RESTRICTED Report No. EA-128a RETURN TO REPOR-ytb o'GK This report was prepared for use within e Bank. VJT It4publishe nor may I Public Disclosure Authorized it be quoted as representing the Bank's iews. Th n res onsibility for the accuracy or completeness of the onte r or . INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized THE ECONOMY OF PORTUGAL Public Disclosure Authorized May 24, 1962 Public Disclosure Authorized Department of Operations Europe CURRENCY EQUIVALENTS 1 U. S. $ = 28. 75 escudos 1 Portuguese escudo = U.S. cents 3.48 1 million escudos = U.S. $34, 783 1 billion escudos = U. S. $34, 782, 608 OTHER. EQUIVALENTS 1 hectare = 2.471 acres 1 millimeter = 0. 0394 inches 1 meter = 39. 37 inches 1 kilometer = 0. 621 miles 1 kilogram = 2. 205 pounds 1 metric ton = 1. 102 short tons COTTLH!TS Pape Basic Data Summary and Conclusions I. NATURAL AND HUMN0 RESOURCES 1 II. POLITICAL ECONOMY OF PORTUGAL 2 III. ECONOMIC STRUCTURE AND PERFORMANCE 3 Recent Economic Growth 3 Principal Economic Sectors 5 Agriculture 5 Forestry, Fishing, Mining 7 Manufactures Electric Power 9 Transportation 9 Tourism 11 IV. FINANCE AID DEVELOPM-11T PLANNING11 Honey and Banking 1 Public Finance 13 Development Planning 14 V. THE OV]LRSEAS PTROVIN-CES 17 VI. OL 1ZilTJ'CO!NH1i1C RL.iTIONS 19 Balance of P~ayments 19 Trade and Payments Policies 21 VII. PROSPECTS FOR ECONO01i1IC D["EL0P1,MNT 23 Growth of National Output 23 Public Finance 24 Balance of Payments 24 VIII. CONCLUSIONS 25 Statistical Tables 1 to 25 Chart on Organization of Government Maps - 1.. General Ma~p 2. Precipitation 3. Land Use 4. Electric Power BASIC DATA Area and Population (June 1%1): Area Population Hetropole 35,400 square miles 9.2 million of which: Azores and Madeira 1,200 "0.6 Overseas Provinces 804,000 I " 14-15 " Net National Income Per Head (1961): U.S. !235, increasing 3% p.a. External Public Debt (May 1. 1962): 5.9 billion escudos (U.S. '204 million) 1.956 1957 1958 1959 1960 1961.1/ (billion escudos) Gross Domestic Product: (factor cost, current prices) 50.9 53.6 54.7 58.3 62.3 66.2 of which, in percentages: Agriculture 29 29 27 27 26 n.a. Manufactures (inc. construction) 35 36 37 36 38 n.a. Industrial Production (1953 = 100) 130 137 147 155 172 180a/ Real GDP (1950 = 100) 127 133 135 143 149 159 Gross Fixed Investment (%GDP) 15 15 16 17 17 17 Money Supply (year end): 25.8 27.2 29.3 31.5 34.0 34.4 Retail Prices (1948 =-100): 104 106 108 1.09 11.1 11,11 Factory Wage Rates (1948 = 100): 11.8 1.23 125 130 132 138 Farm Vage Rates (1948 = 100): 103 104 109 1.15 125 130 Balance of Payrents: ftrmplle (with foreign countries): Exports (f.o.b.) 6.6 6.3 6.2 6.1 7.1 7.3 ImportC (f .o.b.) 10.1 11.L10.6 107 12.1 115.0 Balance of Trade -3.5 -5.1 -/...4 -!,.6 -5.0 -7.7 Current Account Balance -2.2 -3.2 -2.2 -2.5 -3.1. n.a. Overall Balance -1.1 -2.1 -1.8 -1.7 -2.8 n.a. Overseas Provinces (with foreign countries): Balance of Trade 1,.5 1.4 1.9 2.1 1.9 n.a. Overall Balance 2.3 2.2 3.0 2.8 2.7 n.a. Escudo Area Balance 1.2 0.1 1.2 1.1 -0.1. -2.6 Escudo Area External Reserves (year end): 21.7 21.6 22.3 23.2 22.8 20.0 1/ Preliminary. Q/ January - October average: 9% above same period of 1960. Continued 1956 1957 1958 1959 1960 19,61 (est.) (billion escudos) Government Finances: Zxpenditures - Current 5.6 5.6 5.9 6.9 7.4 n.a. i - Capital 2.1 2.6 2.8 2.9 a,9 n.a, I - Total 7.6 8.2 8.7 9.8 11.3 12.8 Revenues Total 7.4 8.0 8.5 8.9 10.1. 10.4 Palance -0.2 -0.2 -0.2 -0.9 -1.2 -2.4 financed by: internal loans: 0.2 0.2 0.2 0.8 1.1 2.4 Treasury reserves: 0.0 0.0 0.0 0.1. 0.1 0.0 j/ Budget estimate: 3.5 billion escudos. Note: All series refer to Metropolitan Portugal, unless otherwise specified. SU1MARY AND CONCLUSIOWS 1. In Metropolitan Portugal, almost half the 9 million people live on the land, and the standard of living is one of the lowest in Europe. There is substantial migration to the Overseas Provinces and South America, and population increase is only 0.8% per year. 2. Economic growth averaged 4% per annum during the 'fifties. Poor soil, low rainfall and hilly terrain combined with problems of land tenure and farm management to make for a virtual stagnation of agriculture. On the other hand, with government assistance and low labor costs, manufactures expanded rapidly, and the infrastructure was greatly improved. The govern- ment pursued conservative fiscal and financial policies. The budget was balanced, and overall economic policy was strongly anti-inflationary. The rise in prices over the last decade was moderate, and substantial inter- national reserves were accumulated. 3. A sign of change in official policy was the Six-Year Development Plan launched in 1953. The Second Development Plan, 1959-1964, is a list of high-priority investments in both private and public sectors for which the government is prepared to help mobilize funds if necessary. Considerable reliance is placed on external sources of finance. The plan covers only one-third of total investment, and less than half of government investment: it is not meant to be a blueprint for over-all development. 4. Three major economic problems confront Portugal. One is the stagnation in agriculture. Another is the shortage of investment funds, and the need to generate more public savings through fiscal measures. Finally, Portugal's foreign trade position is not strong. The deficit on the balance of trade is large and is growing, and the overall balance of the escudo area rests on the current account surplus of the Overseas Provinces with foreign countries. At present, Portugal has a large favorable service account with the Provinces, which also provide raw materials and markets for Portuguese manufactures. 5. The economic and political life of Portugal is closely entwined with that of the Overseas Provinces, which constitutionally are an integral part of the Republic. The evolution of the relations between Portugal and the Overseas Provinces could therefore have economic implications of considerable significance, which it is not at the present time possible to discern. 6. Apart from uncertainties which are essentially political in origin, there are good prospects for increased investment and for income growth at 4 to 5% per year in Metropolitan Portugal. Manufacturing may be expected to continue its rapid growth, and forestry and fishing should expand steadily. The government should be able to increase its revenues and its -ii- development outlays without inflationary pressure being generated. Finally, export income should grow some 41 per year, principally through increasing exports of fish and forest products and textiles; and the service account should be strengthened by rising receipts from tourism and emigrants. 7. At the end of 1961, Metropolitan Portugal had a low external public debt (P76 million), a small debt service ratio (1.4% of exports to foreign countries), and large international reserves (;P692 million). Greater development effort will for some time place a strain on the balance of payments, and while there is some scope for increasing local savings, the low level of incomes means that any substantial advance will require external capital in addition to local resources. Even taking into account the additional $1.27 million borrowed abroad since the beginning of 1962 (including $90 million for the Tagus bridge), Portugal's external debt position, financial structure and growth prospects indicate a satisfactory margin for increased foreign borrowing. THE ECOJOMY OF PORTUGAL I. NATURAL AND HIMAN RESOURCES 1. Constitutionally, the Republic of Portugal consists of the mainland on the Iberian Peninsula of southwest Europe, the adjacent Madeira and Azores Islands, and the Overseas Provinces, principally in Africa, an area amounting to some 840,000 sq. miles with a population of 23 million people, mostly African. This report is primarily concerned with Netropolitan Portugal which, including Madeira and the Azores, has an area of 35,400 sq. miles and a population of 9.2 million. 2. Portugal is a predominantly agricultural country, and yet much of the land is ill-suited to farming. The scarcity of good agricultural land is in part due to low rainfall and annual summer droughts, in part to poor soil and the hilly nature of much of the countryside (see maps). On the other hand, the mountains of the north-central part of Portugal and of nearby Spain provide abundant water for the generation of electricity. Lxtensive forests and good deep-sea fishing are other important economic assets. There is also a wide variety of minerals, but they are often found in deposits too small or inaccessible for economic exploitation. 3. About one-third of the mainland population lives in the principal cities of Lisbon and Oporto, and there is also a substantial urban popula- tion in industrial towns nearby. Almost half the population lives on farms or in rural villages in the north or center of the country, the remainder of the farm population being tenant farmers and laborers on large estates in the south.