Portugal: A Paradox in Productivity

December 22, 2017

Portugal is less productive than advanced economies. Paradoxically, the recent improvement in areas such as human capital, investment in innovation and R&D or a more friendly business environment has yet to lead to convergence in productivity levels. The Portuguese labour productivity as a percentage of G7 countries peaked in 1993 at 63.4%, decreasing since then to 58.4%. A similar trend is observed for productivity as a percentage of the average of EU core countries (from 60.1% to 57.4%) and in multifactor productivity (it grew on average by 3.3% since 1995 in Portugal and by 11.8% in the G7 countries). The paper discusses the association between an increasing misallocation of capital, labour and skills both at a sectoral and firm level and the larger slowdown in productivity growth in Portugal than the one occurring in more developed economies. Moreover, it discusses policy proposals to enhance aggregate productivity growth in the Portuguese economy within a framework of growing integration in global markets: policies to improve the business environment and promote greater product market competition by removing institutional barriers to entry and to growth, tax and other targeted policies to attract FDI, coordinated policies in the areas of education and employment so that incentives are oriented to improve skills and to prompt managers to correct practices that negatively affect productivity growth, a less segmented labour market to increase allocation between tradable and less-tradable activities and the state and private sectors, systematic policy evaluation and a transparent and simpler set of public incentives to induce the change of resources from sheltered to tradable sectors and reduce the misallocation of resources.

Click here to go to the paper by Ricardo Pinheiro Alves.