The Challenge of Economic Recovery

Portugal has faced, in the last few years, important economic and social challenges, with notorious effects on business activities and in the life of its people. Phenomena such as the increasing financial and trading globalization, the adhesion to the euro, the emergence of economies such as China and India, the enlargement of the European Union to 27 countries and, more recently, the global financial crisis, placed the Portuguese economy under heavy pressure, demanding changes in public administration, in the entrepreneurial fabric, in human resources and even in economic habits.

This pressure was a very clear opportunity for Portugal to modernize and develop. As I have stated in several occasions this is a structural challenge that the Portuguese are able to conquer, with the determination, the energy and the will which have been a characteristic of our People, and which I have witnessed, permanently, during my four years as President of the Republic.

The process of the structural transformation of an economy frequently results in several negative, and often severe, consequences in people’s lives. It is thus essential that public policies combine the path of modernization and development of the Country with a cautious follow up of its effects on the standard of living and essential rights of the people, especially those which are less protected and most affected.

In the face of the economic, social, cultural and political reality in which we live, it would be dangerous to ignore or delay the changes which will allow Portugal to assert itself as a developed society. However, only with the unequivocal mustering of all the agents, in an environment of fairness, social balance and national cohesion will we be able to really advance. It is illusory to think that Portugal is able to develop while it continues a dual society, a two stroke process, discriminatory for many layers of citizens or several regions.

I believe that, equally in this context, the President of the Republic has a relevant role to perform.

First of all, the President of the Republic must contribute towards a correct and deep diagnosis of the difficulties and opportunities faced by the Portuguese economy and society. I have endeavoured to do so by stating the truth regarding the Country’s economic and social situation, by pointing out the challenges which Portugal is facing and, very specially, by mustering the Portuguese for the recovery of the economy, through statements, political influence, promotion of initiatives leading to an improvement in the living standards of the people, and by disseminating the many good examples which exist amongst us. As I have often asserted, I believe that truth bequeaths confidence, whilst illusion generates distrust.

Secondly, it is the President of the Republic’s duty to fight for the Country’s social and economic balance. I have specifically emphasized the need to guarantee the good operational standards of the institutions: the full and complete defence of democracy’s fundamental values is essential for the future of the Country. I have equally endeavoured to allow the less protected and those who are traditionally further away from the thoughts of the political powers to be heard, pointing out the risks associated to phenomena such as unemployment, poverty, exclusion, social inequalities and lack of regional symmetries. I am fully conscious that only in an environment of political, economic, social and institutional stability will we be able to hope that Portugal progresses towards levels of development and well being better consistent with our ambition and with the advantageous position we enjoy as a Member State of the European Union.

Thirdly, the President of the Republic must contribute towards the creation of a favourable environment for the implementation of the structural reforms that Portugal requires to answer the challenges of development. I am well aware of the difficulties associated to structural reforms and the natural resistance which these tend to attract. I am equally aware that reforms carry important risks if they are not adequately carried out: change for the sake of changing is not an acceptable choice. It is with this perspective that I have endeavoured to intervene, stimulating dialogue and understanding, pointing out paths and evidencing opportunities, calling attention to the need to create conditions for the Country’s modernization, and also giving warning of the risks attached to the chosen options.

My belief in the Portuguese, in their capability to overcome adversity and to understand the challenges at issue has been sufficient motivation to continue on this track, fully convinced that, if we unite efforts, we shall be successful.

Portugal’s participation in the Economic and Monetary Union has brought important benefits to our economy: a generally more stable macroeconomic framework, improved access to the European market for goods and services, and favourable conditions for the financing of economic agents.

Counter to this, the adhesion to the single monetary unit implied the loss of important adjustment tools, such as the control of monetary and exchange policies. The answer to these internal and external shocks now depends upon different mechanisms, possibly more complex and demanding.

The significance of this new reality became further relevant with the subsequent enlargement of the European Union and the economic emergence of countries such as China and India, Portugal’s direct competitors in the market for global trade. The European enlargement and the fast internationalization of the new emerging economies have weakened the Portuguese industrial fabric and have placed at issue our traditional model of economic growth.

In spite of the progress apparent in several areas, the adjustment of the Portuguese economy to this new framework has been slow and difficult. In addition, the recent worldwide economic and financial crisis has emphasized the existing problems in the business environment and in the structural weaknesses of our economy, bringing into greater evidence the challenges Portugal is facing and the urgent need for a positive response to such challenges.

In latter years the Portuguese economy has systematically diverged from the European average. In order that the situation does not worsen, a recovery in the potential rate of growth of our economy is necessary. The Portuguese industrial fabric, which is demonstrating a high risk of obsolescence, shows difficulty in creating employment with the desirable rhythm and quality. The unemployment rate has, meanwhile, reached historically very high levels, transversally affecting the various segments of the people, including the young and citizens with higher education. The situations of poverty and social exclusion, the territorial inequalities and the cases of territorial depopulation have increased, placing the people’s rights and national cohesion at risk.

We have seen, in parallel, that the financial situation of the Portuguese economy is clearly unbalanced, either in terms of the public sector or in terms of external relations. In addition to the deterioration of the public debt and of families’ indebtedness, Portugal has shown a worrying trajectory in the increase of external indebtedness, which emphasizes the deficit of the external income balance and seriously threatens the available income and the future well being of the Portuguese.

This development reflects, finally, the insufficient growth of productivity and the competitive difficulties of the Portuguese economy.

There is, in effect, a lack of symmetry in the national productive structure, with many of the larger companies accommodated in sectors relatively protected by the State or in sectors of non transactional goods and services, where competition is less intense than in the global market.

We are facing an undesirable and unsustainable situation. Recent economic history shows that Portugal is unable to support a model of economic development based upon the growth in internal demand and in the sectors of non transactional goods and services, and in the absence of a fully competitive environment.

Facing this difficult reality it is necessary to approach the future with increased determination. It is essential to prepare the Country for economic recovery, adopting a path of sustainable growth, which gains advantages from the lessons learnt with the current crisis and which duly maximises our resources.

The grievousness of the current situation demands immediate action, I am conscious of this need and that is why I have pointed out the importance of inverting, now, in 2010, the situation in which the Country finds itself. In the short term it is fundamental to re-establish the confidence of the economic agents and to create conditions for the increase in production and in the attractiveness of our economy, furthering the recovery of investment, both domestic and foreign.

This comprises, specifically, the presentation of a clear and credible plan for the reduction of the deficit and of the public debt until 2013, maintaining measures of social aid to the unemployed and the more unprotected, ensuring fair, rigorous and efficient criteria for attributing this aid; freeing resources for the private sector, in order not to condition the options and opportunities for the development of companies, especially the small and medium sized enterprises; rigorously define and assess public policies as a function of their contribution to the increase in the external competitiveness of our economy; and develop and consolidate the procedures for regulation and supervision, specifically in the financial area.

In addition it is also crucial to face the challenge of economic recovery in a structural perspective, which allows the convergence of the national economy with that of the more developed countries of the European Union, the increase in the standard of living of the Portuguese, the creation of sustainable and good quality employment, and the fight against territorial and income inequalities.

It must be accepted that Portugal is a country with a small sized internal market and that it depends much on external economic relations, not just in terms of trading of goods, but also in the realm of tourism, of foreign investment and on specific sources of financing. For this reason it is essential to combine the strengthening of our competitive capabilities with a mark of credibility, of modernity and a future which will maintain Portugal in a favourable situation in the global World in which we live.

I have insisted in pointing out that we will only attain a sustainable economic recovery with a determined investment in innovation, in the strengthening of competitiveness and in the conquest of new markets. These are effectively the guiding lines to Portugal’s economic future.

The achievement of these objectives is a task which, primarily, is the responsibility of politicians. It is essential do deepen the structural reforms that further the efficiency in the use of resources and the emergence and development of a private initiative with the will to produce, invest and create employment. This is, for instance, the need to strengthen the credibility of our institutions, specifically the judiciary system and public administration; to contain the macroeconomic imbalances; to modernize the State; to invest in knowledge and research: to re-qualify companies and human capital.

I believe, however, that the challenge of economic recovery is a collective responsibility. As such, it must be fully assumed by civil society, including the private entrepreneurial initiative, local communities and local authorities.

It is my conviction that the President of the Republic, in the current context, has to be a mustering agent and the instigator of conditions and initiatives favourable to development, both through his political activities and through his contacts with foreign institutions and with the economic and social life of the Country. This is what I have endeavoured to carry out, especially within the scope of the «Routes» initiative, which has led me to travel the Country from North to South.

I have tried to encourage the various agents – political, economic, social and others – to act as perpetrators of change, searching for innovative solutions for national and local issues. I have tried to contribute towards the dissemination of the good examples of innovation which exist in the Country and to encourage cooperation between agents and communities. I have tried to provide visibility for initiatives that, due to their innovative capabilities in the economic, entrepreneurial, social, cultural or environmental areas, contribute towards the valuation of own resources and towards the improvement of the living standards of the people.

In the current environment, the recognition of good examples and best practices is an aid to find a course for the future which stimulates the confidence of the Portuguese in their own capabilities to settle the Country’s issues. The dissemination of successful initiatives contributes to the people’s belief in the possibility of replicating similar projects and to strengthen their motivation to take action.

The Country’s issues cannot be resolved only with large projects and with the activities developed in large cities and in large companies. We cannot dispense with the actions of the small and medium sized enterprises that represent approximately 98% of our productive fabric and are the main source of creation of employment. And we can equally not dispense with the production which can be carried out in the municipalities and in the small and medium sized urban centres and in the rural area itself.

The «Route to the Local Innovatory Communities» – that I launched in November 2009 – was inspired, precisely, in the belief that, taking advantage of the effects of proximity, these communities may provide a decisive contribution towards economic and sustainable recovery, through the resolution of social issues; of compassionate actions and cooperatives to aid the more vulnerable; of exploiting and valuating their resources – natural, human, heritage and cultural; of creating new opportunities for local employment; and of strengthening the productive capacity of local authorities and of competitive small and medium sized enterprises.

Sector and regional diversification is, after all, a relevant factor for the future of the Country. This double diversification contributes, on the one hand, to lessen the impact of negative economic shocks on people’s and regional life and, on the other, to explore the path towards the discovery of new areas of comparative advantage, strengthening us in the international markets.

In addition, regional diversification, based on exploiting local resources and traditional products, can contribute to re-establish territorial balances and strengthen national cohesion.

The impact of each local innovatory initiative may not have an outstanding dimension in national terms. But the multiplicity of local initiatives may achieve a very significant aggregate effect. For this reason I believe that it is necessary to intensify, qualify and disseminate these development impulses, mustering the local resources that, otherwise, would be ignored or even overrun.

Local authorities can, naturally, have a relevant role in streamlining local energies and capabilities. Immediately by favouring entrepreneurial initiative and young entrepreneurs, facilitating cooperation and sharing of information between the local economic agents and promoting the development of partnerships and contact networks. But equally by encouraging the micro enterprises to gain dimension, to strengthen the qualification of their human resources, and by improving management techniques and entering external markets.

Local authorities may, in short, exert their influence in the dissemination of a culture of innovation and creativity, so that in economic, social, environmental or cultural activities, independently of size, different and novel achievements are carried out but, above all, carried out with better quality and efficiency. I am certain the local authorities are, more than ever, agents for development which the Country cannot do without.

Since the beginning of my mandate as President of the Republic I have emphasized the relevance of companies’ social responsibility. This reference has become especially pertinent in the last two years. In effect, the origin of the current global financial and economic crisis was largely due to the infringement of ethical standards, and to the adoption of risk behaviours that did not take into consideration the possible negative impact on the living standards of the people.

If the absence of ethical principles and values in the markets, in the policies and in entrepreneurial practices will have been the main cause of the international financial crisis, it is also true that companies’ social responsibility may achieve much for economic recovery: taking due advantage of existing opportunities, using and sharing fairly the available resources, generating favourable conditions for the creation and maintenance of employment, achieving fairness in the remuneration of directors and managers as compared to average employee salaries and accrediting the image of the companies before the people. These are essential components for social cohesion and for the confidence of economic agents, without which a sustainable recovery will not be easy.

In this context I must point out that, during my «Routes» I encountered in the entrepreneurs whom I contacted a strong sense of belonging and of responsibility towards the local communities where they are located. An attitude that expresses itself, for example, by maintaining production units in the interior of the country, believing in local resources and searching for innovative solutions to preserve competitiveness.

Recessions, however distressing, may operate as maximizing phenomena to ensure the capability to reinvent the economies. For this reason, it is essential that we look beyond the current crisis. Avoiding, as I stated previously, the repetition of past mistakes, but by linking efforts, mustering wills and preparing, immediately, to take full advantage of the opportunities which will surely appear in the post recessionary period.

Our capability to answer the challenges of economic recovery will determine our collective future.

This is the time to combat weaknesses, to determinedly proceed with the necessary changes and to encourage the initiatives of the people and of the communities, without neglecting the support for the more vulnerable groups of our society. It is in this sense that I have been appealing the political forces to intensify a culture of dialogue and responsibility and that enterprises, local authorities and civil society, in general, develop a culture that helps mustering the Portuguese for change. A culture of better performance, a culture that searches for merit, innovation and excellence.

Aníbal Cavaco Silva
March, 2010