Can Brazil rescue Portugal?

There was loud music playing in the square outside the University of Porto in Portugal on November 30. It was to entertain the large group of teachers assembled there on a cold morning, but this was no celebration.

The white pieces of paper being handed out by the teachers’ union called for a boycott against the test of competency that was being put in place by the Ministry for Continuance of Employment Contract.

Competency testing for teachers is not just a Portuguese issue. Teacher unions in the US have been battling this for some time. US teachers’ unions are powerful and so their protests are often not just a competency issue but also a demonstration of political muscle.

In Portugal too, competency seems to hide other issues. One teacher I spoke to in the square complained that this competency testing was an excuse to eliminate teaching positions and that is why they were protesting. Teachers have been protesting job cuts since the beginning of the year. Public sector job cuts are a part of the austerity measures that Portugal had to agree to in return for the bailout from the EU and IMF. Rising taxes have further bitten into the teachers’ financial security.

Walking around Porto, Portugal’s second largest city, does not give you any sense of crisis. The metro runs on time, garbage does not accumulate at street corners, and the Rua de Santa Catarina, the main shopping thoroughfare, is spilling over with people and they are carrying shopping bags.

Yet, Portugal is in trouble. The unemployment rate is 17.5 per cent (higher than the EU average) and my tour guide reported that unemployment amongst the youth is about 30 per cent. GDP shrank by 3 per cent in 2012.

In the recent budget approved for 2014, public sector workers are to face 12 per cent reduction in salary and reduction in pensions. The government is working towards a goal of bringing down the deficit from 5.5 per cent to 4 per cent of GDP, as required by the terms of the bailout package. One cannot but be sympathetic to the teachers’ concerns about the competency tests. A recent Gallup poll shows a deep resentment of the country’s leadership.

Between 15 per cent and 20 per cent of the people expressed difficulty in being able to meet their food and shelter needs.

Hard decisions There is no doubt that Portugal needs to make some hard decisions. It is widely believed to have mismanaged EU funds in the past. Government debt is high, public sector employment is very high given the size of its population, its banks were weak with a high rate of non-performing assets, and the country was on the verge of bankruptcy in 2011.

It may sound like a cliché to say it, but Portugal needs to make the painful transition from an ‘old’ economy to a ‘new’ economy. Two main industries in the region are textiles and footwear.

You don’t need me to remind you of how the centre of gravity for industries such as these has shifted in the global economy. A T-shirt in a street artisanal fair in Porto featured a slogan reading ‘Not made in China.’ That about sums it all.

If Portugal is to shift away from markets where it is not competitive, it needs to begin with a vision of its place in the future. Yet, as in all turnaround situations, there appears more public discussion about today’s cuts than a future scenario.

The Palacio da Bolsa, a chamber of commerce building put up by the Porto Trade Association dating back to the 19th century, is a recommended tourist spot due to its ornate décor and architecture.

The famed Arab Room might well be in a Mughal palace. It is full of gold filigree work and there is not an inch of space in the walls and ceiling that is not decorated. Inscriptions in Arabic include those from the Koran . It was a room that was made to impress visitors and further trade in a bygone era.

What would be an equivalent room today in the chamber of commerce?

The Brazil lifeline One of Portugal’s great assets is its deep connection with a BRICS country, namely, Brazil. They share a common language and history. Although once a colony of Portugal, Brazil also has the unique distinction in the history of colonisation of being the base for the entire Portuguese empire when Portugal’s court fled there from Napoleon’s troops. Although Brazil’s GDP has also slowed down to about 2.5 per cent, it is the sixth largest economy in the world and offers potential through linkages that Portugal now needs.

Portugal’s Prime Minister Pedro Passos Coelho suggestion last year that teachers looking for employment could move to other Portuguese speaking countries was taken kindly neither at home nor in Brazil.

However, when Brazil’s President Dilma Rousseff visited Portugal in June this year, she knew what her hosts wanted to hear and stressed the need for more economic ties. Portugal needs to find ways to leverage its Brazil connection.

Portugal saw an upward trend in economic activity in the third quarter of this year so the government is hopeful that it will see better times ahead.

However, austerity and cuts can only stem a crisis and cannot be the basis for sustained growth. Given its small population (about 10 million), Portugal needs to focus on its service industries, such as education and medical services. Two other sectors of the economy that can cushion Portugal are tourism and vineyards. But the VAT of 23 per cent on food and drinks is certainly not helping these sectors.

Entrepreneurs may be motivated if it can cut its taxes. While this will not happen in the near future given its current bailout terms, tourist arrivals are up over the last few years and that is one sector that it is eminently endowed both in terms of natural beauty and a welcoming people to benefit from.

(The author is a professor and dean of the Jindal Global Business School, Sonepat, Haryana.)

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