Don't Shoot the Messenger

The Great Portuguese Hollowing Out

With every passing day Portugal has less and less economy left, while fewer and fewer people remain to try to pay down the debt.

As Portuguese President Aníbal Cavaco Silva once put it, “A country without children is a nation without a future.” He was, of course, referring to his country’s ultra-low birth rate, which is just over 1.3 (Tfr) and has been below replacement level (2.1Tfr) since the early 1980s. In 2012 only just over 90,000 children were born in the country, the lowest number in more than a century – you need to go back to the nineteenth century to find numbers like the ones we have been seeing since the crisis really took hold.

But added to this longstanding, yet unaddressed, problem there is now another, just as dangerous, one. High unemployment levels and the lack of job opportunities are leading an ever increasing number of young Portuguese to emigrate. The numbers are large, possibly a million over the last decade, victims of the country’s ridiculously low growth rate – under 1% a year. And the departures are accelerating. Jose Cesario, secretary of state for emigrant communities, estimated recently that up to 240,000 people may have left since the start of 2011.

Naturally this is one of the reasons why Portuguese unemployment numbers haven’t hit the Spanish or Greek heights. According to data from the Portuguese Institute of Employment and Professional Training, during the first nine months of last year 24,689 people cancelled their unemployment registration due to a decision to emigrate. This compares with 16,977 in the first nine months of 2011. In September alone, 2,766 people signed off for the same reason, a 49% increase on September of 2011. Yet between January and September Portugal’s EU harmonized unemployment rate rose from 14.7% to 16.3%, suggesting that without so many people packing their bags and leaving the figure would have been significantly higher, and offering some explanation as to why government officials don’t do more to try and stop the flow.

Nobel economist Paul Krugman recently suggested that among the ailments Japan was suffering from was a shortage of Japanese. Or put another way Japan’s slow growth is partly a by-product of the country’s ageing and shrinking workforce. Looking at the country’s population dynamics Portugal certainly looks a likely candidate to catch this most modern of modern diseases. Not only does Portugal have the key ingredient behind the Japanese workforce shrinkage – long term ultra-low fertility – it has some added issues to boot. Japan may be immigration averse, but its inhabitants aren’t fleeing in droves.

Of course, a shortage is always relative to something. Many hold that the planet is overpopulated, and that energy constraints mean fewer people would be better. So shouldn’t we be celebrating all these children who aren’t getting born?
Well, no, at least not if you want sustainable pension and health system, and that is what the developed world sovereign debt crisis is all about, how to meet implicit liabilities for an ever older population. One thing Portugal won’t have a shortage of is old people, since the over 65 age group is projected to grow and grow, even as the working population shrinks and shrinks. No wonder the young are leaving, even if the youth unemployment rate wasn’t 38.3%, just think of all the taxes and social security contributions the remaining young people are going to have to pay just to keep the welfare ship afloat. Patriotism at the end of the day has its limits.

Unfortunately population flight and steadily rising unemployment aren’t the only problems the country is facing. The economy is also tanking, and getting smaller by the day.

Far from the recession getting milder as last year progressed it actually accelerated, and there was a 3.8% output drop in the three months to December in comparison with a year earlier.
Naturally, it isn’t all bad news. Exports are doing extremely well. They were up by 5.8% during the course of 2012, and the really good news was an increase of almost 20% in shipments outside Europe – exports to countries outside the EU jumped 19.8% to13.1 billion euros. These now constitute nearly 30% of total exports, up from just over 25% in 2011. In contrast exports to other EU countries – where domestic demand is contracting rather than expanding – were up a mere 1%. In contrast retail sales were down nearly 10% on the year, construction output 15%, and industrial output 5%.

This is a familiar picture across Europe’s southern periphery, where positive export performance does not compensate for shrinking domestic demand due to the smallish size of the export sector, generating a negative environment which ongoing reductions in government spending do nothing to assuage.

And next year it looks set to get worse. The Bank of Portugal is now forecasting a GDP drop of 1.9% in 2013, compared with earlier expectations for a much softer fall. As recently as last October the IMF was expecting only a 1% drop. In any event it will be the third consecutive year of decline, making for five out of the last six years where the Portuguese economy has gone backwards following the best part of a decade where it scarcely moved forwards.

But if there is a shortage of both growth and young people, there is no shortage of debt. Gross government debt as a percentage of GDP hit the 120% of GDP level last year. And it isn’t only public sector debt, the Portuguese private sector owed some 250% of GDP at the end of last year, according to Eurostat records, one of the highest levels in the EU.

Worse still the country’s net international investment position had a negative balance of nearly 110% of GDP, the worst in the EU.

This last detail is important, since according to conventional economic theory it is by drawing down on overseas assets (which have been acquired by pensions and other saving) that elderly societies can help meet their pension and health liabilities (the Japan case). But in Portugal far from reaping returns on this account, paying down these debts, or interest on them, will be a drain on public resources for many years to come.

So with less people working and paying into the welfare system, less GDP, and huge debts the numbers simply don’t add up. This year we will see GDP levels last seen in 2000. Yet in their latest Article IV consultation report the IMF Executive Directors actually “welcomed the [Portuguese] authorities’ impressive policy effort to gradually reverse the accumulated imbalances and prevent future crises”. How they can say this and keep a straight face when talking about a country which is actually travelling backwards in time is hard to understand. It looks increasingly like the Fund is suffering from “integrity flight” and relegating itself to the role of a public relations body for a group of fumbling European politicians.

The depth of ignorance which exists on the challenges the country faces was revealed last year when Prime Minister Pedro Passos Coelho actually said that the best solution to youth unemployment problem was for young people to emigrate. We are increasingly handling the new and complex problems presented by the 21st century with the aid of simplistic formulas derived from 20thcentury textbook economics. It’s time for someone somewhere to wake up to the fact that the old models don’t work, because there are growing number of key factors they simply don’t capture. The poor performance of economists using these models is increasingly getting the profession a bad name among the public at large. Mr Draghi’s outright monetary transactions programme may well be doing a marvelous job of addressing the issue of financial capital flight but it offers few solutions to the human capital one. In the absence of policies which acknowledge these issues exist and then address them none of the sustainability analyses – debt, financial sector, whatever – are worth the paper they have been written on.


I have established a dedicated Facebook page to campaign for the EU to take this issue more seriously, in particular by insisting member states measure the problem more adequately and having Eurostat incorporate population migrations as an indicator in the Macroeconomic Imbalance Procedure Scoreboard in just the same way current account balances are. If you agree with me that this is a significant problem that needs to be given more importance then please take the time to click “like” on the page. I realize it is a tiny initiative in the face of what could become a huge problem, but sometime great things from little seeds to grow.

This is a revised version of an article which originally appeared on the Iberosphere website.

6 Responses to “The Great Portuguese Hollowing Out”

Paul KukhtaMarch 9th, 2013 at 1:33 pm

Mr. Hugh, you've been beating the drums on the demographic issue for several years now – and I've never seen you propose concrete solutions to it. How do you expect this to be solved – by stimulating birth rates, cutting entitlements for the elderly, attracting more immigrants to the EU periphery? The first solution is hard to implement and it would raise the TDR (total dependancy ratio – qunatity of non-working age persons per 100 working age persons), thus magnifying the problems that you're talking about in the nearest decades. The second doesn't sound politically feasible, not to mention its social implications. Attracting immigrants to depressed economies doesn't sound feasible too and there's a whole bunch of problems associated with that anyway. So how do you expect to solve this?

JStCMarch 9th, 2013 at 6:23 pm

2012 ….90,000 births = 7,500 per month = 250 per day … every day for the entire year….that is plenty…more than plenty..if not too much….90,000 is a lot of money/stuff that has to come from somewhere…wages?….

Edward Hugh edwardhughMarch 10th, 2013 at 10:31 am

Hello Paul,

"you've been beating the drums on the demographic issue for several years now – and I've never seen you propose concrete solutions to it".

You are right. I don't have an instant solution to this problem. Indeed in the long run I don't think there is a "solution" as we currently envision solutions.

The conclusion I think we can draw though, is that most of the measures being advocated by mainstream economists don't work, whether this be austerity or stimulus, since neither of these address the fertility issue (it is beyond the bounds of monetary policy). If I am right and it is these epochal swings which lie at the heart of our current difficulties, purveyors of these policies are misleading man, many people, because they are suggesting they can create a sustainable, self sustaining economic recovery when they can't.

So the solution lies in part in adaptation and acceptance. But voters are a long way from this point at present, so we are seeing increasing volatility in the political system as people are expecting something they can't have.

Maybe it is better to think about the demographic issue in a similar way to the climatic one. It is something that is happening, that will happen more quickly or more slowly but it will happen. We are the agents of at least part of this change, but there isn't much policy can do about it. We come from an age where it was thought policy could solve everything, now we discover it can't.

But that doesn't mean we can do nothing. There are specific measures we can take that will help. Naturally some countries can benifit to the disadvantage of others. Those who wake up first to what is happening will be the main beneficiaries.

On the other hand, does it make sense at the moment that so many people in the UK are getting worked up about Bulgarians and Romanians comming to the country to work.

There is a long long road to travel on this front. Maybe seeing what gets to happen in Japan and then subsequently in China will help concentrate peoples minds.

"There's a storm coming".

A SinclairMarch 12th, 2013 at 10:41 pm

Cutting government spending is the only solution. Raising taxes will just accelerate the out migration and bring the crisis forward. All pensions must be cut including those already retired; deductibles/co pays for medical must be raised. Salaries and benefits for all government workers must be cut. It is the absolute failure of the socialistic model. There is no amount of stimulus that will work. The private sector engine is burdened and weak and the business environment must be improved. Labor laws must be relaxed.

I believe that we should change the GDP formula for all countries and measure and compare Private Sector GDP. We should be focused on the health of the private sector engine. Government is a burden. The more weight you put in the wagon; the harder it is to pull it.

GDP= Consumption + Investment + Net Exports (no Government spending)

Failure to do the above will mean failure of the entire system. The longer they wait, the more young people leave and it soon becomes impossible to solve. The old must lose benefits or the young will leave. Many governments will have to get to a cash basis without new revenues, as lenders will gradually figure out what you have explained. Time is critical for Portugal. Emigration of the young is happening to some extent in Ireland and Spain as well.

johnMarch 11th, 2013 at 10:20 pm

wouldn't emigration help with the shrinking of the labor pool, lower government transfer payments, lower consumption allow for a better balance of payments situation? if business are constantly looking for ways to do more with less people isn't the natural response to have less people. The question of who will pay for the welfare, well in a smaller labor pool wages increase, people can afford to pay more taxes and also the potential for an increase in savings would increase as people don't spend thousands of dollars caring for dependents.

Pecos BankerMarch 12th, 2013 at 8:35 pm

Pardon my naiveté, but I couldn't help wondering *what* the Portuguese are exporting that seems to be the one positive thing about their economy–is it Mateus wine? Perhaps knowing the answer to this question, rather than just looking at some nice charts and hearing about some percentages of percentages would be useful in trying to reach some conclusions or a possible diagnosis at least. Economists do not appear to be two concerned with the "what" as far as I can tell–for all I can tell, maybe the economy is dependent on earthworms for fish bait. Might just have some relevance.