in the metalworking sector, primarily metal goods, mechanical engineering and transport equipment. This industrial structure will obviously be influenced by the coming accession of Portugal to the European Community.

Benefits of EC Membership

The main benefits of EC membership can be divided into three areas--1) access to the Community market, 2) application of structural policies and deregulation, and 3) liberalization of domestic markets. As a consequence of the 1972 trade agreement, Portuguese industrial exports already enjoy duty-free treatment in the Community. However, some products considered sensitive are still subject to quotas, such as some categories of textiles and apparel. These quotas will be increased annually after accession and will be eliminated after three years. Their removal will allow industry to make full use of its export potential and will be of strategic importance, not only because of growth in the specific industry, but also and mainly due to economic expansion which will generate new investment opportunities in other industries, both domestic and export-oriented.

With regard to agricultural products, the effects can be divided into two principal categories. The first is the removal of the existing restrictions on trade of some processed agricultural products, namely canned fish and tomato paste, which occupy a very important position in total exports. The impact of the removal of the existing trade barriers for these industries will be similar to the textiles sector. The second consequence of assession on agricultural production will result from the application of the Common Agricultural Policy (CAP). The price and support mechanisms when applied to Portugal will promote, as they did in other countries, improved soil utilization and resource allocation, more rapid mechanization, and consequently high investment and productivity levels. The development of agriculture is of crucial importance because this sector has not followed the growth patten of industry in the past decades and therefore has been slowing the country's development.

The second major effect has to do with EC structural policies, namely, the Regional Policy, Social Policy and Agricultural Structural Policy. The application of these policies to Portugal will mean that without decreasing the overall investment effort in the manufacturing sector, the country will be able to devote a much greater amount of resources to improving infrastructure. This will translate into better communications, more balanced regional development, better agricultural extension services and marketing channels, easier physical access to foreign markets, and upgrading and greater mobility of the work force. The effect of adequately utilized structural policies could provide significant stimulus to the economy by removing bottlenecks which have in the past prevented a more thorough exploitation of the growth potential.

The third effect includes liberalization and reorganization of domestic markets. Deregulation will affect exchange controls, import registration, capital markets and price controls, to name only a few. Portuguese legislation in a broad number of fields will have to be adapted to community rules. This means that during the transition period, certain regulations will be changed and a number of government controls and some red tape will be eliminated.

In the capital markets, the adoption of Community Directives will contribute to liberalization and diversification of financial instruments, improved efficiency of financial intermediation and increased propensity to save. This will provide business with better access to capital, and more diverse options for funding their operations and growth. The recently authorized establishment of new banks, the expected creation of venture capital companies, and the already-initiated revision of securities regulations are a few examples of the rationalization of capital markets that is already taking place.

The abolishment of import registration requirements along with the application of Community Directives regarding competition will create a more liberal framework for firms to conduct their business. In this regard, it is also worth noting that some customs duties still in effect will be eliminated. Imports from EC countries are now duty-free for over 80 percent of the industrial products. The remaining products still face some tariff protection that varies between 2 or 3 percent and 20 percent. The lower tariffs are generally residual duties in the process of being removed entirely. The higher tariffs are a result of duty reintroduction in the context of an "infant industry clause' in the 1972 Agreement. All of them will be gradually eliminated during the transitional period. Also, the tariffs which Portugal now applies to goods coming from non-EC countries will be gradually changed until they reach the levels of the EC Common Customs Tariff Schedule, which generally provides less protection than the present Portuguese Tariff Schedule. Opening up of the domestic market will contribute to higher efficiency, more investment and better resource allocation. This is also shown by past free trade experiences. In the case of Portugal, the lower tariff protection associated with Portuguese membership in EFTA and the EC Trade Agreement provided an important stimulus to domestic-oriented industries.

All indications are that the same effect can be expected from the liberalization of the Portuguese domestic market that will be associated with EC membership. When Italy joined the other five countries in the establishment of the Common Market, some feared that, given the different levels of industrial development, the Italian industry would be crushed by the European giants. Despite the gap in productivity, efficiency and size, Italian industry has done extremely well and has rapidly developed in a number of sectors such as electrical appliances and machine tools, and is now one of the major European producers of computers. Italian industry took advantage of the market enlargement and trade liberalization, strongly focusing on its comparative advantage. Other EC countries had similar experiences and Portugal is expected to follow suit after accession. A transition period has been engotiated with the EC to allow for a gradual adaptation of the Portuguese economy and structures, and to avoid unnecessary shocks.

Portuguese-based companies, both locally and foreign-owned, will have access to what is called the "European Free Trade System' (the 17 EC-EFTA nations), constituting a market of 310 million with a combined GDP of $2.75 trillion and an average per capita GDP of over $8,800. Economic activity has been picking up in Europe since 1983, although at a slower pace than in the U.S. recovery. Projections now indicate a period of moderate but steady growth, with real GDP growth averaging 2.3 percent in EC countries and 2.5 percent in EFTA countries.

After accession, looking at the Portuguese industrial base and taking into account the effects described above, we can expect to see the first group of industries (the more traditional ones), strengthening their structures and improving their efficiency at the same time that they consolidate and increase their share of the European market. The second group of capital intensive basic industries will probably maintain their positions, while productivity will grow with their technological upgrading.

Is is in the third and fourth groups of industries, however, that more spectacular developments will probably occur. Growth in these industries will reflect a better exploitation of comparative advantages. The opportunities afforded by EC accession will likely be concentrated in sectors such as hand fools, electrical and non-electrical machinery, electrical cables, medical and surgical equipment, optical and precision instruments, forest-related products (such as paper and resins), automotive components and tourism. Portugal is also likely to develop a comparative advantage in more advanced sectors like bioproducts, fiber optics, and electronic components.

Portuguese industry already enjoys a relatively skilled labor force and low labor costs. With EC accession, Portugal will offer access to an enlarged market, along with structural changes which will provide the necessary stimulus, to place Portugal in a privileged position to take part in the third industrial revolution.

Photo: A careful study, followed by planning, seeks to reconcile the development of the Sines and Santiago do Cacem with the preservation of Santiago do Cacem's intrinsic historical value (above). In the early phase of developing the Sines industrial complex, a major priority was to construct a railway system to link the complex to the national railway system and the rest of the country (right).

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