This time it is different!

Apart from this Government’s competence, the state of grace of Portuguese economic growth enjoys a structural effect from Passos Coelho’ Government.

The title is an ironic throwback to one of the most interesting economics books title’s published in recent years (Carmen Reinhart and Kenneth Rogoff in 2009). With this question about warnings, signals and fate, I want to call your attention to the sensitive political interpretation of recent GDP performance figures. Is it the most appropriate occasion to praise the economic resurrection by raising the figures released by the Instituto Nacional de Estatística (Portuguese’s National Statistics Institute)? According to the published data, the Portuguese economy grew 2.8% in 2017’s first quarter, counting on the contribution of net external demand (NED).

The economic dynamics evidenced by the INE are positive and remarkable. But it poses a problem to political dynamics. The opposition will not be comfortable with this data. Not because it wishes poor results, but because it has trapped itself in an argumentative alley. And that may not be good. When a democratic government is restricted to the criterion of economic performance, the numbers rule. And this is not a criticism of the Portuguese right-wing parties – now members of the opposition at the Parliament. It is a logical corollary of our political system, in which the dictatorship of numbers is transversal to all parties when in the shoes of the opposition. The parties tend to reflect the success or failure of policies from a criterion of objectivity, based on a simplification to which they call “economy” and the way it behaves. But economics is more characterized by a Heisenberg uncertainty principle than by a Newtonian vector sum. I only wish to emphasize the numbers’ instrumental character for a political judgment. Both before – during the PSD-CDS Government – and now – under the “Geringonça”[1] (the “Contraption”).

However, I do not wish to claim that the GDP performance figures do not play a significant role in reading economic performance. Nor do I wish to claim that the GDP data is useless. They aren’t, of course. However, if we are to use economic language, its effects are exacerbated by the existence of a marginal utility with increasing returns to scale in the political system and in the maintenance of government power whenever the GDP data are useful. Thus, in order not to make decisions that are too short-term, we must be careful in interpreting growth data.

What, then? Is this a real effect of the current Government’s policies or are these numbers a delayed effect, which only now is beginning to be felt from the austerity purge implemented by Passos’ Government? While it is true that António Costa always defended a path of economic development based on internal demand, Passos Coelho, by defending austerity, maintained an increased need for an external market. Who was (is) right after all, according to the numbers? To be strict on the matter, I would say that both were and are right. While it is true that NED had a positive balance in the first quarter, it is equally true that the policies for income replacements, the balance of public accounts and the evolution of the indicators of confidence have all contributed to a growth sustainability that has taken place now, under Costa’s governance.

My opinion is that, apart from this Government’s competence, the state of grace of Portuguese economic growth is enjoying a structural effect from Passos’ Government. With budgetary restrictions imposed during the austerity program, with the consequent contraction of domestic demand, Portuguese businesspersons were forced to increase the degree of internationalization in order to reduce domestic demand. Hadn’t Portuguese companies been oriented to other markets, perhaps today we would not be talking about these growth numbers! If any positive aspect resulted from austerity this is, undoubtedly, one of the few to retain. And this redirection to internationalization by companies has had a strong impact on the external accounts sustainability. I would thus say that Costa enjoys a period of sustained economic development. The sustainability of the external accounts by the positive action of the companies’ internationalization, combined with a reinforcement of the internal market by the policies of the current Government, give a glimpse of positive aspects for the future. Bottom line, Democracy works, and care must be taken with excessive manipulations of the data, both then and now.

This care in interpreting data is very important if we do not want to neglect the inherent weaknesses of our economy. Public accounts should continue to show signs of debt reduction. Only this way will be possible for a greater latitude on sustainable policies and the strengthening of the social state that will not exclude the most fragile ones. This is Costa’s merit.

The road is not easy. Crises and economic shocks exist. In these moments, cynicism invites democracies to populism. But Portugal’s recent History and its young democracy show a resilience to the electoral turmoil of the Western world as well as an effective functioning of the party system – hence these numbers and the growth that accompanies them. Portuguese democracy is young – although this is often presented as a problem – but youth can also be an advantage. Indeed, this time must be different. The numbers seem to agree!

[1] The geringonça term emerged from the Portuguese right-wing parties to criticize António Costa when he negotiated – in an allegedly desperate way to become prime-minister – a dealing with the Portuguese Communist and Bloco de Esquerda Parties to ensure a parliamentary support for the new government.

This article translates a column originally published in the Portuguese newspaper Público.

(the opinion expressed herein is binding only on the author)

José Borges Alves

Senior Research Fellow