Portugal, situated on the Iberian Peninsula between Spain and the Atlantic Ocean, has been an independent state since 1640. The state was governed by a dictatorship in 1928–74 under António Salazar (1928–68) and Marcello Caetano (1968–74). Caetano was overthrown in 1974 in the ‘carnations revolution’ led by a group of professional soldiers. Following this left-wing revolution Portugal’s democratic constitution came into force in 1976. The transitional phase was characterized by a left-wing political agenda of nationalization and social reform as well as the liberation of Portugal’s colonies in Africa (Angola, Guinea-Bissau, Mozambique) and Asia (East Timor and Macao). Portugal subsequently underwent a gradual transition to stable democracy. The country joined the European Community (EC) in 1986 and has benefited politically and economically from membership. The two main political parties—the Socialist Party (PS) and the Social Democratic Party (PSD)—are both strong advocates of membership and have directed domestic policy since the early 1980s to meet the criteria for membership first of the EC and then of Economic and Monetary Union (EMU).
According to its Constitution, Portugal is a democratic republic. The country is often referred to as a semi-presidential state: the head of state, directly elected every five years, exercises a direct influence on politics. The President can veto legislation and has the power to dismiss a government and dissolve parliament. The current President is the socialist Jorge Sampaio who was first elected in 1996. Legislative power lies with the Assembléia da República which is elected by a system of proportional representation every four years unless parliament is dissolved and early elections are called. This happened in December 2004 and new elections were held on February 2005. Executive power lies with the government, which since 2005 has been an PS single party majority government headed by José Sócrates. Portugal is a unitary and centralized state. The socialist government’s proposal to establish eight regional authorities was rejected by the public in a government-sponsored referendum in November 1998. Some 63.3% of voters rejected regional devolution as a general issue and 64% rejected the proposal as a good idea for their own region. The turn-out was 48.3%. The proposal was supported by the PS and the Communist Party of Portugal, but opposed by the PSD and the Popular Party (PP).
Portugal’s first 10 years of parliamentary democracy were marked by unstable coalition and minority governments, of which there were no fewer than 16 in 1974–87. These included a government of the left in 1974–79 and a government of the centre-right, dominated by the PSD, in 1979–83. Under Prime Minister Mário Soares the PS led the ‘Centre Bloc’ coalition in 1983–85 and effected tough economic reforms recommended by the International Monetary Fund. The PS was punished for these policies in the general election of October 1985, which the PSD won. PSD Prime Minister Aníbal Cavaco Silva governed for one-and-a-half years, leading a minority government, and was re-elected in 1987 with an absolute majority. This followed a vote of censure in April 1987 and early elections in July of that year. The government of 1987–91 was the first to serve the full four-year term of office. Cavaco Silva, who governed until 1995, presided over reform of the economy and Portugal’s accession to the EC in 1986, and sought to undo the post-revolution laws, such as employment laws and nationalization laws. He announced that he would not stand for re-election in 1995.
The PS won the elections held in 1995 and Prime Minister António Guterres led a minority government that relied on the Communists and the PP to pass legislation. The government was re-elected in 1999 with exactly one-half of the seats in the Assembléia da República; its success was attributable to the political and economic policies it had pursued and to Portugal’s qualification for entry into the first wave of EMU. Guterres resigned as Prime Minister and PS party leader in 2001 after his party’s had performed poorly in local elections. New elections were called, 18 months early. In these, held on 17 March 2002, the PSD, led by José Manuel Durão Barroso, won 40.2% of the vote and 105 parliamentary seats, and subsequently formed a coalition government with the PP, which won 8.7% of the vote and 14 seats. As Prime Minister, Durão Barroso intended to cut taxes. However, in 2002 he was forced to raise them when it emerged that Portugal had breached the Stability and Growth Pact which obliged members of the euro area to maintain their budget deficit at less than 3% of gross domestic product (it was 3.9% in Portugal in 2001). Durão Barroso resigned as Prime Minister and leader of the PSD in 2004 following his appointment as President of the European Commission. The government of Pedro Santana Lopes was plagued by unemployment and other economic problems, and lasted for only five months. The PS won an overwhelming victory on 20 February 2005 on a promise to improve economic growth, reduce unemployment and transform Portugal into a technology-rich economy.
Economy: The Portuguese economy is traditionally dominated by agriculture, fishing and tourism in the south, and by textiles, shoes, ceramics and wine in the north. Apart from some large industrial companies, at the end of the 1970s most firms in the north—where three-quarters of industrial firms are located—employed fewer than 10 workers. Portugal has one-third of the world’s cork trees and provides 55% of world’s output. Portugal has benefited economically from membership of the European Union (EU). In the 15 years to 2000 the gap in living standards between Portugal and the rest of the EU halved. Gross domestic product (GDP) per caput (at PPP) in 1986 was 53% of the EU average. By 2000 it had risen to 75%. However, regional disparities still exist: per caput GDP is 90% of the EU average in Lisbon, but only 50% in the Azores.
GNP: US $109,300m. (2001); GNP per caput: $10,900 (2001); GNP at PPP: $178,000m. (2001); GNP per caput at PPP: $17,710 (2001); GDP: $109,803m. (2001); exports: $51,419m. (2001); imports: $58,275m. (2001); currency: euro; unemployment: 5.1% (2002).
Portugal has an open economy that is reliant on foreign trade, and has been a member of the European Free Trade Association since its foundation in 1974. Portugal was late to industrialize and its dictator António Salazar (1928–68) originally promoted the ideal of a rural economy and society. Industry and trade was encouraged from the 1950s onwards and industrial output increased throughout the 1960s at 14% per annum. In the same period there was mass emigration as some 2m. left the country. Following the revolution in 1974, the state took charge of one-quarter of the economy, and financial services, steel, shipbuilding and beer production were nationalized. The left-wing revolutionary regime developed a large public sector and welfare state. It offered generous subsidises to nationalized industries and strict laws to protect labour. Government spending increased significantly, not least because wages rose by 35% in 1975–76. The Portuguese public sector remains large, with 708,000 workers, some 15% of the workforce, employed by the state. The government still spends more than 50% of the country’s GDP.
Portugal experienced slow economic development for the first decade after the revolution and the economy suffered from a number of weaknesses. The country had relied on its colonies for cheap raw materials and revenue and was deprived of these when the colonies were liberated. Domestically, there was insufficient investment in infrastructure and productive and human resources. There were low levels of education and the rate of illiteracy among the population aged 15 years and over was 16%. The business sector was based on family businesses and undercapitalized. The banking sector was highly regulated until 1984 and the stock market remained dormant until 1985. During the late 1980s and early 1990s the Portuguese economy underwent a significant and rapid transformation. Portugal had the fastest rate of economic growth in Europe in 1986–88: the economy grew by 4.3% in 1986 and by 5% in 1987. The rate of inflation, which was 25% in 1983 and 1984, fell to 8.2% in 1988, and the rate of unemployment declined from 9% to 6.6% in the same period. Moreover, the state halved the public deficit in the two years to 1987.
The transformation of the Portuguese economy has been attributed to three things. Portugal sought assistance from the International Monetary Fund on two occasions, in 1977 and 1983; the adjustment requirements imposed on the second occasion were taken particularly seriously by the ‘Centre Bloc’ coalition government at the time which was made up of the two main political parties (the Socialist Party and the Social Democratic Party). Portugal applied to join the European Community (EC) in 1977 and became a member in 1986. It was required to adjust its economy to meet the conditions of the Single European Market in 1992, though some sectors were granted transition periods of between five and 10 years. From 1985 successive Portuguese governments undertook a programme of privatization. The Constitution was changed twice: first to allow the privatization of industries which had been nationalized in the revolutionary years, and then to permit the reduction of the state’s share of ownership of the economy to less than 50%. The highly regulated banking sector was liberalized from 1984: the state privatized many banks, 90% of which had been state-owned, and foreign banks were allowed to establish themselves in the country. The removal of credit controls at the start of the 1990s also fuelled a massive consumer boom. Foreign direct investment increased and trade and investment opened up, particularly with neighbouring Spain.
Portugal also benefited financially as a poor member of the EC. In the first two years of its membership it received 137,000m. escudos from the EC in the form of structural funds and cohesion funds. Transfers from the EC were equivalent to 4% of the country’s GDP in 1992. Some 30% of EC funding was spent on agriculture and the rest was invested in infrastructural projects such as the improvement of telecommunications facilities, motorways and bridges, as well as to improve skills and new technology. EC membership also gave Portugal macroeconomic credibility. It joined the Exchange Rate Mechanism in 1992, but was forced to devalue the escudo in November 1992 and May 1993. By means of strong political determination to join the first wave of Economic and Monetary Union (EMU) it succeeded in meeting the convergence criteria for membership by cutting its budget deficit and public-sector deficit, tightened fiscal policy and used revenues from privatization to eliminate debt. The rate of inflation fell from 12.6% in 1991 to 2.5% in 1999. Macroeconomic stability was also secured by a system of national social bargaining that was established in 1984 through the Conselho Permanente de Concertação Social (CPCS). The CPCS—made up of the government, trade unions, and employers’ organizations—agreed wage policies, working conditions and working hours. The institution led to moderate wage claims, which helped keep inflation under control, and social peace.
The rate of convergence between Portugal and the EU slowed from the late 1990s and by 2001 Portugal was growing at a slower rate than other EU countries. It also experienced difficulty in adhering to the conditions of the Stability and Growth Pact for membership of EMU. In 2001 the country narrowly avoided being officially reprimanded by the European Commission on account of its high level of public spending that led to a budget deficit equivalent to 3.9% of GDP in 2001. Portugal was able to avoid fines and denial of access to cohesion funds by reducing public spending and raising taxes. The budget deficit was equivalent to slightly less than 3% of GDP in 2004.
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