Portugal Forgets Empire and Plays Catch-Up With Modern Europe

Lisbon, a charming but dilapidated coastal city of seven hills, looks more like a teeming Third World metropolis than the modern European capital that it is.

There are the sloping terra-cotta roofs, the palm trees, the well-used park benches and ugly modern monuments. Shoeshine men work on the black-and-white tiled sidewalks and pedestrians dart through honking, fume-spewing traffic. The people look sturdy, and not particularly fashion-minded.

This scene underscores how far Portugal, perched on the southwestern fringe of Europe, has to go to achieve its goal of catching up with its neighbors. Now an overheating economy is further imperiling that ambition.

A surging inflation rate and trade deficit could hamper the small country’s ability to expand and modernize in readiness for 1992. That’s when the 12-nation European Community, which Portugal joined in 1986, becomes one barrier-free marketplace of 320 million consumers.

In the late 1980s, Portugal is belatedly turning its attention eastward to the rest of Europe after hundreds of years of looking across the Atlantic and into Africa and India.

The 10.3 million Portuguese, descended of Celtic, Roman and Moorish conquerors, perhaps have come to terms with the loss of the globe-circling empire that their famous explorers discovered five centuries ago.

Portugal’s colonial legacy is still evident in the relaxed mingling of black, brown and white faces in Lisbon’s cafes, in the curry in Portuguese food, in the easy command of English in this Portuguese-speaking country.

After painful recession, austerity and more than 25% inflation in 1983 and 1984, Portugal is one of Europe’s most dynamic economies. Gross domestic product has grown 4.5% a year on average for three years, and is projected to continue at 3.5%. Unemployment has been halved to nearly 6%.

A conscientious debt-repayer, Portugal has cut its foreign debt to $16 billion, down from 80.4% of GDP in 1985 to 40.7%.

But signs of economic overheating appeared last year, forcing unpopular measures. Prime Minister Anibal Cavaco Silva’s center-right Social Democrats, who won an unprecedented majority in Parliament in the June, 1987, general election, have lost support in recent months.

A poll recently published in O Jornal showed the Social Democrats down to 41% nearly halfway through their four-year term from just under 50% in the election. The clean-cut, 49-year-old prime minister has developed a reputation for being abrasive and overly self-confident.

The opposition Socialists, meanwhile, have gained to 36% from 22.3%, and Socialist President Mario Soares, a legendary, consummate politician, has become increasingly popular.

Nonetheless, Cavaco Silva is still expected to be the first Portuguese leader to survive a full four-year term since the 1974 Revolution of the Carnations, which ended 48 years of authoritarian rule, mostly under rightist dictator Antonio Salazar.

“We are making our way firmly forward toward a more efficient and competitive economy, a more creative and enterprising society, a freer, more modern country, without being perturbed by those who would like Portugal to turn back to the past,” the prime minister said in a recent speech.

The most prominent opponents of modernization are farm workers, who are resisting the planting of eucalyptus trees for paper pulp processing, fearing these will replace traditional olive trees and threaten farm jobs.

The eucalyptus war reached a climax in late March, when local people trying to dig up newly planted trees in Valpacos clashed with national guardsmen.

In Lisbon, there are plenty of complaints, too.

Jaime de Lacerda, director of the Confederation of Portuguese Industry, said, “Now people tend to criticize the government a lot and the mood is a very critical one.”

Said economist Jose Cavalheira Antunes of Banco Espirito Santo, “I think we have a certain situation of crisis.”

You hear it on the streets.

Isaac da Silva, a 52-year-old taxi driver, said, “Many people are unhappy because life isn’t easy. We have to work very hard. The cost of living is very hard.”

But not everybody is negative.

Licelia Godinho, a 35-year-old car rental worker, said, “There are more jobs. There is less poverty in particular than in the other days.”

Inflation has jumped to an annual rate of 12.3%, more than twice the government’s 6% target for this year, while the trade balance went into the red last year, giving it a $5.9-billion gap.

Strong consumption and investment are to blame. Recent political stability has unleashed long pent-up demand.

To cool the economy, the government in April instituted 11 financial measures that raised interest rates--now at nearly 15%--reduced banks’ liquidity and restricted the availability of credit, particularly in the booming car-sales market.

Although some measures were widely regarded as necessary, they were attacked as late and misdirected. They have underscored the government’s tendency to intervene while simultaneously championing free-market policies.

“Again, it is the private sector that is suffering,” said Luis Campos e Cunha, an economics professor at Lisbon’s New University. “They should be thinking of squeezing public expenditure.”

Foreign investors complain of having to cope with the frequent policy changes and voluminous red tape. Taxes are complex and labor laws restrictive. There are periodic public sector strikes.

Foreign Investors

Nonetheless, foreign investors, seeking a foothold in the Common Market ahead of 1992 and attracted by Portugal’s low wages, invested $496 million in the year ended October, up significantly from $166 million in 1986.

Said Nicholas Racich, administrator of Manufacturers Hanover Trust Co.’s Portuguese operations, “You have to keep plugging away.”

But the millions of dollars of EC financial aid that have flowed into Portugal have proved a mixed blessing. Although it has enabled much-needed improvements to transport and communications to begin, EC demands for Portuguese matching funds have worsened the budget deficit.

The government is implementing far-reaching economic reforms, including restructuring the capital markets.

The third-tier Lisbon and Oporto stock exchanges, not yet fully recovered from the stock market crash, are being modernized and combined into a national bourse. In late April, the government launched an ambitious privatization program with the sale of a 49% stake in Unicer, the state-owned brewer.

“We want to create the confidence, confidence on various levels, not just in the market but also in the financial institutions,” said Rui Ambrosio Tribolet, the Lisbon Stock Exchange’s general secretary.

But another problem is that Portugal’s progress is expected to widen social divisions.

‘Everyone for Himself’

Said Cavalheira Antunes: “The idea of social solidarity is regressing and the idea of everyone for himself is coming out on top.”

Portugal lags behind its neighbors on many counts.

At about $3,700, its per capita GDP is Europe’s lowest. It has the worst literacy rate and one of the highest infant mortality rates.

Portugal imports 80% of its energy and, surprisingly, half its food, even though one-fifth of the population works in agriculture.

The country is extremely dependent on tourism. Each year, Portugal’s population more than doubles as tourists flock in, mostly to the southern Algarve coast.

Other big industries tend to be traditional: textiles, footwear, cork, forestry products, fishing, wine and ceramics. Shipbuilding and repair, and construction also are important.

The experts say 1992 poses two possible scenarios.

If it’s lucky and smart, Portugal could become Europe’s California by concentrating on exotic produce, high technology, light manufacturing and tourism.

If it is not, foreigners might buy up Portugal’s choice assets, leaving it flooded with imports and producing the low-tech, low-profit goods.

The Portuguese, who are mostly Catholic, conservative and family minded, have a reputation for being resilient in adversity and flexible in the face of change.

In particular, Portugal prides itself on successfully absorbing about 700,000 Portuguese retornados and African immigrants who fled to the country in the mid-1970s after Portugal gave up its African colonies of Angola, Mozambique and Guinea-Bissau.

Optimistic about the outlook is the industry confederation’s Lacerda, who said: “I think we are not going to miss the opportunity of 1992.”