THE PORTUGUESE ECONOMY AND THE EU ENLARGEMENT · 2012-09-13 · THE PORTUGUESE ECONOMY AND THE EU ENLARGEMENT 150 1.1 HISTORICAL BACKGROUND TO CENTRAL AND EASTERN EU ENLARGEMENT:

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TABLE OF CONTENTS 8

ANALYSIS AND CONCLUSIONS 149

1. HISTORICAL BACKGROUND TO CENTRAL AND EASTERN EU ENLARGEMENT: THE PROCESS 150

2. CURRENT OVERVIEW OF THE ECONOMIC SITUATION AND OF LEVEL OF DEVELOPMENT IN CANDIDATE COUNTRIES AND PORTUGAL: THE STARTING POINT 153

3. FRAMEWORK: THEMATIC SURVEY OF STUDIES RELEVANT FOR AN EVALUATION OF THE IMPACTS OF EU ENLARGEMENT 158

4. CANDIDATE COUNTRIES' AND PORTUGAL'S INTEGRATION INTO CROSS BORDER TRADE: RECENT EVOLUTION AND PREDICTABLE ENLARGEMENT EFFECTS 1594.1. Foreign Trade Structure and Dynamics in Candidate Countries and Portugal 1594.2. Proximities in Sectoral Structures andGaps in Development Levels: Strengthening Intra-industry

Trade between Portugal and the EU15 Member States and Candidate Countries 168

5. PORTUGAL AND THE REORIENTATION OF FDI IN THE ECONOMIC AREA OF THE ENLARGED EUROPEAN UNION 1795.1. Portugal and the Candidate Countries: FDI Profile and Trends 1795.2. Candidate Countries - Rivals in Attracting FDI 1875.3. Candidate Countries as Sources of Investment Opportunities 190

6. MIGRATORY FLOWS AND IMPACT ON LABOUR MARKETS 1946.1. Effects of East-West Migration on Member States 1946.2. Immigration and its Impact on the Portuguese Labour Market 194

THE PORTUGUESE ECONOMY AND THE EU ENLARGEMENT

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7. CHARACTERISATION OF COMPETITIVE MODELS OF CANDIDATE COUNTRIES AND OF PORTUGAL: COMPARED QUALITATIVE ANALYSIS 1967.1. Recent Evolution of the Competitive Position 1967.2. Allocation of Support Infrastructure as a Restraint On Locating Economic Activities

in the New Context of the Enlarged Union 2067.3. Evaluation of the Impact of the Economic Model Prevailing in Candidate Countries

on the Competitiveness of the Portuguese Economy 210

8. QUANTITATIVE EVALUATION OF THE IMPACT OF EU ENLARGEMENT ON THE PORTUGUESE ECONOMY: GLOBAL EFFECTS 2128.1. The Impact of Enlargement on the Portuguese Intra-Communitary Trade in view

of Gravitational Models 2128.2. Results of the Approach based on a Macro-econometric Model: the “Shocks”

of Enlargement over the 2004-2009 Time Horizon 239

RECOMMENDATIONS 253

9. ECONOMIC POLICY RECOMMENDATIONS 2549.1. Enlargement Challenges on the Agenda of Great Strategic Guidelines for European Construction 2549.2. The Agenda of Community-based policies and Enlargement Challenges: Major Issues 2649.3. Agenda of National-Based Policies and Enlargement Challenges in Portugal:

Major Recommendations 270

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ANALYSIS AND CONCLUSIONS

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1.1 HISTORICAL BACKGROUND TO CENTRAL AND EASTERN EU ENLARGEMENT: THE PROCESS

The European Union can already look back on a history of successful enlargementsand is now preparing for its biggest ever enlargement in integrated terms of scope anddiversity: the number of candidate countries is the biggest ever (12, ten of which by May2004, to be followed by Romania and Bulgaria, expected to join in 2007; Turkey isconsidered a candidate but has not yet started accession negotiations), the area of theUnion will increase by 34%, and population will incorporate an additional 105 millioninhabitants (28% more than the EU15 present population).

This broadened enlargement, both at territorial and population level, is not, however,followed by GDP growth (+ 5.4%, taking the 12 candidates into account), as mostcandidate countries show development levels below that of the Community average.Lower income levels in candidate countries will statistically result, in immediate terms, ina drop in the GDP per capita average at Community level and in an increase in therespective dispersal, at regional and national level, posing new challenges for theeconomic and social cohesion within the European Union.

This enlargement is thus not just a challenge but also a great opportunity for the EU,on the threshold of the 21st century: this is a unique historic task to further the integrationof the continent by peaceful means, extending an area of stability and prosperity to thenew members, strengthening the role of Europe as an economic power.

Enlargement is thus a continuation of the EU’s original purpose of healing Europe’sdivisions and creating an ever-closer union of its peoples. By welcoming new memberswho respect political criteria, the Union restates the fundamental values that underpin it.From a political point of view, enlargement will increase political stability in Europe,enabling the EU to tackle international problems more effectively.

Enlargement will bring about significant economic opportunities, namely in the formof a larger single market: the Union enlarged to 25 members will be the world’s largesttrade bloc, representing a 500 million citizens market. The enlarged size of this marketand an overall drop in customs tariffs (mostly in respect of the new members), will risethird-countries demand for preferential access to the Community market, which willcertainly bring about greater bargaining power for the EU within the World TradeOrganisation. A market of this size is also expected to drive investment and job creation,increasing prosperity in the EU, in old and new members.

Consumers will also benefit from a wider choice and lower prices, while entrepreneurswill not only share a common set of rules and benefit from intensified trade and greaterefficiency, but they will also experience greater competition.

Institutional implications and financial perspectives

The significant increase in diversity and number of Member States stemming from theenlargement also poses major challenges at institutional level, the European Unionhaving to evolve rapidly in respect of its governance conditions and rules, both in termsof improving Community policy coordination models and of matching Europe’s realitieswith various national and regional realities, and also in coherence terms for major politicaldecisions.

To this effect, the Treaty of Nice and, later on, the Treaty of Accession, introducedreforms to the composition and mechanisms for the decision-making process withinEuropean institutions. The Commission will comprise only one commissioner per

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Member State (within the framework of EU25), the European Parliament saw its maximumnumber of seats reduced, and in the Council votes were reweighted and the scope ofdecision adopted by qualified majority voting was extended to several matters previouslyrequiring an unanimous vote.

Since the early 90s, EU enlargement has required an appropriate financial frameworkfrom the EU assistance provided in support of reforms to be implemented in candidatecountries as a result of the accession process. As from 2004, enlargement will implymajor changes to EU Budgets: the EU accession of the 10 new Member States hasalready changed the Financial Perspectives in force for the period 2004-06 and willdefinitively influence the “design” of the next Financial Perspectives (2007-13) currentlyunder discussion. The communication1 from the Commission published in February 2004is the basis for discussion in this matter, proposing that the next Financial Perspectivesbe focused on four major priorities: sustainable growth, protection and management ofnatural resources, European citizenship and strengthening of the role of the EU as globalpartner.

Legislative proposals on Structural Funds and the Cohesion Fund will only beproduced during July 2004. Nevertheless, on the basis of the said Communication and onthe Third Report on Economic and Social Cohesion, which includes the general guidelinesfor the next financial framework (2007-13), some of the key ideas the Commission isplanning for the reform on structural funds are already evident. In this respect, thecohesion policy for the period 2007-13 will focus only on three priorities: (1) convergenceand competitiveness, (ii) regional competitiveness and employment, and (iii) territorialcooperation, cutting the number of objectives from nine to three, whilst the number ofinstruments supporting such objectives will drop from six to three (see Table 1-1).Simultaneously, new transition criteria can be expected for the most developed regions,in respect of aid within the scope of Objective 1.

According to priority themes and the respective objectives structure submitted for thecohesion policy of the next financial framework, there would appear to be a clear focus,by the Commission, on the development of human and immaterial capital to the detrimentof other key factors, such as physical capital, which is reflected, for example, in the powerof investment in training, innovation and services over investment in construction.In financial terms, a relative increase is proposed, for the period 2007-13, in financialresources for structural and cohesion policies, which currently account for one third ofthe Community Budget (EU 15). Despite the relative estimated increase, the big changein cohesion policy expenditure is evident at the level of redistribution of suchexpenditure, which, as from 2007, will fall more significantly on the new members, to thedetriment of the existing Member States, with particular emphasis on Cohesion countries.

1 COM (2004) 101 final , “Building our common future: Policy challenges and budgetary means of theEnlarged Union, 2007-2013”, of 10/2/2004.

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2000-2006 2007-2013 Objectives Financial Instruments Objectives Financial Instruments

Cohesion Fund Cohesion Fund Convergence Cohesion Fund,and Competitiveness ERDF and ESF

Objective 1 ERDF, ESF, EAGGF-Guidance, FIFG

Objective 2 ERDF, ESF Regional Competitiveness and Employment:- regional level ERDF, ESF

Objective 3 ESF - national level: European Employment Strategy

INTERREG ERDF

URBAN ERDF European Territorial Co-operation ERDF

EQUAL ESF

LEADER+ EAGGF-Guidance

Rural development and restructuring of the fisheries EAGGF-Guarantee, FIFGsector outside Objective 1

9 Objectives 6 Instruments 3 Objectives 3 Instruments

Source: European Commission, “Third report on economic and social cohesion: A new partnership for

cohesion, convergence competitiveness co-operation”, 03/2004

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Table 1-1: Objectives and Financial Instruments of the EU Cohesion Policy

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2. CURRENT OVERVIEW OF THE ECONOMIC SITUATION AND OF THE LEVEL OFDEVELOPMENT IN CANDIDATE COUNTRIES AND PORTUGAL: THE STARTING POINT

In the first chapter, we focused on the object of this study. In this chapter we move onto analyse and characterise the present situation and the pre-enlargement of candidatecountries and of Portugal, compared to that of the EU 15, in respect of their level ofdevelopment, living standards, macroeconomic situation and labour market.

Accession to the European Union by the candidate countries should lead to a processof catching-up of their average level of development compared to the Community average.However, compared to the previous convergence processes, particularly with Portugal,some of these countries are so far behind that they will hardly achieve the process ofconvergence within a relatively short period and, in some cases, it will only be possible ifthere are very sharp growth rates.

Against this background, the position of the Portuguese economy compared to that ofthe candidate countries, taking into account the evolution of the average benchmark onthe move from EU15 to EU25, reveals a complex system of approaches (similarities) anddistancing (differences) that must be detailed as the “starting point” of the analysis offorecast consequences of enlargement as far as the evolution of the Portugueseeconomy itself is concerned.

The main elements of approach or similarities between Portugal and the candidatecountries are the following:

• The productive specialisation pattern of GDP and employment has severalsimilarities in Portugal and in the candidate countries, particularly in respect of alesser overall development, in dimensional and qualitative terms, of knowledge-based industries and advanced service activities, compared to the averagebenchmark of the EU15, although this is more evident in the sectoral structure ofemployment; and

• The combination of competitive factors at work in Portugal and in the candidatecountries also shows several points of contact, to a certain extent, in that thegrowth models are largely based on labour-intensive activities, on activitiesinvolving the transformation of natural resources and on intermediate activitiesincluded in more global and distribution production chains, based on lowproductivity and wages in view of the levels prevailing within the EU15;Productivity comparisons show that Portugal is slightly above the most dynamiccandidate countries (Slovenia, Czech Republic and Hungary) and that theproductivity of the remaining candidate countries is clearly below that of ourcountry. With regard to wages, the conclusion is similar, with Slovenia’s figuresvery close to those of Portugal, although differences compared to the candidatecountries as a whole tend to be greater than in the case of productivity, whichreflects significant competitive pressure on Portuguese exports.

• The strong concentration of foreign trade flows within the European Union alsoapproaches Portugal’s positions, where concentration, which exceeds 80% ofexports, is, at least so far, higher than that of the candidate countries, in whichconcentration has been increasing very quickly, in step with the respectivetransition. In conjunction with the precedent areas of approach, this approachreveals a potential for competition and replacement in the European single marketbetween Portuguese exports and those of the candidate countries, alreadyreflected in the evolution of the market shares of some products.

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The main distancing or differentiation elements between Portugal and the candidatecountries are the following:

• Portugal’s position on the road to real convergence within the European area,where structural funds and cohesion policies contributed, since full accession in1986, to significant gains in the relative level of GDP per capita, which exceeded70% of the average of EU15 and is approached only by Malta and Slovenia andexceeded by Cyprus.

Chart 2-1: GDP per capita, in PPS (EU15 = 100), 2001

Sources: Project Team based on NewCronos data

Most candidate countries lag far from the average European development level,standing at about 50% of this level or even below, which means that there is still along and difficult real convergence process for all of them. Indeed, the PortugueseGDP per capita may stand at 85% and 91% of the Community average of the EU25and EU27 respectively, according to preliminary calculations.Differences between Portugal and the candidate countries, in terms ofconvergence, will certainly have consequences in the access to structural funds,implying, in the next financial framework, a progressive reduction in globalsupport and a significant redirection of objectives underpinning the respectiveuse.

• The Labour Market is more favourable in Portugal; where high rates of activity andemployment and low unemployment and youth unemployment are quite similarto those in some of the candidate countries. Despite the recent deterioration inunemployment in Portugal, the gap with candidate countries provides scope forthe adoption of structural adjustment strategies against competitive challengesdriven by the deepening and EU enlargement, not to be neglected.

• The education level of the labour force evinces the most significant differencesbetween Portugal and the candidate countries. In 2001, 80.2% of the Portuguese

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population aged 25 to 64 had completed only the lowest level of secondaryeducation, against 22.6% in the 11 candidate countries. The weight of thepopulation of this age group with secondary education completed stood at 10.7%in Portugal, compared to figures around 74.8% in the Czech Republic and 68.7% inPoland. The weight of the population with higher education in Portugal is lowerthan in all candidate countries.Clearly, these conclusions can, to some extent, be deemed relative in view ofrecent divestment in this field in most candidate countries, reflecting, to someextent, outdated school programmes and curricula and poorer adaptation to theneeds of modern market economies and labour markets. In any case, despitethe fact that this could lead to unsuitable vocational and qualification profilesin their human resources, the situation shows a considerable potential in termsof multitasking labour, able to adapt quickly to new challenges as a resultof the high average of school levels. The counterbalance of this fact, through agreater focus of the majority of the existing EU15 Member States on the ongoinghuman resources training and on the upgrading of their qualifications, is,on the other hand, very limited and biased in view of increasingly obsoletetechnologies, processes and products, and, therefore, of qualifications connectedtherewith.

Chart 2-2: Unemployment Rate (%), 2002

Sources: European Commission, Employment in Europe 2003

• Portugal’s geographic position within the European area differs from that of mostcandidate countries, with particular emphasis to Central and Eastern Europeancountries, closer to Europe’s heart. This gap, which may deemed a signifycantdisadvantage from a standpoint of intra-European trade polarised by the centraleconomies of the enlarged Europe, and a considerable advantage from a

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Chart 2-3: Breakdown of Working Age Population (aged 25-64) by Highest Level ofEducation Completed, 2001

Source: Statistics in focus, nº 19 & 20/2002Lower Secondary = Primary educationUpper Secondary = Secondary EducationHigher = Higher Education

standpoint of economic relations external to the enlarged European area,particularly in the relationship with the American and African continents,requires careful attention within the framework of challenges posed by theenlargement.

In short, we may conclude that Portugal’s position within the context of an enlargedEuropean Union has proximities and disparities with candidate countries.

In respect of proximities, particularly noteworthy is that Portugal and the candidatecountries share some of the vulnerabilities either in terms of production and commercialspecialisation (GDP and employment sectoral structures, exports structure as far asproducts are concerned), or in terms of prevailing feature in business models of theircompanies (configuration of the dominant competitive factors), within a context wherethe Portuguese economy, with productivity levels close to those of potential competitorsbut with higher wages and lesser education of the active population, faces accruedcompetitive pressure that can neither be underestimated nor neglected.

In respect of disparities, it should be emphasised that Portugal, compared tocandidate countries, has a large experience in market economy consolidated organisation

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and in terms of progress made in an effective real convergence within the European areathat provides it with sound reasons to face with greater or lesser success this additionalcompetitive pressure, particularly if the country introduces structural reforms to itscompetitive model in the nearby future.

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3. FRAMEWORK: THEMATIC SURVEY OF RELEVANT STUDIES FOR AN EVALUATION OF THEIMPACTS OF THE EU ENLARGEMENT

The economic implications of EU enlargement for the two blocs of countries involvedin the process (EU15 and candidate countries) have been, in recent years, the object ofcountless analyses either of a more qualitative nature or of an essentially quantitativeone – using models, particularly general balance models and gravitational models, thatallow estimates to be made on economic impacts of enlargement in the long run.

This chapter aims at identifying the “State of the Art” in respect of studies made on theimpact of enlargement, 11 documents having been selected to support both the analysismade in the first two sections of the study and the evaluation of the qualitative andquantitative impacts of enlargement on the Portuguese Economy. Summary sheets weredrawn up for assumptions and main results of each of those documents, covering studiesof a more general and transverse nature, works focused on the analysis of impacts atsectoral level and analyses specifically directed at impacts on a given country.

A summary of main results of those works suggests a convergence of opinions withrespect to forecast gains for both parties – EU and Accession Countries – following theconclusion of the enlargement process. The idea also appears to be consensual that gainsare distributed asymmetrically between Accession Countries and EU15 and, within thesetwo blocs, between countries. In relative terms, growth (understood as the increase inreal GDP) induced in the EU as a result of the enlargement will be rather lower (between0.2% and 0.5% of the GDP in the most central scenarios) than in the candidate countries(between 1.3% and 1.5%), in the first place because we are talking about two groups ofcountries of largely different sizes. In the EU, it seems consensual that Germany willbenefit the most from the enlargement, and, some studies pinpoint Austria as one of thecountries that will benefit the most.

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4. CANDIDATE COUNTRIES’ AND PORTUGAL’S INTEGRATION INTO CROSS BORDER TRADE:RECENT EVOLUTION AND PREDICTABLE ENLARGEMENT EFFECTS

In this chapter, endeavours are made to evaluate the integration of candidatecountries and Portugal into cross border trade, through an in-depth characterisation, on acompared basis, identifying major opportunities and threats for our economy, of foreigntrade structures both of Portugal and of the candidate countries, through a carefulreading of correlations between them and through a study on the evolution and featuresof the increasingly important intra-industry trade.

The analysis of the specificities of Portugal’s trade relations with candidate countriesand the EU is supplemented by a sectoral classification scale designed to identify thosesectors with prevailing horizontal differentiation degrees or advantageous verticaldifferentiation versus disadvantageous vertical differentiation. On the other hand, resultsof the analysis of the levels of proximity of trade specialisation structures, levels andtypes of intra-industry trade and the competitive position (comparative advantages anddisadvantages disclosed and specialisation by key competitiveness factor) areinterlinked in order to detect any signs of competition imbalances and productionsegments of greater potential risk.

4.1 Foreign Trade Structure and Dynamics in Candidate Countries and Portugal

The analysis undertaken in this chapter necessarily covers the evolution of candidatecountries’ and Portugal’s foreign trade structure over time. To this end, and to streamlinethe analysis, an appraisal was made on the three most representative years of theeconomic and political evolution of Central and Eastern European Countries (CEECs). Thechoice fell on 1995 (the year most CEECs’ economic reforms were introduced), 1998 (theyear EU accession negotiations took place for the majority of candidate countries) and,finally, 2000 (the most recent year with available data for a correct evaluation ofcandidate countries’ foreign trade).

The analysis of trade evolution between the EU and the candidate countries showsthat over the past few years trade relations between the EU and the candidate countrieshave undergone remarkable changes: in five years, EU imports from candidate countriesmore than doubled, while exports to candidate countries increased by 77%. The evolutionof the balance of trade with the EU among candidate countries shows Poland as thecountry with the most significant trade exchanges with the EU (imports and exports inUSD million), immediately followed by the Czech Republic and Hungary. The figures forthese three countries are also very close to those observed both for Portugal and forIreland, and higher than those for Greece over the three years under analysis (1995,1999 and 2000), although still far from figures achieved by Spain, the largest importerand exporter, among cohesion countries, compared to the EU.

The analysis of the importance of the EU market in total foreign trade of eachcountry in 2000 (both of the candidate countries and of the cohesion countries) showsthat Portugal is the country most “dependent” on the EU (about 80% of its exports andimports are directed at and sourced in the EU), closely followed by Spain. As far ascandidate countries are concerned, Slovenia, the Czech Republic, Hungary and Poland,immediately followed by Romania and Estonia, posted figures close to those of Spain.With the exception of Estonia, the Baltic countries and Bulgaria are the countries least“dependent” on trade with the EU, and, for example, imports from the EU accounted forroughly less than half of total imports by these countries in 2000.

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For a better understanding of the evolution of trade balances in candidate andcohesion countries, an analysis was made of the cover rates in their trade relations bothwith the EU and the world. Except for Ireland (where the cover rate has always been above140% in its trade relations with the world, and above 150% with the EU, in all the years –1995, 1999 and 2000), only Latvia in 1995, Slovakia in 2000 and Estonia in 2000 hadfavourable cover rates above 100%. The cover rates analysis also shows that, in theevolution of transactions with the EU, this indicator has been rising in most candidatecountries and falling in all the cohesion countries. We also found that, with the exceptionof Turkey and the Others from Southern Europe (Cyprus and Malta), all candidatecountries had cover rates higher than in Portugal.

A detailed analysis of trade flows between the EU and the Accession Countries(percentage of total exports and imports, intra-EU trade included, of each Member Statedirected at or sourced in candidate countries), it is evident that Austria and Germany arethe countries with the most intense trade relations with candidate countries, whereasPortugal, Spain and Ireland posted very low figures. This can be explained by the“geographic proximity” effect, which exercises significant influence on foreign tradebetween candidate countries and present Member States. Analysing the regional tradespecialisation between Member States and candidate countries, it is evident that not allEU countries trade with the same Accession Countries. Those groups of countries mostinvolved in reciprocal trade are those closer in geographical terms. More specifically, thestrongest ties are between: Germany/Austria and Central European countries;Finland/Denmark/Sweden and the Baltic countries and Poland; Mediterranean countries(especially Greece) and Black Sea countries.

Table 4-1: Regional Trade Specialisation between the EU and the Candidate Countries (2000)

Note: “MM” & “M” (MM>M) imports intensity from the respective candidate country in total imports ofthe Member State. “XX” & “X” (XX>X) exports intensity to the respective candidate country as aproportion of total exports of the Member State. Others from Southern Europe: Cyprus, Malta, Andorra and Gibraltar

Source: Project Team based on CHELEM data

Black Sea Baltic Sea Central Europe Mediter-ranean Sea

TR BG RO EE LV LT PL CZ SK SI HU Other

North Sea Netherlands X M XX MBelgium-Luxembourg XX M X M

UK M XX M XIreland M X X M

Baltic Sea Denmark M M X MM XXFinland XX MM XX M XXSweden XX M MM XX

Central Europe Germany MM XX MM XX MM XX MM XXAustria XX MM XX MM XX XX MM XX

Mediterranean France M XX X MSea Italy M XX M XX XX

Spain M XX M XXGreece MM XX MM XX XX XX

Portugal M M X

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For a comprehensive overview of the various candidate countries’ foreign tradestructure with the EU, an analysis by products was performed, in which the 15 mostimported and exported products have been selected (by weight proportionate to totaltransactions) per candidate country with regard to transactions solely with EU membercountries as well as with the Rest of the World, in 2000.

The list of the 15 main products traded per candidate country (in 2000) was used tobuild up four product matrices (one for each analysis – exports and imports in the worldand the EU), with columns of matrices representing, by intervals, the number of timesproducts are repeated by each country ranking, and the lines represent, also by intervals,the sum of positions of these products in each ranking.

The analysis of world import trade shows that Germany, the Russian Federation, Italyand Scandinavia are the main origin markets for imports in most candidate countries,while the most important imported products (either for their position in the ranking of the15 main products of each country or for the number of times they are repeated in theserankings of the various candidate countries) are: crude oil, other non-specified products,petroleum products and auto components, as well as telecommunications materials,plastic articles and materials, trinkets, metal articles and mechanical appliances, andmotor vehicles and motorcycles.

The analysis of candidate countries’ structure of exports to the world shows thatGermany continues to be their main destination market, followed by Italy, Scandinavia,the United Kingdom, USA and France. Main products exported by the majority of thesecandidate countries (both for their position in the ranking of the 15 main products of eachcountry and for the number of times they are repeated in these rankings, of the variouscandidate countries) are: refined petroleum products, knitwear, motor vehicles andmotorcycles, clothing, steel and iron.

The analysis of candidates’ foreign trade structure, by origin country, within theframework of the EU, shows that for easily reasons understandable, Germany is the mostimportant country of origin for the majority of candidate countries, followed by Italy,France and Finland. Portugal, in its turn, accounts for but a marginal share in imports ofcandidate countries in general, alternating with Greece as the last of the main EU15countries of origin. The main products imported by candidate countries (both for theirposition in the ranking of the 15 main products of each country and for the number oftimes they are repeated in these rankings of the various candidate countries) throughtheir trade relations with the EU Member States are: auto components, yarn and fabrics,trinkets, metal articles and mechanical products in general, and plastic articles andmaterials.

With regard to the analysis of candidates’ exports by country of destination within theEU, it is evident that, for the majority of candidates, main destinations were Germany,Italy, United Kingdom and France. The main products exported by candidate countries tothe EU (both for their position in the ranking of the 15 main products of each country andfor the number of times they are repeated in these rankings of the various candidatecountries), taken as a whole, in 2000, were: knitwear, motor vehicles and motorcycles,and refined petroleum products, in addition to clothing and furniture.

This analysis emphasises that, when structures of candidate countries’ exports bothto the EU and to the world as a whole are compared, it can be concluded that the weightof products as a proportion of total exports and type of products exported are very similar,in contrast to the comparison of structures of candidate countries’ imports from EU orfrom the world. Here, there are clear differences not only in terms of the type of the 15major products imported but also their ranking differs according to each country.

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An analysis is next made of the mutations in the specifics of the Accession Countries’foreign trade structures as compared with the EU, Portugal in particular, based onindicators providing a view of the dynamism of the specifics of these international tradestructures, allowing considerations to be made on the evaluation of the specialisation ofthese countries in terms of international trade and detecting the competitive coursestaken in terms of their position in international trade.

In this connection, the evolution of several indicators is examined, particularly percapita exports, per capita imports and the market position indicator from 1993 to 2000.Next, an appraisal is made of the evolution of the specialisation profile of these countriesin terms of international trade and, lastly, the consequences are examined with regard tothe competitiveness of these countries compared to the EU and Portugal, through anassessment of Competitiveness Factors and of the levels of Technological Intensityunderlying the most relevant sectors in the specialisation profile.

The analysis of the evolution of per capita exports over the period 1993-2000 unveilsconsiderable discrepancies between growth rates in this indicator among the countries underreview. Growth trends within the EU show a large disparity, for while Ireland stands out from theothers, with a growth rate clearly above the EU average, Portugal, on the other hand, hasperformed clearly below the average. This denotes a divergence trend between the specificsinherent in the Portuguese commercial structure and the EU pattern.

Moreover, the analysis of this indicator in respect of candidate countries shows that,despite the fact that they all have per capita export levels below the Community average,convergence trends towards the EU clearly differ among the countries under review. Thus,Slovenia and Estonia stand out as countries that have the greatest trend towards convergencewith the Community average, while Turkey and Romania are more at a disadvantage.

Moreover, it should be emphasised that Portugal is in a more disadvantageous position, notonly than most of its Community partners, but also when compared to some of the candidatecountries, particularly Slovenia, Estonia, Hungary and the Czech Republic.

The following chart systematises export and import evolution per capita for candidatecountries between 1995 and 2000, compared with Community dynamics, to showconvergence versus divergence in specifics underlying the respective commercialstructures. Therefore, it is evident that major convergence trends with the Communityaverage involve countries such as Slovenia and Estonia, while countries such as Turkeyand Romania are still in a fairly disadvantageous position.

Portugal, in turn, has per capita export and import levels lower than those of some ofthe candidate countries, but its evolution tends to a more dynamic growth in per capitaimports than in per capita exports.

There follows an analysis of the evolution of the Market Position Indicator for thecandidate countries between 1993 and 2000, which is a “revealed competitiveness”indicator. A comparison is also made with the evolution of the “Market Position” of EUmember countries.

Throughout the period under analysis, Portugal’s performance was negative andshowed no signs of improvement. Despite the fact that the EU competitive performancein terms of international trade deteriorated by the end of the 90s, none of the candidatecountries was able, in 2000, to achieve levels closer to the Community average. However,if Portugal is selected as the benchmark for the competitive performance of theAccession Countries, it is evident that several candidate countries rank higher. Estoniaand Slovakia are the candidate countries with the greatest convergence trend towards theEU market position.

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Chart 4-1: Per capita Exports and Imports in Candidate Countries compared to Community Average

(1995/2000)


The Revealed Comparative Advantage Indicator allows to measure the comparativeadvantage on the basis of the trade pattern, based on the assumption that trade flowvalues unveil a comparative advantage. The criteria underlying its construction,particularly the comparison between the weight of exports of products as a proportion ofthe country’s total exports and the weight, in respect of the same product, on the globalmarket, allows comments to be made regarding the evaluation of internationalspecialisation.

To ascertain the candidate countries’ specialisation structure in terms of internationaltrade, the Revealed Comparative Advantage Indicator was applied to the respective tradestructures to determine those sectors in which the respective countries have greatercomparative advantages.

Consequently, some similarities may be detected between those sectors of strongerinternational specialisation in Portugal and in the candidate countries, particularly at thelevel of the knitwear and clothing sector, wood products, and the leather, hide andfootwear sector. Portugal has revealed comparative advantages in the so-called“traditional” sectors, of which wood products, tapestry, knitwear and clothing, leather andfootwear, beverages, cement and ceramics are outstanding, reflecting, therefore, aspecialisation profile highly focused on exploiting low labour costs and negligibleenhancement in the most dynamic factors of competitiveness as compared with theCommunity specialisation pattern. On the other hand, there are several candidatecountries with comparative advantages in sectors where Portugal has “strongerspecialisation”, which may increase the challenges of a stiffer competition.

Next, the aim is to determine the specialisation pattern of candidate countries, usingthe EU as the benchmark region and applying the Global Comparative Advantage Indicator

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for the purpose, based on international trade structures. The aim is to study the patternof specialisation framework in accordance with key competitiveness factors and theunderlying technological intensity degrees in order to gauge their potential as an induceror blocker of competitive progress.

Chart 4-2 shows candidate countries’ and Portugal’s specialisation pattern pursuant tokey competitiveness factors, for the year 2000. Analysis of the trade specialisation of thecandidate countries compared to that of the EU, in keeping with the valuation of the keycompetitiveness factors, shows that Hungary, Estonia, Malta, Cyprus, the Czech Republic andSlovakia seem to present in 2000 global comparative advantages in some sectors that exploitdynamic competitiveness factors, and therefore reveal an international specialisation patternwith a competitive positioning profile more attractive than the Portuguese.

Chart 4-2: Global Comparative Advantages pursuant to Key Competitiveness Factors

(2000)


In fact, Portugal has an international specialisation pattern that, compared to the EU, isentirely based on industries organised around low labour costs as the key competitivenessfactor, and it is, therefore, short in more dynamic competitiveness factors such as makinguse of economies of scale, R&D intensity and product differentiation. Therefore, the strong“overspecialisation” of those sectors based on the exploiting of low labour costs in Portugal’sspecialisation profile is synonymous with a certain weakness and little incorporation ofvalue added and competitive soundness, given the Portuguese “insecurity” in factors of theutmost importance such as product differentiation, human resources quality andtechnological innovation, as far as its international specialisation profile is concerned.

The specialisation pattern of some of the candidate countries began to bolster updynamic competitive factors towards the end of the 90s and to shift away from the weakcompetitive sustainability linked to the exploiting of low labour cost. They thus sought tocircumvent effects that were none too solid and did not stimulate competitiveness withinthe European context.

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Chart 4-3: Global Comparative Advantages according to the Degree of Technological Intensity, 2000


The international specialisation pattern pursuant to the evaluation of technologicalintensity degrees of the candidate countries shows that, in 2000, Malta, Cyprus, Hungary,Estonia and the Czech Republic were the countries with the largest overall comparativeadvantages at higher technological intensity levels (see Chart 4-3).

To gauge the similarity between the international specialisation pattern of Portugal and ofthe candidate countries, an analysis may be made by crossing the percentage of products withdisclosed comparative advantages shared by candidate countries and Portugal (x axis), of thepercentage of products with overall comparative advantages shared by candidate countriesand Portugal (y axis) and, at the same time, the exporting weight of the Portuguese sectorswith showed comparative advantages in total Portuguese exports to EU.

Chart 4-4: Degree of Similarity between Revealed Comparative Advantages and Overall Comparative Advantages of Portugal and of the Candidate Countries, in 2000


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Thus, the higher the percentages of disclosed comparative advantages or overallcomparative advantages that the candidate country has in common with Portugal, thegreater the similarities of the international specialisation patterns, and therefore thegreater probability of competitive comparison. On the other hand, the greater theexporting weight of the Portuguese sectors with comparative advantages in totalPortuguese exporting structure to the EU (represented by the bubble size), the greaterthe importance of that sector to the total Portuguese structure, and therefore therepercussions stemming from the competitive threats driven by similarities of thespecialisation patterns will tend to be all the greater.

It can thus be seen that those countries with greater similarities with Portugal’sinternational specialisation patterns (bigger percentages of RCA and OCA in common withPortugal) and that, concurrently, have revealed comparative advantages in common withPortugal in sectors of major importance to the Portuguese export structures to the EU arePoland, Slovenia, Slovakia, the Czech Republic and Hungary.

Proximities and Divergences, Threats and Opportunities: Resort to Foreign Trade Structure Correlation Matrices

To deepen the analysis of the similarities and differences between the candidatecountries’ and Portugal’s foreign-trade structures (so as to set out the potential threats toPortugal stemming from accession by the candidate countries during the coming EUenlargement), a correlation coefficients matrix between structures of exports to EU ofthe candidate countries was constructed. The central diagonal shows the figures for thestandard deviation of each country’s export structure, allowing characterisation of thedegree of concentration. Nevertheless, since the standard deviation values only allow acomparison of concentration levels of export structures by product categories for eachcountry, analysis of similarities between export structures of the various countries isundertaken by comparison of correlation coefficients.

The results of the standard deviation analysis show that Ireland, Finland and Spain are theMember States that have the greatest levels of concentration of their export structures (to theEU), while the countries with diversification of exports is closer to the European average areDenmark, Sweden and Austria. Portugal, in turn, has a standard deviation value clearly abovethe European average, suggesting an export structure considerably more concentrated thanthe European average in certain types of products. Of the candidate countries, Malta and Latviaare the countries with the most concentrated export structures, with standard deviationsconsiderably higher than the EU15 aggregate, which shows a standard deviation considerablycloser to that of Poland, Turkey, Czech Republic, Hungary and Slovenia.

The analysis of the correlation coefficients show that the countries with an exportstructure more similar to that of the EU15 as a whole are France, Belgium and Germany.Finland and Greece, in turn, have the lowest correlation coefficients (compared to theEU15 aggregate) of the Member States, indicating export structures quite different fromthe European average. In respect of candidate countries, the Czech Republic, Slovakia,Slovenia and Hungary have export structures more similar to those of the EU15 average(high correlation coefficients), contrasting with Cyprus, Bulgaria, Latvia and Romania,which have considerably lower correlation coefficients.

Analysing this correlation mechanism in detail (including results of standard deviations)comparing Accession Countries with Portugal, it may be concluded that, firstly, the Portuguesestructure of exports to EU15, as compared with that of the various candidate countries, arelower concentrated only for some types of products as compared with exports from the islands

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(Malta and Cyprus), the Baltic states (Estonia, Latvia and Lithuania) and Slovakia. In turn, allthe other candidate countries have concentration degrees of their export structures (to the EU)that are lower and considerably closer to the EU15 aggregate figure than Portugal.

It can be said, on the other hand, that, as compared with Portugal’s export structure and tothat of the EU15 aggregate, Slovakia, the Czech Republic, Slovenia, Hungary, Poland and Turkeyhave correlation coefficients higher than those of the other candidate countries. This meansthat these countries not only compete with Portugal in respect of products exported to the EU(since they have similar export structures, i.e., higher correlation coefficients than thePortuguese export structure), but also are increasingly becoming competitors of Portugal inthe target market of a large slice of their exports (EU), since their correlation level, in the lightof the export structure of the EU15 aggregate, is similar to that of Portugal, as in the particularcase of the Czech Republic, Slovakia and Slovenia.

Table 4-2: Correlation Coefficients and Standard Deviation of Export Structures of Member States and Candidate Countries, 2001

Note: Correlation coefficients and standard deviation multiplied by 100

Such potential competitors with Portugal may, however, become future opportunitiesfor Portuguese exports. For the purpose, an analysis was next made of the structure ofPortuguese exports and of the imports structure of candidate countries, with respect to

EU15 F B L D I NL UK IRL DK FIN S A E GR P TR SI MT CY EE LV LT BG CZ SK HU PL RO

EU15 0,31France 95 0,41Belgium 91 92 0,40Luxembourg 52 38 33 0,44Germany 91 93 89 32 0,40Italy 81 79 73 36 68 0,26Netherlands 67 46 46 67 38 46 0,36United K. 82 66 59 62 61 60 84 0,35Ireland 42 26 23 55 19 25 52 50 0,74Denmark 46 35 33 30 22 55 51 55 29 0,32Finland 25 15 16 16 14 20 22 27 6 21 0,54Sweden 68 61 57 30 54 68 43 56 27 49 56 0,32Austria 73 71 65 39 57 72 47 59 21 45 39 62 0,34Spain 87 93 93 26 94 70 32 52 12 22 8 50 61 0,52Greece 28 22 22 23 9 39 29 29 19 44 15 34 30 15 0,38Portugal 77 80 81 23 78 69 33 48 10 22 12 44 58 83 23 0,44Turkey 34 34 34 9 36 39 13 19 2 12 4 21 25 38 42 45 0,35Slovenia 70 75 73 16 81 64 18 36 4 16 10 42 47 80 6 71 40 0,42Malta 22 14 17 6 17 14 31 27 4 8 6 13 11 12 5 20 13 11 0,80Cyprus 3 4 4 0 4 2 0 3 0 0 0 1 1 4 1 3 3 3 2 0,66Estonia 20 10 11 12 14 14 21 30 2 27 57 32 25 6 15 9 13 12 10 12 0,56Latvia 12 4 9 3 4 9 22 15 1 20 24 30 11 2 13 5 14 10 10 3 45 0,73Lithuania 17 7 19 1 7 19 34 18 1 20 20 28 5 5 27 11 33 11 22 1 41 56 0,60Bulgaria 10 6 12 5 5 19 11 6 0 10 8 11 6 4 19 17 43 13 16 5 16 22 46 0,40Czech Rep. 79 83 75 29 89 65 32 50 14 17 9 48 54 83 5 72 42 84 13 29 16 9 11 9 0,38Slovakia 77 82 85 18 88 60 25 42 5 12 9 43 47 88 9 83 40 83 16 18 15 13 20 19 86 0,57Hungary 65 58 51 42 64 44 42 60 26 18 27 43 59 55 10 51 33 51 12 42 38 6 13 11 64 56 0,42Poland 48 49 45 10 52 51 16 27 3 18 9 41 37 50 7 47 46 65 13 10 20 16 27 23 67 56 51 0,33Romania 13 8 10 4 9 30 10 9 3 14 9 15 11 8 17 32 53 25 21 4 22 23 43 64 18 27 20 36 0,44

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world trade, fifteen major products having been selected in each trade structure subjectto analysis.

Taking into account the intersections as possible business and trade flowopportunities between Portugal and the group of candidate countries, superimposition ofthe two commercial structures shows that several of the main products exported byPortugal – motor vehicles and motorcycle products; electrical apparatus and conductors;trinkets, metal articles and general mechanical products; yarn and textiles; plasticarticles and materials; and motor vehicle components – are also listed among theproducts imported by the group of candidate countries.

In this connection, the data suggest that Portugal could benefit if it were to focus onestablishing or strengthening trade in the foregoing products with these countries.Nevertheless, these results do not necessarily mean that Portugal will benefit from sucha focus, since, to reach more accurate conclusions we would have to undertake a moredetailed analysis, using indicators of another type, of the bilateral trade relations betweenPortugal and each candidate country, taking into account, in particular, Portugal’scompetitive position by product with regard to these countries. However, this simpleanalysis of exports versus imports constitutes an indicator that could well call attentionto possible business opportunities for Portugal in the markets that will come to form partof the EU internal market.

This appraisal of the proximities and divergences, threats and opportunities is goneinto in greater depth hereunder, through an analysis of Portuguese intra-industry tradewith the EU15 Member States and with candidate countries.

4.2.Proximities in Sectoral Structures and Divergence in Development Levels: Strengthening Intra-industry Trade between the EU15 Member States and Candidate Countries

Intra-industry trade is an important segment of the international trade since there isan upward trend both in imports and in exports, by a given country, of items that belongto the same product classification.

Therefore, an analysis is made of the intra-industry trade using CEPII (Centre d’étudesprospectives et d’informations internationales) methodology, with a view to determinewhether “two-way trade” between Portugal and the candidate countries and the EUmember countries is horizontally or vertically differentiated, so as to get information onthe relative quality of Portuguese exports. Theoretically, the trade in products withhorizontal differentiation is associated with exchanges in varieties considered to be ofsimilar quality, while vertical differentiation could suggest a different level of sectoraldevelopment between trading partners.

The results of the analysis of the CEPII methodology unveils an upward trend in thePortuguese intra-industry trade with its trading partners, albeit levels between Portugaland the present EU member countries remain considerably more significant than thosebetween Portugal and the candidate countries. The analysis of bilateral trade relationsbetween Portugal and the EU member countries shows that Portuguese intra-industrytrade is greater with those countries with which Portugal’s trade is more significant,namely Germany, France, Italy, the United Kingdom and Belgium.

With respect to Portugal’s bilateral relations with candidate countries, it may beobserved that Portugal’s intra-industry trade was particularly greater with CentralEuropean countries, namely with the Czech Republic, Poland, Hungary and Slovakia, andalso Turkey, to a certain extent.

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Chart 4-5: Intra-industry Trade between Portugal and Candidate Countries ( %)

Source: Project Team based on International Trade, INE and Euro stat/COMEXT Statistics

Computation of levels of horizontal intra-industry trade and of vertical intra-industrytrade on the grounds of an analysis of the relative quality of exports compared to imports,has allowed the calculation of determinant factors for the country’s pattern of tradespecialisation, showed a clear predominance of vertically differentiated intra-industrytrade over the horizontally differentiated trade. While horizontally differentiated IBT isgenerally associated with trade between developed countries with similar levels ofcompetitiveness, vertically-differentiated product IBT may sometimes be reflected in thefact that less developed countries tend to export lower quality varieties and to importhigher quality ones. Therefore, the remarkable predominance of vertical IBT in Portugal’strade structure required a more detailed analysis of the nature of this type of trade, sinceit could suggest a different level of sectoral development between trading partners.

An analysis of the vertical intra-industry trade showed that Portugal’s trade of thisnature with the European Union has been predominantly low vertical, which has putPortugal at a disadvantage, suggesting competitiveness imbalances as compared withits trading partners and giving some signs of “peripheralisation” of the Portugueseeconomy with regard to the European Union. Nevertheless, in more recent years there hascome to be a tendency of attenuation of the supremacy of Portugal’s intra-industry tradewith low vertical differentiation in its trade with the European Union, to such an extentthat, in 2001, there was a reversal of Portugal’s disadvantageous situation. Should thistrend come to benefit from future factors leading to its strengthening, particularlygrowing corporate focus on enhancing dynamic factors of competitiveness, such asproduct differentiation, human resource quality and technological innovation – capable ofincreasing the relative quality of Portuguese exports – to the detriment of exploitation ofhardly sustainable competitiveness factors – involving little incorporation of value addedand little competitive soundness, such as exploiting low labour costs – it could possiblycontribute to the approaching of productive structures and to a possible convergence oflevels of competitiveness between Portugal and its Community trading partners.

In its relations with the EU, the Portuguese trade structure appears to show signs ofchange towards a gradual “replacement” of inter-industry trade by upper-vertically

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differentiated intra-industry trade. This is based, on the one hand, on the trend towardsstronger growth in intra-industry trade as a proportion of total trade (with a consequentdecline in inter-industry trade) and, on the other hand, on the fact that the growth rate ofvertical intra-industry trade is considerably higher than that of horizontal IBT, a growthconnected with an upward trend in upper vertical intra-industry trade.

Despite the fact that in the Portuguese trade with the European Union there has beena reversal in the predominance of lower-vertically differentiated trade, the domesticeconomy is still at a disadvantage with regard to several Community partners and, as faras trade with candidate countries is concerned – notwithstanding the fact that Portugalappears to be in a better position since upper-vertically differentiated intra-industry tradeprevails – there is still a large number of candidate countries with which Portugal is at adisadvantage.

Then followed the analysis of the characteristics of sectoral structures inherent inPortuguese trade relations with the Community area and with candidate countries, with aview to obtaining more refined conclusions regarding the proximity of the specialisationstructures and regarding divergences at the respective levels of sectoral development, inorder to detect possible signs of imbalances in competitiveness and productivesegments of greater potential risk.

Thus, the intra-industry trade methodology previously used was applied to a sectoralclassification scale comprising 19 sectors or groups of products, as follows: A: Agriculture,Animal Creation & Fishing; B: Energetic Products and Mining; C: Food & Beverages; D:Textiles & Knitwear; E: Footwear & other Leather Articles; F: Wood, Cork & other FurnitureArticles; G: Paper & Pulp; H: Printing and Publications; I: Coke & Refined PetroleumProducts; J: Pharmaceuticals; L: Rubber Articles; M: Other Chemical Products & SyntheticFibres; N: Plastic Articles; O: Cement and Construction Materials; P: Metal products; Q:Machines, Equipment & Instruments; R: Electrical Machinery and Apparatus &Electronics; S: Transport Material; and T: Miscellaneous.

Sectoral analysis of the intra-industry trade structure in the Portuguese traderelations with the Community area was initially undertaken to ascertain predominance ofinter-industry trade versus intra-industry trade.

In view of this, Chart 4-6 (where sector initials correspond to those listed above)shows a number of sectors that form a field distancing Portugal’s productivespecialisation structure from that of the Community area, which include: EnergeticProducts and Mining, Footwear & other Leather Articles, Paper & Pulp, Other ChemicalProducts & Synthetic Fibres, Printing and Publications, Food & Beverages, Agriculture,Animal Creation & Fishing, other Non-metallic Mineral Products, Machines, Equipment &Instruments, and Machines, Equipment & Instruments, and the Miscellaneous sector.There are also a number of sectors that suggest a greater approach by Portugal’sproductive specialisation patterns to those of the Community area, namely TransportMaterial, Coke & Refined Petroleum Products, Rubber, Textiles & Knitwear, ElectricalMachinery and Apparatus & Electronics, Wood, Cork & other Furniture Articles,Pharmaceuticals and Plastic Articles.

Sectoral analysis of the nature of trade implicit in Portugal-EU relations shows twodistinct situations. In those sectors more dependent on natural resources there is apredominance of inter-industry trade, particularly in products involved in agriculture,animal creation & fishing, food & beverages, paper, leather, other non-metallic mineralproducts, energetic products and mining. Those sectors less dependent on theexploitation of natural resources and involving a greater degree of transformation show apredominance of intra-industry trade, as is the case of transport material, the electrical

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machinery and apparatus and electronics sector, pharmaceuticals, rubber and plasticarticles . Therefore, the inter-industry trade flows between Portugal and the Communityarea are essentially the result of differences in factorial endowments mostly associatedwith trade in primary goods and in manufactured goods involving considerable use ofnatural resources or labour-intense goods, while the predominance of intra-industrytrade is particularly obvious in differentiated manufactured goods trade or in those inwhich economies of scale are exploited to a considerable extent.

Chart 4-6: Sectoral Structure of Inter- and Intra-industry Trade in Relations betweenPortugal and the EU, 2001 (as %)

Source: Project Team based on Eurostat/COMEXT Statistics

There follows a sectoral analysis of the structure of intra-industry trade betweenPortugal and the candidate countries, with a view to underscore prevailing relations ininter-industry versus intra-industry trade. As in the case of the previous analysis,different groups of sectoral positions were encountered in relations between Portugal andthe candidate countries, as illustrated by Chart 4-7 (in which the sector initialscorrespond to those listed above):– Group I – Predominance of Intra-industry Trade: this group of sectors, comprising

rubber products and printing and publications, suggests, in this field, signs ofproximity of Portugal’s production specialisation structures with those of thecandidate countries;

– Group II – Predominance of Inter-Branch Trade but with lower weight than theaverage of the Inter-branch Trade of the Candidate Countries. The levels of inter--industry trade between Portugal and the candidate countries are considerably lowerthan those between Portugal and EU15, as a result of a greater integration and con-vergence of Portugal’s productive structures with those of its present Communitypartners. However, notwithstanding the predominance of inter-industry trade, thereare a number of sectors where levels of intra-industry trade exceed those in relationsbetween Portugal and the candidate countries, showing a degree of approximation ofPortugal’s productive specialisation structures with those of the candidate countriesas far as these sectors are concerned, higher than the average of total trade flows.This group includes the Footwear & other Leather Articles, Textiles & Knitwear, Plastic

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Articles, Transport Material, Electrical Machinery and Apparatus & Electronics, andother Chemical Products & Synthetic Fibres sectors.

– Group III – Predominance of Inter-Branch Trade and with a weight greater than theaverage of the Inter-Branch Trade of the Candidate Countries. This situation coversthe other Non-metallic Mineral Products, Pharmaceuticals, Metal Products, Machines,Equipment & Instruments, Agriculture, Animal Creation & Fishing, Pulp & Paper,Energetic Products and Mining, Coke & Refined Petroleum Products, andMiscellaneous sectors, which constitute a field of lesser proximity of Portugal’s pro-ductive structure with those of the candidate countries.

Analysis of the nature of the sectoral trade flows between Portugal and the candidatecountries underscores two distinct situations. The predominance of inter-industry trade tendsto increase in those sectors that are very natural-resource intensive, as in the case of anumber of sectors whose inter-industry trade weight is greater than the average in relationsbetween Portugal and the candidate countries, namely Agriculture, Animal Creation & Fishing,Food & Beverages, Paper, Wood, other Non-metallic Mineral Products, and Energetic Productsand Mining. On the other hand, lesser inter-industry trade (that is, a predominance of intra-industry trade or a predominance of inter-industry trade at a level lower than the averageweights seen in the Portugal-candidate countries relations) tends to be seen in sectors lessdependent on exploitation of natural resources, whose trade flows are based less on diffe-rences of factorial endowments, namely Rubber, Plastic Articles, Transport Material, ElectricalMachinery and Apparatus & Electronics, and other Chemical Products and Synthetic Fibres.

Chart 4-7: Sectoral Structure of Inter- and Intra-industry Trade in Relations between Portugal and the Candidate Countries, 2001 (as %)


Following the sectoral analysis of the predominance of inter-industry trade versusintra-industry trade, it is important to determine the nature of intra-industry tradeintrinsic to Portugal’s relations with the Community area and with candidate countries,particularly in terms of dominant differentiation, so as to analyse the relative quality ofexports compared to imports, by sector.

The structure of intra-industry trade in Portugal’s relations with the Community areais outlined in Chart 4-8, which breaks down the intra-industry trade by sector. Analysis of

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the breakdown of intra-industry trade by sector in Portugal’s relations with its presentCommunity partners underlines the fact that there are four distinct groups of sectoralpositions: Group I: Predominance of horizontal differentiation (exchange of qualitiesdeemed similar), which includes Agricultural Products, Animal Creation & Fishing, andTransport Material; Group II: Predominance of upper vertical differentiation (Portugal isat an advantage with regard to its partners), which includes the Printing and Publications,Footwear & other Leather Articles, Electrical Machinery and Apparatus & Electronics, andPharmaceuticals; Group III: Predominance of lower vertical differentiation (in this casePortugal is at a disadvantage, given exports of lower-quality products and imports ofbetter-quality products), which includes the other Non-metallic Mineral Products, Pulp &Paper, Plastic Articles, other Chemical Products & Synthetic Fibres, Energetic Products &Mining, Textiles & Knitwear, Food & Beverages, Metal Products, and Coke & RefinedPetroleum Products sectors.

Portugal’s trade relations within EU15 evince a strong predominance of intra-industrytrade against horizontal trade, suggesting divergences between sectoral developmentlevels in Portugal and within its present Community partners. The predominance ofvertical intra-industry trade is, in most sectors, fundamentally associated with apredominance of trade with a low vertical differentiation, putting Portugal at adisadvantage compared to its Community partners, given exports of lower qualityvarieties and imports of better-quality varieties. Portugal’s specialisation profile in termsof trade of a vertical nature with lower differentiation compared to that of its Communitypartners (Portugal at a disadvantage) is, essentially, clearly visible in the so-calledPortuguese traditional specialisation industries, such as Textiles & Knitwear, other Non-metallic Mineral Products, Pulp & Paper, Cork and other Furniture articles, among others.

Chart 4-8: Structure of Intra-industry Trade in Portugal-EU Relations, by Sector, 2001, AS %


Focusing on the breakdown of intra-industry trade by sector in Portugal’s relationswith the candidate countries, based on Chart 4-9, three distinct groups of sectoralpositions stand out: Group I: Predominance of horizontal differentiation (exchange ofqualities considered to be of similar quality), including the Food & Beverages, AgriculturalProducts, Animal Creation & Fishing, Footwear & other Leather Articles, and Metal

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Products sectors; Group II: Predominance of upper vertical differentiation (Portugal is atan advantage regarding its partners), which includes other Chemical Products &Synthetic Fibres, Rubber, Electrical Machinery and Apparatus & Electronics, Wood, Cork &other Furniture articles, Textiles & Knitwear, Plastic Articles and Miscellaneous sectors;and Group III: Predominance of lower vertical differentiation (in this case Portugal is ata disadvantage in terms of the relative quality of exports as compared to imports),including the Paper & Pulp, Pharmaceuticals, Machines, Equipment & Instruments,Transport Material, and other Non-metallic Mineral Products sectors.

In Portugal’s trade relations with the candidate countries, the group of sectors inwhich predominates the intra-industry trade of a vertical nature is considerably morenumerous than the group of sectors with a predominance of intra-industry trade withhorizontal differentiation, leading to the conclusion that trade in varieties of differingquality is considerably greater than trade in varieties of similar quality, indicating,therefore, the existence of divergences in the levels of sectoral development betweenPortugal and the candidate countries. Nevertheless, the number of sectors in whichPortugal is at an advantage, i.e., where high vertical differentiation predominates, isslightly higher than the number of sectors in which Portugal has a low verticaldifferentiation against the candidate countries. In respect of Portugal’s disadvantageousposition compared to the candidate countries, it is evident that sectors responsible forthis position are not just the so-called traditional industries, such as Pulp, Paper, andother Non-metallic Mineral Products, but also Pharmaceuticals, and Machines, Equipment& Instruments.

Chart 4-9: Structure of Intra-industry Trade in Relations between Portugal and the Candidate Countries by Sector, 2001, AS %


Table 4-3 summarises the nature of intra-industry trade (horizontal, low vertical andhigh vertical) extent in Portugal’s sectoral trade flows with each candidate country, inorder to systematise the most relevant candidate countries in trade relations in segmentsthat are sensitive as far as Portugal is concerned.

0

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Table 4-3: Structure of Portugal’s Inter-industry Trade by Sector and by Candidate Country, 2001


Nature Sectors Horizontal Low Vertical High Verticalof Dominant IBT IBT IBTInter-IndustryTrade (IBT)

Sectors with Sector A - Agriculture, Animal Creation & Fishing Turkey – Cypruspredominance Sector C - Food & beverages Polandof horizontal Maltadifferentiation Sector E - Footwear & other leather goods Poland Czech Rep. Turkey

SlovakiaBulgaria

Sector P - Metal Products Czech Rep. Turkey TurkeyHungary Estonia RomaniaBulgaria Poland Cyprus

SlovakiaSlovenia

Sectors with Sector D - Textiles & Knitwear Poland Latvia Turkeypredominance Czech Rep. Lithuania Estoniaof high vertical Romania Hungary Polanddifferentiation Romania Czech Rep.

Slovenia SlovakiaHungary

Sector F - Wood, Wood & other Czech Rep. PolandFurniture articles Hungary

CyprusSector L - Rubber Slovakia Turkey Lithuania

PolandCzech Rep.

HungarySector M - Other Chemical Products Slovenia Turkey& Synthetic Fibres PolandSector N - Plastic Articles Czech Rep. Turkey

Slovakia PolandHungary Slovenia

Sector R - Electrical & electro-technical Turkey TurkeyRomania PolandSlovenia Czech Rep.

HungarySlovenia

Sectors with Sector G - Pulp & Paper Hungarypredominance Sector J - Pharmaceuticals Bulgaria Hungaryof low sector Sloveniavertical Sector O - Other non-metallic Turkey Poland Turkeydifferentiation mineral products Hungary Czech Rep.

Sector Q - Machines, Equipment Hungary Turkey Turkey& Instruments Slovenia Czech Rep. Poland

Romania HungarySector S - Transport material Poland Czech Rep. Turkey

Romania PolandHungary

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Agric. Energ. Food Textile Footwear Wood Coke Other Other Machines Electrical Transp.Animal & & & & other Cork Pulp Print. & Pharma- Rubber Chemical Plastic non- Metal equip. Machinery Materialcreat. mining beverag. Knit- leather & other & Publica- refined ceuticals prod. articles -metallic prod. & and

& wear goods Furnit. Paper tions petro- & mineral instrum. Apparatusfishing articles leum synthetic prod. &

prod. fibres electrothec.

Estonia

Latvia

Lithuania

Czech Rep.

Poland

Hungary

Slovakia

Slovenia

Malta &Cyprus

Turkey

Romania

Bulgaria

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In candidate countries as a whole, trade partners with which Portugal has competitiveweaknesses in a larger number of productive segments are Hungary, the Czech Republicand Slovenia. In fact, notwithstanding the fact that Portugal is at a disadvantage in termsof the relative quality of its exports in certain sectors against the other candidatecountries, it is when compared with these countries that its position at the level of lowvertical trade is experienced to a greater extent in terms of the number of sectorsinvolved2. In fact, a more detailed analysis of results suggests as the most sensitivesegments in Portugal’s trade relations with Hungary: Textiles & Knitwear, Wood, Cork &other Furniture Articles, Paper & Pulp, Pharmaceuticals, Plastic Articles, and other Non-metallic Mineral products. In trade relations with the Czech Republic, the sensitive sectorsare Footwear & other Leather Articles, Wood, Cork & Furniture, Plastic Articles, Machines,Equipment & Instruments, and Transport Material, while those in which Portugal is at adisadvantage in trade relations with Slovenia are the Textiles & Knitwear,Pharmaceuticals, other Chemical Products & Synthetic Fibres, Metal Products, andElectrical Machinery and Apparatus & Electronics sectors.

With a view to bring together information on the proximity of the trade specialisationstructures between Portugal and the candidate countries and to highlight the nationalpositions unveiling greater competitive imbalances, the results of the different statisticalindicators applied to Portugal’s bilateral trade flows were then crossed with the variouscandidate countries, by sector.

Table 4-4: Similarities in Trade Specialisation Structures between Portugal and the Accession Countries – Differences in Development Levels

2 The position as far as low vertical trade is concerned is felt more in these countries in terms of the num-ber of sectors involved since, taking into account the weight of low vertical trade flows as a proportion oftotal trade, the Czech Republic, Slovenia, Latvia and Romania stand out.TH

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It is therefore evident that the proximity of trade specialisation structures betweenPortugal and the candidate countries is greater in the Textile & Knitwear, Wood, Cork &Furniture, other Non-metallic Mineral Products, Machines, Equipment & Instruments, ElectricalMachinery and Apparatus & Electronics, Transport Material, and Plastic Articles sectors.

On the other hand, countries with greater similarities with Portugal’s internationalspecialisation structures (greater percentages of RCA [revealed comparativeadvantages] common to Portugal and greater similarities in sectors of great importanceto the export structure to the EU) are Poland, Slovenia, the Czech Republic, Slovakia andHungary. At a second level of importance stand Bulgaria, Turkey and Romania, with somesimilarities with the Portuguese trade specialisation structure.

Taking in account divergences encountered in sectoral development, it is evident thatPortugal’s unfavourable competitive positioning compared to the candidate countries,marked by the presence of intra-industry trade of a low vertical nature, can be seen inPortugal’s trade with a greater number of countries in the Textiles & Knitwear, MetalProducts, Footwear & other Leather Articles, Cork & Furniture, Plastic Articles, MachinesEquipment & Instruments, and Electrical and Electronic sectors.

Nevertheless, it is important to compare trade specialisation structures withdivergences at sectoral development levels between Portugal and the candidatecountries. On the grounds of information streamlined in the foregoing table, it is evidentthat the most relevant sectors in Portugal’s trade specialisation, in which Portugal is at acompetitive unfavourable position compared to a considerable number of countries, areTextiles & Knitwear, Wood, Cork & Furniture, Plastic Articles, Machines, Equipment &Instruments, Electrical and Electronic, Transport Materials, and other Non-metallic MineralProducts. Indeed, in these sectors Portugal has considerable competitiveness tradeweaknesses compared to candidate countries, in that, on the one hand, these sectors areof great importance to the exporting structure both of Portugal and of the candidatecountries and they have considerable competitive advantages for both, and thereforethreats arising from potential deviation of trade and the impacts stemming there from onPortugal’s exporting structure are potentially quite significant; on the other hand, onefinds significant divergences in the levels of sectoral development in these sectors inPortugal’s relations with a considerable number of candidate countries, and Portugal hasa weak competitive position.

Below is a matrix of sectoral sensitivity levels in Portugal’s bilateral trade relationswith candidate countries, providing a synthesis of the foregoing analyses, particularly ofthe presence of intra-industry trade with low vertical differentiation and of itspredominance in trade relations, of the exporting specialisation structures to the EU andof the expressiveness of the sectoral comparative advantages. Therefore, the combinedanalysis of the proximity of the trade specialisation structures and of divergences insectoral development in Portugal allowed sectoral sensitivity levels to be classified as“medium”, “medium/high” and “high”.

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Legend:1. Fairly significant weight (above 2%) of sectoral exports to EU in the exporting structure, both

of Portugal and of the candidate country2. Expressive Revealed Comparative Advantages: Sectoral Similarities between candidate

countries and Portugal3. Inter-industry Trade: proximities and divergences in sectoral development levels

Horizontal intra-industry tradeHigh vertical intra-industry trade Low vertical intra-industry trade

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Table 4-5: Sectoral Sensitivity Levels in Trade Relations between Portugal and the Candidate Countries

Country Medium Medium/High High

Estonia Metal Products Textiles & KnitwearWood, Cork & FurnitureElectrical Machinery and Apparatus & Electronics

Latvia Wood, Cork & Furniture Textiles & KnitwearLithuania Wood, Cork & Furniture Textiles & Knitwear

Electrical Machinery and Apparatus & Electronics

Czech Rep. Footwear & Other Leather Articles Other Non-metallic Mineral Products Transport MaterialsWood, Cork & Furniture Electrical Machinery Machines, Equipment &

and Apparatus & Electronics InstrumentsTextiles & Knitwear Plastic Articles

Poland Metal Products Textiles & Knitwear Other Non-metallic Mineral Wood, Cork & Furniture ProductsPulp & PaperPlastic ArticlesMachines, Equipment & InstrumentsElectrical Machinery and Apparatus& ElectronicsTransport Materials

Hungary Wood, Cork & Furniture Pulp & Paper Textiles & KnitwearPharmaceuticals Plastic ArticlesOther Non-metallic Mineral ProductsMachines, Equipment & InstrumentsElectrical Machinery and Apparatus & ElectronicsTransport Materials

Slovakia Footwear & Other Leather Articles Textiles & Knitwear Plastic ArticlesMetal Products Pulp & Paper

Other Non-metallic Mineral ProductsMachines, Equipment & InstrumentsElectrical Machinery and Apparatus & ElectronicsTransport Materials

Slovenia Metal Products Pharmaceuticals Textiles & KnitwearOther Chemical Products & Synthetic Fibres Wood, Cork & Furniture Electrical Machinery

Pulp & Paper and Apparatus & ElectronicsPlastic ArticlesOther Non-metallic Mineral ProductsMachines, Equipment & InstrumentsTransport Materials

Malta & Cyprus Wood, Cork & Furniture Textiles & KnitwearOther Non-metallic Mineral ProductsElectrical Machinery and Apparatus& ElectronicsTransport Materials

Bulgaria Footwear & Other Leather Articles Textiles & KnitwearFood & BeveragesOther Non-metallic Mineral ProductsMachines, Equipment & InstrumentsElectrical Machinery and Apparatus & Electronics

Romania Transport Materials Textiles & KnitwearFootwear & Other Leather Articles Machines, Equipment Other Non-metallic Mineral Products & Instruments

Electrical Machinery and Apparatus & Electronics

Turkey Metal Products Textiles & Knitwear Machines, Equipment Rubber Other Non-metallic Mineral Products & Instruments

Transport Materials Electrical Machinery and Apparatus & Electronics

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5. PORTUGAL AND THE REORIENTATION OF FDI IN THE ECONOMIC AREA OF THE ENLARGEDEUROPEAN UNION

The aim of this chapter is to analyse EU enlargement implications on internationalinvestment flows as far as Portugal is concerned. More specifically, the goal is toascertain the point to which enlargement could, on the one hand, lead to the deviation ofinternational investment (including divestment) from Portugal to the candidate countriesand, on the other, to open up opportunities for Portuguese companies. The intention is toobtain a reasonably fine analysis, to two NACE digits, focused on those candidatecountries that are seen as potential challengers and/or seem to offer great investmentopportunities.

The procedure is detailed in Figure 5-1. This procedure leads to a “twofold” vision:candidate countries are viewed as a challenge (that is, as rivals in attracting FDI) and asan investment opportunity for Portuguese companies. It is evident nevertheless, thatrisks underlying challenges are far greater than the potential advantages stemming fromopportunities.

Figure 5-1: Analysis Process to be Followed

This chapter will be divided into three sections, besides this introduction. The nextsection presents and construes FDI features and trends in Portugal, and especially incandidate countries – identifying, among these, major challengers. Then, an analysis willbe made of these countries as rivals in attracting international investment, identifying,for the main sectors of activity, destinations competing with Portugal and the expectedsize for challenges. The following section will look at candidate countries as sources ofinvestment opportunities. The outcome will be the identification of sectoral paths leadingto investment motivation for Portuguese companies abroad, in the candidate countries inparticular.

5.1. Portugal and the Candidate Countries: FDI Profile and Trends

Overview

Investment abroad by the enlargement countries is small, and their contribution aspotential investors in Portugal is of negligible. Consequently, our attention with respect toFDI flows in candidate countries will focus solely on inflowing FDI. In the case of Portugal,given the twofold aim of this chapter, we shall address FDI inflows and outflows.


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The comparison of Portugal’s performance in enlargement countries is thereforerestricted to FDI inflows. In very general terms, this comparison is pinpointed in Table 5-1,hereunder.

Table 5-1: Overview of FDI Flows

It is evident that FDI has tended to increase in candidate countries, notwithstandingthe remarkable reduction in FDI inflow in 2001, a year FDI movements generally dropped.Throughout 2002, there was a reversal in the international scenario of lower FDI. Althoughthis upswing has not been equal in every country, there can be no doubt that, as a whole,candidate countries have been a pole of attraction for international investment. The valueof FDI in these countries during 2002 was 2.5 times greater than the average for 1990-95. Consequently, their share of total global FDI increased once again, following thedownturn in 1999-2000, the increase amounting to 3.6% in 2002, the highest since thestart of the process of liberalisation of their economies.

Undeniably, expectations for accession to the European Union have played a decisiverole in this extremely good performance of the candidate countries as FDI targets. Moresharply than in Portugal and Spain during the 80s, this expectation generally hastenedthe investment process.

It is important to note, on the other hand, that five countries (including those that areeconomically more advanced in the transition process itself) accounted for over 80% ofFDI inflows into the candidate countries during the period under review. This trend waseven stronger in 2002, with Hungary, Poland, the Czech Republic, Slovakia and Sloveniaattracting 87% of the total.

Comparison of the performance of Portugal and of the candidate countries inattracting FDI (see lines 4, 7 and 8) shows that our country lost ground: beginning withan average of 34.6% of that of candidate countries in 1990-95, the figure fell to about 19%in 2002. More relevant, however, is the fact that from 1996 to 2002 the 30% share was nolonger exceeded and for several years it remained below 20%. Notwithstanding the factthat UNCTAD statistics show a relative upswing in Portugal’s position in global FDI in 2001-02 compared to the second half of the 90s, the fact is that Portugal is lagging behind thecandidate countries in attracting FDI. The latter have a far greater power of attraction.

Although FDI attracting performance and potential indices, calculated in the UNCTAD

World Investment Report, contain several restraints, their analysis provides interestinginformation for an initial comparative approach to Portugal’s performance as compared tothat of the candidate countries. Firstly, these indices lead to the conclusion that in 2001

1990 - 95 1996 1997 1998 1999 2000 2001 2002

(1) FDI Candidate Countries 5 166 10 033 11 596 17 819 20 051 22 238 19 355 23 111(2) FDI HU+PL+CZ+SK+SI 4 453 86 46 8 976 13 051 16 019 18 222 15 874 20 169(3) Bulgaria + Romania 219 372 1 720 25 68 1 860 2 027 1 970 1 585(4) Portugal 1737 1 488 2 477 3 144 1 234 6 464 5 892 4 276(5) (1)/World Total (%) 2.3 2.6 2.4 2.6 1.8 1.5 2.4 3.6(6) (2)/World Total (%) 2.0 2.2 1.9 1.9 1.5 1.2 1.9 3.1(7) (4)/World Total (%) 0.77 0.39 0.52 0.45 0.11 0.43 0.72 0.66(8) (4)/(1) 34.6 14.8 21.4 17.6 6.2 29.1 30.0 18.5(9) (2)/(1) 86.2 86.2 77.4 73.2 79.9 81.9 82.0 87.3

Units: million dollars and percentagesSource: World Investment Report, 2000, 2002 & 2003

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most candidate countries performed above their potential, while this was not true ofPortugal. The idea of those countries’ real ability to attract FDI (especially the CzechRepublic, Malta, Slovakia and Bulgaria) is thus confirmed, supported by prospects of EUmembership for the very near future. Along the same lines, these four countries areamong the 25 best in terms of attracting FDI, measured by the FDI inflow-to-GDP ratiofrom 1999-2001.

The second aspect to be underlined is, to a certain extent, the reverse of the foregoing:there are countries that stand below the diagonal, which is also true of Portugal. They areHungary and, to a special extent, Slovenia. Curiously enough, while Portugal’s performance hasimproved, the opposite was true in these countries. At first sight, Poland’s and Hungary’sposition is amazing. In fact, as countries among the most developed of the group of candidatesand as front-runners in the transition process, they might have been expected to have a verystrong track record in attracting FDI. The explanation for this required an analysis of theevolution of the position over time. It is evident that in 1994-96 Poland and Hungary were wellabove the diagonal, Hungary in particular. In 1991-93 and 1995-97 Hungary was consistentlyamong the 15 best-performing countries. It can thus be seen – and this is the third comment– that there would appear to be cycles in attracting FDI, with the “first-generation stars” (withthe notable exception of the Czech Republic) waning, while new countries become“fashionable”, such as Bulgaria or Slovakia. Part of the explanation for these cycles lays in thedynamics of the privatisation processes; another is linked, as in the case of Hungary, to a“saturation” effect of the window of investment opportunities perceived by potential investors.

There are two conclusions to be drawn in any comparison between Portugal and thecandidate countries. On the one hand, the majority of enlargement countries (especiallysome of our main competitors, such as the Czech Republic or Slovakia) have performedbetter than Portugal in attracting FDI in the recent past. On the other hand, thesustainability of such advantageous positions (i.e., above the diagonal) over time wouldappear to be difficult, suggesting the existence of cycles, as in the case of Poland andHungary. Companies acted ahead of enlargement, as it were, promoting corporateintegration ahead of regional integration. This means that part of the enlargement effectson FDI has already occurred and is still doing so.

Portugal and the International Investment Flows

From being a country receiving investment up to the start of the 90s Portugal hasbecome an economy in which investment inflows and outflows are in balance. As from1996, net figures for Portuguese FDI abroad and of FDI in Portugal have been close to eachother, the former having consistently exceeded the latter between 1999 and 2001.

The evolution has been quite irregular: following certain stagnation in 1997-98 there wasa downturn in 1999, followed by a sharp recovery in 2000 and then by a downward trend.

FDI in PortugalTaking into consideration stock statistics based on a survey by the Bank of Portugal

referred to the end of 1996, when the value was 14,520 million Euros, a breakdown bysector of activity and by country will be made below.

In sectoral terms, four major groups of activities account for over 90% of the stock:manufacturing industry (34%); real estate activities & services provided to companies (24%);trade (17%); and financial activities (16%). The strong position of real estate & services tocompanies is chiefly the result of NACE Class 74, which includes holding companies, and thisobviously conditions the real representativeness of the statistics by sector.

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In terms of countries of origin of the investment (defined, it should be recalled, by thecountry of the parent company of the non-resident investor), results are somehowsurprising, with France in the lead (17%), followed closely by the United Kingdom (14%),Spain (13%) and the United States (12%): Germany, the country central to the matter ofenlargement, accounted for less than 10% of FDI stock .

In terms of FDI flows between 1997 and 2002, the main group of activities targeted byFDI has been real estate activities & services to companies (which includes holdingcompanies), with 45% of the total, though slowing slightly in 2000-02. Financial activitiesand the manufacturing industry have been losing weight relative to their position in the1996 stock; the manufacturing industry accounted for just 7% of FDI over the six-yearperiod.

In FDI flows, Spain and the United Kingdom have been the major sources, accountingfor 21% and 20% of the six-year total, respectively, while France and Germany have lostground in their position in the FDI stock, accounting for 5% and 8% of FDI only,respectively, from 1997 to 2002.

Portuguese Investment AbroadAs we did for FDI in Portugal, we shall use stock elements as benchmark,

supplemented later by an analysis of the flows.Analysis of the stock of Portuguese investment abroad shows that it is highly

concentrated in two groups of activities: real estate activities & services to companies(44%) and financial services (34%). The shares assigned to the manufacturing industryand to trade are very small: 9% and 3% respectively. Concentration in the first two groupsis even greater than that of FDI in Portugal as a result of the use of holding companies andof the financial activity involved.

In geographic terms, Spain and Brazil are the main destinations of investment,accounting for 28% and 15% of the total respectively. Here, too, there is confirmation ofwhat has often been said: the importance of geographic and psychological proximity indirecting international investment and, more specifically, Portuguese investment abroad.This reasoning of proximity may well condition the perception and exploitation ofbusiness opportunities in Central and Eastern Europe by Portuguese companies.

Surprisingly, at first sight, the next three positions in the table of destinations areIreland (9%), the Netherlands (7%) and Luxembourg (6%). From our point of view, theexplanation is quite simple: these three countries offer preferential conditions to set upholding and international tax management companies, of which Portuguese companiestake advantage. None of the candidate countries is among the main destinations, whichis somewhat unexpected, at least as far as Poland is concerned. The reason may lie in theuse of holding companies in other European countries as the base from which to invest inCentral and Eastern European countries.

The analysis of flows in Portuguese investment (from 1998 to 2002) shows that atsector level the spotlight is clearly on real estate & services to companies (holdingcompanies), accounting for 70% of the investment abroad during the five-year periodunder review. The second position is for trade(13%), which was rather unnoticeable in thestock in 1997; it should be noted, however, that investments were made in one singleyear. With respect to stock elements, financial activities and the manufacturing industryhave lost ground.

Brazil and Spain unquestionably remain the main destinations, accounting for nearlytwo thirds of the investment. Brazil has considerably strengthened its position withregard to stock elements, accounting for 34% for the whole of the five-year period, while

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Spain continued to stand at 28%. Nevertheless, longitudinal analysis suggests thatinvestment in Brazil is slowing down, while Spain, following a negative figure in 1999, hasrecently recovered.

Investment figures in candidate countries are too insignificant to be mentionedcompared to those of main destinations. On the other hand, there would appear to us tobe an additional factor to be considered: let us admit that investments in enlargementcountries are not made from Portugal, but rather from holding companies domiciled inother parts of Europe, particularly Benelux and Ireland.

Considering the sectoral structure of investment, three aspects stand out: (1) thegrowing weight of financial activities, which, from 1999 to 2001, exceeded that of totalnet investment; (2) the recent affirmation of the wholesale trade, with 18% of total netinvestment in 2001; and (3) the decline in the manufacturing industry and in services tocompanies, with clearly negative figures in 1992-2004.

FDI in Candidate Countries

Candidate Countries as Poles of Attraction of FDI: a TypificationMost candidate countries have given significant importance, even in political terms, to

attracting FDI. In this connection, almost all countries have altered their legislation toensure non-discrimination between nationals and foreigners; the main exceptions areownership of land (Bulgaria) and some sectors in which FDI is restricted (Slovenia,Cyprus). Most countries also have specific agencies to deal with attracting investment.

However, despite the widespread intention of attracting FDI, the various candidatecountries do not compete on an equal footing. Analysis of positions and characteristics ofthe candidate countries allows us to establish four main groups:

(1) Central Europe, which can be divided into two sub-groups: core countries(Hungary, Poland and the Czech Republic) and the atypical cases (Slovenia andSlovakia). Core countries are the first wave of candidates and are at a moreadvanced stage in the transition process;

(2) Baltic Countries (Estonia, Latvia and Lithuania), with relatively advancedtransition processes, liberal FDI policies, privatisations that are practicallyconcluded and FDI profiles marked by proximity to the Scandinavian countries.These are countries that are not in the first line of competitors owing to theirspecific geographic location;

(3) Mediterranean Countries (Malta and Cyprus), with profiles considerably markedby their standing as islands. In the industrial area both have several exportingactivities, though of no great significance. They are not major competitors as faras Portugal is concerned.

(4) Black Sea Countries (Romania and Bulgaria), quite behindhand in their process oftransition and in accession to the European Union (planned for 2007). Their levelof development of infrastructure and of sophistication in the industrial structureis fairly limited. However, the low wages and relative qualification of theirmanpower make these countries powerful competitors in attracting investment inlow-technology areas, both in traditional industries (Clothing, Footwear) and inassembly (Auto Industry).

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Investment Flows: a Comparative ViewAn analysis of investment flows requires two preliminary reserves. The first is the

relative variability in annual figures, largely influenced by the occurrence of majoroperations, some of them linked to privatisation processes, and for this reason theaggregate figures are analysed. The second has to do with privatisations. Analysis ofexisting literature shows that, although they were not always open to foreign capital,privatisations, generally speaking, have played a very active role in attracting FDI, since alarge part of the share capital of privatised companies was acquired by foreign partners.As a rule, the countries in the forefront of privatisations were also those in which therewas greater penetration by foreign capital. There are significant intra-country differencesin the privatisation rate and in their use as a means to attract FDI.

In view of the general evolution in FDI inflows into enlargement countries, growthexpectations for flows have been confirmed. Indeed, regarding the average figures for1990-95, all countries – with the exception of Cyprus, Malta and Hungary – posted higherfigures in every subsequent period. In relative terms, the bigger “jumps” were those of theCzech Republic, Poland, Romania, Bulgaria, Slovakia and Lithuania.

A comparison over time shows, on the other hand, distinct evolution trends in themost recent past. Thus, a comparison of the 1996-98 and of the 1999-2001 three-yearperiods shows that not all candidate countries experienced investment growth. Indeed,Hungary, Latvia, Romania and, to a very slight extent, Lithuania and Slovenia saw adecline in FDI inflows. In other countries, such as Poland, the Czech Republic, Slovakia orMalta, growth was considerable; in relative terms, the sharpest growth was evident inSlovakia, Malta, the Czech Republic and Bulgaria.

In brief, these results suggest that, for candidate countries as a whole, there are differingcapacities and performances in attracting FDI. Not all have strengthened their position,either in absolute terms or in comparison with Portugal. The comparison suggests, inparticular, an increase in the ability of countries such as Slovakia and the Czech Republic toattract FDI and a certain “exhaustion” of that of Hungary, Poland or Romania.

In terms of relative positions, Poland’s leadership until 2001 was due not so much toits greater specific capacity to attract FDI but to the size of the Polish economy itself.Although absolute values are considerable, particularly to the extent that they reflect acapacity to attract actual FDI projects, the relative elements should also be noted, linkingthe levels of attraction of FDI with the size of national economies.

Chart 5-1 details FDI figures per country during each of the three-year periods underreview with an indicator concerning the size of economies, or Gross Domestic Product(GDP). This chart gives an idea of the variability, both inter-country and in terms of time in agiven country. There are countries in which the relative weight of FDI to GDP is traditionallymodest, below 3.5%, such as Romania, Cyprus or Slovenia. On the other hand, one shouldunderscore others in which the weight has been consistently higher than the 3.5%threshold, such the Baltic States, Hungary, Poland or the Czech Republic. However, the mostremarkable aspect is the intra-country variability, bringing back ‘cycles’ in FDI-attractingperformance. On the one hand, some countries are accelerating, such as the Czech Republicand Slovakia; on the other, other countries seem to have moved into ‘recession’, such asHungary or Romania, confirming results achieved in connection with absolute figures.

The analysis is easier and more interesting if we take Portugal as the benchmark.Considering as benchmark axes the weight of FDI/GDP in 1999-2001 and the growth rate ofthis weight during the two three-year periods studied, Chart 5-2 shows that eight of the twelvecandidate countries performed better than Portugal in attracting investment (measured by theFDI/GDP ratio for 1999-2001). However, only three (Malta, the Czech Republic and Slovakia)

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had at the same time ratio growth rates greater than Portugal’s. In competitive terms, the mostthreatening situation is that of the Czech Republic, although Slovakia should not be neglected.

Chart 5-1: FDI Inflows as a Percentage of GDP

Source: World Investment Report 2000, 2002 e 2003

Chart 5-2: FDI/GDP Ratio Compared to Portugal

The present Member States of the EU were the source of a fairly significant portion of theinflow of FDI into candidate countries. However, it should be observed that part of theseinvestments will have been made by European divisions of multinational companies whosedecision centres are not located in the Union. From 1996 to 2000, Germany, theNetherlands and France were the main foreign investors in the candidate countries.

The analysis allows Portugal’s main challengers to be identified from a standpoint ofattracting FDI. In fact, the geographic location, investment conditions offered, the size ofeconomies and the volumes of FDI flows mean that several countries can be eliminated, save

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some episodic aspects, which offer no significant challenges for Portugal. The Baltic Countries,for their geographic location and preferential relations with the Scandinavian countries of theEU, and for the small size of their economies, are not considered direct competitors of Portugal.This is also true of the Mediterranean Countries. Despite greater geographic proximity, beingislands with small sized economies, does not allow them to assert themselves, except inspecial cases (tourism, transport), as competitors in attracting mobile internationalinvestment.

Hence, the identification of seven challengers: Central European countries (Hungary, Poland,the Czech Republic, Slovenia and Slovakia) and Black Sea countries (Bulgaria and Romania). In--depth analysis will be made of these seven countries, evaluating FDI stocks, involving, in thefirst instance, an approach by country and then an approach by sector of activity.

The analysis by country was intended to identify, in relative terms, the structure of theorigins of FDI stock in Portugal’s main challengers. For the purpose, the FDI SpecialisationIndex by Country (FDISIC) was prepared, which provides information concerning therelative preference of investors from countries of origin under consideration for the variouscandidate countries. The results provide very interesting information:

– Geographic proximity influences the destination of investment flows: Austria andSweden are particularly illustrative cases;

– American investment is especially directed at Poland: the size of the Polishinternal market has to do with this;

– Bulgaria, concomitant with Poland, is the only country with an index for the EUcountries below the unit;

– German investment is remarkably dispersed but – opposite to what might beexpected – it prefers countries such as Hungary, Slovakia or even Bulgaria to Poland.The sharing of the German language is probably not the main reason but rather theattempt to achieve strong positions with smaller investment and, in the case ofindustry, to take advantage of production cost differentials, re-exporting the productsor components to Germany via networks;

– On the other hand, French investment was largely directed at Poland: the historicFranco-Polish attraction would appear to continue to work;

– For reasons that we have been unable to determine, British investment is relativelymore geared towards Poland, and especially to Bulgaria, apparently avoiding Hungary.

The conclusion is obvious: the only magnet for Portuguese investment in thecandidate countries is Poland. In absolute terms, Spanish investment is not much greaterthan Portugal’s and is also largely directed at Poland.

In line with the procedure employed in the country analysis, the analysis by sectoralso involved a specialisation index – the FDI Specialisation Index by Sector (FDISIS).Focusing the analysis on the manufacturing industry, several curious aspects stand out:

– In Hungary, the Electric and Electronic Equipment Industry (which is in keepingwith initial expectations and with the existing perception of advantages offered bythis country) and in Textiles, Clothing and Footwear (which is totally unexpected);

– In Poland, in industries in which the weight of the domestic market is relevant:Pulp & Paper; Transport Equipment and the Food industry;

– In the Czech Republic, in the Metallurgy and Metal Products industries, though not(surprisingly) in Transport Materials;

– In Slovenia, in Non-electric Machinery and in Chemicals; and– In Bulgaria, also in Non-electric Machinery, this is also unexpected taking into

account the relative level of development of the Bulgarian economic structure.

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The line analysis is influenced by the relative size of the countries in terms ofattracting FDI. The countries with a lower FDI inflow tend to have a greater variance inFDISIS. With this reserve, attention is drawn to:

– The directing of FDI in the Food industry to Bulgaria and Poland;– The investment focus on Textile, Clothing and Footwear, somewhat unexpectedly,

on the two countries where transition is most advanced (Hungary and the CzechRepublic), while the index is below 1 in Bulgaria;

– The very high indices returned by Bulgaria and Slovenia in Non-electric Machinery; and – The relative preference of investors in Electrical Machinery for Hungary (where the

index is greater than 2) and in Transport Materials for Poland.The information obtained for services allows several odd specialisation patterns to be

underlined, particularly Hungary’s focus on the Electricity, Gas and Water area, Slovakia’son Transport and Bulgaria’s on Tourism.

5.2 Candidate Countries - Rivals in Attracting FDI

Candidate countries constitute new location options that make it more difficult forPortugal be a part of the shortlists in undertaking new investments, and consequentlyreduce its possibilities of attracting new internationally mobile investment to our country.In analysing the existing rivalry, the key vector of analysis is the sector of activity, sinceit is considered that relevant elements can be identified at this specific level to allowreflection on the plausible conduct of investors in the future. The first element isidentification of the relative importance of the types of FDI. These have been establishedin accordance with proposal made3, as indicated hereunder:

(1) Market, when FDI is essentially directed at supplying the domestic market of thecountry destination (or of neighbouring countries). A distinction will be madebetween the FDI of companies already established in the EU, in which thedeviation of FDI will not, in principle, be relevant, in which case Portugal may wellbe in competition with the candidate countries;

(2) Resources, especially natural resources, sources of energy. In this type ofinvestment, too, the potential deviation of FDI will not be significant;

(3) Unskilled Work.(4) Skilled Work.(5) Strategic Assets, particularly access to a pool of labour of extraordinary skills in

certain technologies or activities, insertion into particularly dynamic clusters,acquisition of market knowledge, domination of present potential competitors, etc.

In view of the list of FDI determinants, an analysis was made of Portugal’s strengthsand weaknesses, such as location of international investment for the activities underconsideration. This analysis, allied the benchmark elements mentioned above, allows adefinition of the degree of Portugal’s vulnerability in an enlarged EU.

Sectoral Analysis: Major Challenges

There is a very large variety of sectoral positions as far as vulnerability to enlargementis concerned. First and foremost, the warning made earlier should be listened to: the

3 Cfr., for example, John Dunning, Globalisation and Multinational Enterprises, Harmondsworth: Allison-Wesley, 1993.

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problems faced in attracting FDI will not begin after enlargement, many of them alreadyexist. That said, it can be seen that Portugal’s vulnerability is all the greater in NACE fourclasses (see Table 5-2): Clothing; Footwear; Unspecified Machinery & Equipment; andMedical, precision and optical instruments.

These are sectors in which Portugal’s capacity to attract FDI is weakened and in whichfurther “deviations” of investment are not out of question, particularly with the transfer of unitsfrom Portugal to the candidate countries. The pattern common to these industries is sensitivityto relative labour costs, safeguarding minimum skill levels, particularly in the two latter cases.Investments are not made so much with the objective of supplying local markets, but basicallyto produce for export. Portugal shows three weaknesses: labour costs and availability;industrial tradition (in machinery and Medical, precision and optical instruments); and distancefrom the centre of the Union that is Germany. Moreover, the potential for incentive granting toinvestment is declining in Portugal, while it will tend to upswing in candidate countries.

Table 5-2: Sector Classification by Vulnerability Level

The existence is thus confirmed of a pincer movement conditioning performance inattracting FDI. On the one hand, the least advanced candidate countries are indeedthreats in the case of traditional labour-intensive activities. On the other hand, there is thecompetition of the most industrialised countries in those sectors more skill demanding.

There follows a group of six activities in which Portugal’s vulnerability, though nothigh, is still significant: Manufacture of Basis Metals; Metal Products; Electrical Machinery& Apparatus; Radio, Television and Communication Equipment & Apparatus; MotorVehicles; and Real Estate Activities.

Here, too, there are several reasons for vulnerability, despite common factors inmetal, machinery and transport chain sectors. In the case of Real Estate Activities(clearly different from the others), the expected development of the economies of thecandidate countries has attracted real estate developers and will continue to do so. In theother five NACE classes, industrial tradition and the cost/quality ratio of the workforce arethe main assets of some countries compared to Portugal.

For its features as an industrialising industry, the vehicle manufacturing industry faces thegreatest challenges. In fact, it drags other activities in its wake and certain projects act asanchors in attracting FDI to other areas. Furthermore, it is, of the NACE classes included in themedium to high vulnerability group, the one in which the value of FDI stock has the greatestweight (6.1% of the total FDI stock in Portugal, at end-1996). Lastly, it is one of the activities inwhich the FDI rate in the candidate countries has been more intense.

At the other extreme, there are activities in which analysis shows that Portugal is notvery vulnerable. These include five NACE classes: Food & Beverages Industries; Wood &

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Vulnerability ActivitiesLow 15 – Manufacture of Food Products & Beverages; 20 – Wood & Cork; 40 – Electricity, Gas & Water Supply &Prod.;

51 – Wholesale Trade; 55 – Hotels and RestaurantsMedium-Low 22 – Publishing and Printing; 30 – Manuf. of Office Machinery & Computers.; 64 – Post & Telecommunications;

65+66+67 – Financial ActivitiesMedium 17 – Textiles; 21 – Paper & Pulp; 24+25 – Manufacture of chemical and plastic products.; 26 – Manufacture of non-Metallic

Mineral Prod.; 45 – Construction; 72 – Computer and Related Activities; 74 – Other Business ActivitiesMedium-High 27 – Manufacture of Basis Metals.; 28 – Manuf of Fabricated Metal Prod.; 31 – Manuf. of Electrical Machinery &

Apparatus n.e.c.; 32 – Manuf.of Radio, Television and Communication Equip. & Apparatus..; 34 – Manufacture of Motor Vehicles; 70 – Real Estate Activities

High 18 – Clothing; 19 – Footwear; 29 –Manufacture of Machinery and Equipment; 33 – Medical, precision & optical instruments

Source: Drawn up in-house on the basis of the work sheets presented in Appendix 5-1

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Cork Industries; Electricity, Gas and Water Supply and Production, Wholesale Trade; andHotels and Restaurants.

These, basically, are activities in which the main FDI determinants are the supply of thedomestic market of the countries where they set up or access to/control of natural resources.The potential for inter-country competition in attracting FDI projects is therefore limited.Moreover, the geographic gap between Portugal and the candidate countries rendersimplausible any investment directed at the rationalisation of market supply activities.

Since the potential for technological modernisation is one of the main reasons todefine policies designed to attract FDI, it seemed to us to be of interest to cross thesectoral results obtained regarding Portugal’s vulnerability with technological intensity.This exercise allowed a direct relationship to be established between technologicalintensity and vulnerability, though mitigated by several exceptions. These have to do, onthe one hand, with the Manufacture of Office Machinery and Computers (NACE 30) and,on the other, Clothing (NACE 18) and Footwear (NACE 19).

Except for these cases, it may be observed that in low technology-intensive activitiesPortugal’s vulnerability never exceeds the average, while in medium-high and hightechnology-intensive areas it is never below the average.

Perhaps more than this association, what has to be underscored is the fact that Portugalundergoes twofold competition from the candidate countries. The most advanced, such asthe Czech Republic and Hungary, are our competitors in attracting investment in medium-high and high technology-intensive areas, such as machinery, Medical, precision and opticalinstruments and motor vehicles. Less industrialised countries, such as Romania andBulgaria, are competitors in the traditional labour-intensive industries (and also in the mostlabour-intensive activities in the mechanical chain sectors).

Crossing the major rivals with Portugal’s vulnerability, present by sector, the impression isthat Portugal’s main challengers in attracting FDI are Slovakia and the Czech Republic. Slovakiais one of the main rivals in 9 of the 10 activities with a medium-high or high vulnerability. Theyare followed by Hungary (6 cases) and Romania (5). In contrast, Poland is only a rival in two.Once again, results confirm the hypothesis of the pincer movement which Portugal is facing.

The result, unexpected at first sight, of Slovakia appearing as the “main” competitor, isprecisely the reflex of this reasoning. Indeed, Slovakia is a competitor both in moresophisticated activities, with a greater demand for skilled labour, and in others morelabour-intensive and sensitive to low wages.

To conclude this analysis by country, we have considered that it might be interestingto make use of a quantitative indicator, allowing the “measurement” (necessarilyimperfect) of what is at stake. Table 5-3 details the relative size of the stock of IDE inPortugal “threatened” by each challenger.

Table 5-3: Main Threats – Analysis of R&D Stock

Country Vulnerability LevelLow Medium-Low Medium Medium-High High Medium-high∅ High

Slovakia 17.8 12.7 14.7 3.9 18.6Slovenia 11.7 4.5 1.7 6.2Hungary 17.8 28.5 16.4 0.4 16.8Poland 18.1 17.8 24.4 11.2 11.2Czech Rep. 13.2 17.8 31.3 19.2 21 21.3Bulgaria 1.5Romania 1.5 4.4 1.8 1.8

Unit: Percentage of FDI stock in Portugal for those industries considered vulnerable to each country shown inthe lineSource: Drawn up in-house

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The analysis confirms several of the foregoing observations, tinting them as well. Infact, the Czech Republic and Slovakia appear to be the most threatening ones: they areamong the main challengers in sectors in which Portugal’s vulnerability has beenclassified as medium-high or high and account respectively, in the latter case, for 21% and19% of FDI stock in Portugal. Hungary and Romania follow, also with relevant positions.However, the challenge posed by the former is considerably greater, since it is constitutesa formidable competitor in activities of medium medium-high technological intensity. Inturn, Poland – previously considered as a rather irrelevant competitor – is gaining pace,threatening 11% of FDI stock in Portugal; altogether, however, Poland appears more as arival in areas of low or medium vulnerability (60% of the stock).

To conclude with, the Czech Republic, Slovakia and Hungary are major challengers,which do not mean, however, that in specific activities and projects other countries arenot strong rivals. The idea of the pincer, in which the first wave of candidates constitutesthe threat in the technologically more advanced sectors and the second in the mostlabour-intense rather unskilled ones, is confirmed. Challenges are considerable. In thedefinition of the location of new investment projects, the number of countries capable ofbeing considered on long lists increases, making it harder to attract projects for Portugal– taking into account that psychologically there is an idea that in the coming years theaction will be in the candidate countries and that, therefore, companies will tend to investmore there.

5.3 Candidate Countries as Sources of Investment Opportunities

Although distance continues to be a major conditioning factor, it is believed thatenlargement will not only open up new business and investment opportunities but it willalso increase the sensitivity of Portuguese companies to use such opportunities. Morespecifically, it could well be that it will provide more business opportunities for Portuguesecompanies as a result of the complete elimination of customs barriers, the fostering ofmarkets in these countries, the additional support inherent to the provision of structuralfunds and the reduction in Portuguese companies’ perception of investment risk.

As in the approach to competition in attracting FDI, the key vector of the analysis isthe sector of activity, considering identical panoply of sectors. An evaluation is next madeof the in-house skills of Portuguese companies, in general terms, taking into accountcurrent knowledge of the Portuguese business structure, Portuguese direct investmentin candidate countries, in the recent past and foreign trade statistics.

If companies of very limited skill bases have scarce possibilities insofar asautonomous, proactive activity in the economic area resulting from enlargement, thesolution for those companies with a significant skill base may not involve directinvestment abroad. This is particularly true in those cases Portugal offers specific locationadvantages; exploiting them will basically involve exports and not direct investment(excluding, probably, that of a commercial nature). In other cases, however, advantagesare not dependent on location in Portugal – and they may be exploited and/or driven bysetting up subsidiaries in the candidate countries. Location advantages may stem fromfour major factors: closeness to the market; links with customers; production conditions/access to resources; and specifics of the business, particularly in the case of services.

The issue is to identify those locations whose non-mobile advantages cancomplement the specific capabilities of Portuguese companies. To answer this, conditionsoffered by the candidate countries must be taken into account, by selecting those thatconstitute unlikely FDI destinations. One must also assess their adequacy, expressed in

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aspects such as cultural compatibility, the ability to find local partners or the learningopportunities. Another relevant factor is customer relations; in this case, more than thecountry in which to set up, it is the integration into supply networks that is important, thegeography of which is determined by the location of the central unit.

In brief, in those cases in which Portuguese companies have internal skills that grantthem international competitive capacity, there are basically two situations:

– Their competitive expression requires location in Portugal; or– Such advantages can be exploited and/or driven regardless of their location in

Portugal.In the former, we are faced with situations in which the form of international

operations, particularly with regard to the candidate countries, will be exports (possiblywith the support of commercial offices to be set up).

In the latter, investment abroad makes sense. There are therefore four possibilities ofharmonising the company’s specific advantages and the non-mobile advantages of thecountry of destination:

– Market proximity, in which an evaluation must be made of conditions offered bythe various destinations, ranging from similarity with the Portuguese market tothe degree of maturity, the expected growth dynamics and the presence of majorinternational players;

– Links with customers, in which the advantages are driven by involvement inrelationship networks, with customers in particular: the essential will then be todiscover location trends for major customers, and the company must be ready tofollow them quickly;

– Production conditions offered by the destination country, both in terms of costs and interms of access to resources, making use of the units abroad as bases for exports; and

– Specific location requirements, inherent, for example, in the need for localpresence to provide personal services, such as the hotel trade or consultancy.

Results: Major Opportunities

There are a relatively large number of activities for which the skill bases of Portuguesecompanies have been considered too limited to sustain international business, and forthis reason they were not expected to become involved in internationalisation – eitherthrough exports or through direct investment. There would appear to us to be grounds forthis assumption, particularly in view of the geographic and psychological distancebetween Portugal and most of the candidate countries, which raises the barrier. Of theactivities included in this group, mention is made of the manufacture of wood products,publishing, basic chemical products and medical, precision and optical instruments.

We then have a number of sectors in which the specific advantages of the companiesare strongly geared by the location of the manufacturing activities in Portugal, andtherefore the basic form of approach to the foreign markets is through exports. This groupincludes several of the activities that in the recent past have generated significant exportflows to candidate countries (such as textiles or wood pulp), as well as others in whichPortugal has advantages, such as some types of beverages, ceramics or glass articles.Generally speaking, these are activities in which Portugal’s advantages arise from a blendof natural resources and industrial tradition.

Lastly, let us take a look at the four groups in which FDI appears to us to be mostprobable. The motivation of market proximity, particularly in large, unexplored markets,

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could lead to FDI in sectors such as food (exploiting specific niche markets), paperarticles, certain segments of non-electric and electric machinery, and plastics. These areactivities in which investment tends to be market-oriented, in which, in some cases, thereare Portuguese companies that have good experience in internationalisation throughdirect investment.

Links with customers are especially important in certain types of non-electricmachinery, particularly moulds, and auto parts. Integration into supply networks is, in thelatter case, decisive. Moreover, the very considerable investment by auto builders incandidate countries suggests that now is the time to invest – not post-enlargement, forby then the essential part of the supply networks will already have been established.

The third subgroup involves activities in which presence in certain candidate countriesmay constitute a complement or leverage for the international competitiveness ofPortuguese companies. In this case, the reasoning is not the supply of the market orintegration into supply networks, but rather, fundamentally, to take advantage of localmanufacturing conditions (particularly resources and costs) to produce for export. Herethere are two major factors of location: natural resources – leading to investment inactivities such as cork or beverages; and labour costs – since Portugal is no longercompetitive as a place for manufacturing in labour-intensive activities requiring a largeamount of rather unskilled work and are sensitive to labour costs, some companies viewthe dislocation of these activities as an instrument central to maintaining or evenincreasing their competitiveness. Of the various possible locations, the second-wave of thecandidate countries (that is, Romania and Bulgaria) appear as interesting destinations.

The fourth and last subgroup was defined by location demands, more particularly bythe specific need for co-location of suppliers and customers seen in various types ofservices. Consequently, this subgroup involves solely construction and servicesactivities (electricity and gas, trade, hotels and restaurants, telecommunications,financial services, real estate activities and IT services).

To sum up, there are various business possibilities in the candidate countries.Nevertheless, future opportunities are, to a certain extent, conditioned by two factors: (1)the geographic and psychological distance from these countries, which makes them“distant” targets, ranking them second as compared to other destinations such as Brazil;and (2) the small number of “Portuguese” pieces already in place on the chessboard, as aresult also of the first of these factors. As stated on several occasions, post-enlargementopportunities are largely played for before enlargement comes about. On the other hand, co--operation opportunities as an instrument to boost entry should not be neglected.

In respect of the four subgroups of activities in which direct investment operations inthe candidate countries by Portuguese companies are evident, endeavours have beenmade to identify the most likely destinations for such investment. The main conclusionswere the following:

– Limited prospects for investment in the Czech Republic, Slovakia and Slovenia,closely linked to a perception of psychological distance and to the relatively small-sized markets, heightened in the case of the Czech Republic by proximity toGerman and by the “exhausting” of opportunities. There are more opportunities inSlovakia and Slovenia, particularly because its privatisation processes are not yetcomplete, despite the factors mentioned above restrain their attractiveness; and

– Strong attractiveness of Poland and Hungary in those activities in which FDI isboosted by the proximity of the market or by location demands, that is, in whichthe local market vector is important. Indeed, Poland is the largest market and,additionally, it has greater psychological proximity to Portugal in religious and

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linguistic terms (it is relatively easy for Poles to learn to speak Portuguese). Ashas been the case to date, Poland will continue to be the main destination ofPortuguese FDI in the candidate countries. However, three activities (Electricalmachinery & Apparatus, Moulds, and Wood & Cork) have been identified in whichHungary’s attractiveness is greater.

There is considerable attractiveness in the second-wave of candidate countries,Romania in particular. In fact, Romania offers two significant advantages compared toBulgaria: a wider domestic market and linguistic proximity, which makes it attractive foractivities in which FDI tends to be directed by market proximity or by location demands(services); in a considerable number of activities of this type Romania is an interestinglocation, the most so since there is a perception of opportunities that are still open. Bothcountries have in common an important factor of attraction – low costs. With average wagesin the manufacturing industry standing at 1.22 and 1.28 Euros per hour in 2000, Bulgariaand Romania are potential destinations for displacement of the industrial operations ofclothing and footwear companies, and several recent cases bear witness to this.

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6. MIGRATORY FLOWS AND IMPACT ON LABOUR MARKETS

6.1 Effects of East-West Migrations on Member States

It is known fact that free movement of people is one of the four fundamental freedomsprovided by the Treaty of Rome. Despite the transitory periods established, by redefiningthe borders of the Union, the enlargement has obviously affected human resources andthe situation in Community’s Labour Markets.

The impact of immigration on the EU15 countries, particularly on Labour Markets, willdepend on the intensity and timing of the migratory flows following enlargement. Variousestimates have been made to quantify these flows. More sophisticated analyses suggestthat from a global economic perspective the potential net east-west net labour flowssubsequent to enlargement do not seem to pose any serious threat to wages and jobs inthe EU. In a scenario of accession by the 10 CEECs, it is estimated that cumulative netinflows of migrants will amount to less than 1% of the EU15’s projected population ofworking age in 2010. More recently, the Sapir Report4 puts the amplitude of these flowsduring the first decade of the enlargement at between 0.4% and 1.2% of the total presentpopulation of the EU15.

The weight of people born in Central and Eastern Europe, residing in the presentMember States in the pre-enlargement stage, accounts for just 0.8% of the totalCommunity population (16% of the non-nationals), although their relative weight isconsiderably more significant in the case of Germany (2.4% of the population) and Austria(3.4% of the population and 51% of non-nationals).

It is slated that the intensity and characteristics of these flows will change over time;over the early years of membership, an increase in “incomplete migration” is expected(involving individuals making frequent short visits abroad to work, while keeping theirpermanent domicile in their country of origin) that has been seen in recent years.However, at a later stage, as the growth and consolidation of the process of catching up ofthe new Member States in relation to the EU is intensified, the intensity of the migratoryflows will tend to drop, except for purposes of reuniting families.

Migration effects on each of the Labour Markets of the EU15 will also differ in the lightof the sectors and of worker qualifications: they may be more intense in sectors involvingthe manufacture of non-tradable goods, in which there is less capacity to adjust, and inthe lower-skilled areas of the Labour Market if, as has been the case so far, the migrantsfrom the East – though they are generally better qualified – continue to take ratherunskilled jobs. Thus, despite expectations that the migratory flows will have a relativelysmall effect on average wages, the impact on wage distribution may be greater, and thewage gap between skilled and unskilled labour could increase with enlargement.

6.2 Immigration and its Impact on the Portuguese Labour Market

The number of foreigners living or with residence permits in Portugal has increasedprogressively over the past 20 years (more so in recent years as a result of the extraordinarylegalisation enacted), accounting for nearly 4% of the resident population in 2002.

Albeit its intensity, immigrant flows into Portugal have seen significant changes as faras their composition is concerned. Analysis of residence permits issued in recent years

4 “An Agenda for a growing Europe”, André Sapir et al., July 2003.

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shows that up to 2001 the greatest migrant flow was from the Portuguese-speakingAfrican countries (over 50% in 2000); from then on the immigration flow changedradically, and those born in Eastern Europe came to account for about 55% of arrivals inthe country, with particular emphasis on Ukrainians who accounted for 35% of thepermits in 2001-02.

With regard to nationals of candidate countries, immigration into Portugal has notbeen very significant, for the time being. In 2001-02 the migratory flow from these 12countries accounted for just 8.4% of the total number of residence permits granted, withemphasis on Romanians (6% of the total).

According to available statistics, 16% of foreigners living in Portugal 2002 were EU15citizens, followed by those from the Ukraine, the Cape Verde Islands and Brazil,individually accounting for 15% of the total (the extraordinary legalisation of Brazilians in2003 could alter the picture). Of the candidate countries, Romania stands out with about3% of the total.

The greater ease of movement of citizens of the candidate countries within the EU asa result of enlargement will have implications in terms of immigration flows and, since theimmigration chiefly involves active members of the population, it could bring somepressure to bear on the Labour Market, especially in some activities and skills.Employment contracts linked to residence permits have mainly involved civilconstruction jobs (40% of the permits in 2001) and unskilled jobs.

The effects of the enlargement on the Portuguese Labour Market could therefore bemore significant as far as unskilled workers are concerned, particularly when theeconomy is in the doldrums, and it may contribute to worsening unemployment and bringpressure to bear on slow advancement of wages, with probable effects involving anincrease of precariousness and discrimination in the Labour Market. With regard to themost skilled professions, the consequences may be good if more-skilled workers come tobe integrated, particularly in areas in which domestic skills are in short supply (thehealth sector for example). In the event of greater integration of foreign workers with theirpapers in order, Social Security revenues may increase (as may tax revenues), thoughincreased expenditure on the services to be provided to these workers will offset this.

However, the characteristics of the present migratory flows may change a little, andthere may come to be movements determined by reason of bringing families together,which will certainly put less pressure on the Labour Market.

The EU enlargement process, particularly from an EU28 viewpoint, that is, followingthe geographic “arrival” at the Black Sea area, is likely to cause public and privatedecision-makers in Portugal to view the present migratory flows from Eastern Europe asan interesting opportunity to drive our economic, social and political relations with theregion, all the most significantly the most they are articulated with the life cycles of themigratory processes themselves (arrival, integration and return).

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7. CHARACTERISATION OF COMPETITIVE MODELS OF CANDIDATE COUNTRIES AND OFPORTUGAL: COMPARED QUALITATIVE ANALYSIS

In this chapter an endeavour will be made to characterise, in statistical and dynamicterms, from an initial standpoint of qualitatively gauging the impact of enlargement, thegrowth and competitiveness models of the Accession Countries and of Portugal, on thebasis of comparison with the EU15, once again, and on a prospective basis, in an attemptto establish the scenario, whenever possible, of any evolution over a medium- and long-term horizon. The analysis will focus on every issue related with advances in thesecountries in terms of real convergence and with the most or less intensive use (better andmore efficient use of progressively better qualified resources) or extensive use (moreundifferentiated and unqualified inputs) of the Accession Countries and Portuguesecompetitive and growth models. On turning in the analysis from the results to thespecialisation profile and to the supporting and factorial competitive conditions, specialattention will be given to aspects such as:

• the internal productive structure based on the breakdown of production value, GVA andemployment by the various sectors listed in NACE Rev. 1 classification (Point 7.1.);

• the levels of development of R&D activities and of the scientific and technologicalsystems, and of the penetration by the new information technologies into thevarious sectors of society (Point 7.1.);

• the quality and cost of human resources, particularly in terms of the educationand qualifications of the active population, of corporate investment in ContinuingVocational training and of the costs of the work factor (Point 7.1.);

• the availability of support infrastructure in Portugal and in candidate countries(section 7.2) as a key factor in attracting and retaining activities and investment,conditioning their location within the new context of the enlarged EU.

Lastly, in section 7.3, a summary and qualitative appraisal will be made, taking intoaccount the foregoing results, of the competitive challenges facing Portugal andstemming from this EU enlargement process.

7.1 Recent Evolution of the Competitive Position

The New Dimensions of Real Convergence in Enlarged Europe

Albeit progress, the Portuguese economy is still considerably below the Europeanaverage (55% on full accession in 1986, 62% at the start of the 1st CSF in 1989, 65% at thestart of the 2nd CSF in 1994, and 70% at the start of the 3rd CSF in 2000), though clearlyabove most candidate countries, with the exception of Cyprus and Slovenia, where, in2003, the situation was better than in Portugal. This was more the result of recentdifficulties experienced by the Portuguese economy in keeping up the previous upwardtrend to real convergence (latest Eurostat estimates put GDP per capita in Portugal,measured in PPS, at the level seen in 1998, that is, 68%).

The existing gap in living standards between the 10 candidate countries and the 15present Member States of the European Union are evident when comparing figures forGDP per capita in the 10 EU Accession Countries with the average of the EU15, both ineuros (24.3%) and in PPS (48.7%) in 2003. The situation of the candidate countries is,however, fairly heterogeneous, with a minimum figure of 37.1% (Latvia) and a maximumof 77.5% (Cyprus) in 2003. Five countries stand above the average (Cyprus, Slovenia,

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Malta, the Czech Republic and Hungary, in descending order) and another five below theaverage (Latvia, Lithuania, Estonia, Poland and Slovakia, in ascending order).

The pace of real convergence of the candidate countries during the transitionprocess was not particularly fast: the relative GDP per capita in the 10 EU AccessionCountries was, in 1993, 14.4% in Euros and 40.4% in PPS. The analysis shows, on theone hand, that the increased heterogeneousness of the EU, stemming from thepresent process of enlargement, is even clearer to see on changing the focus of theanalysis from countries to the regions that constitute them.

The challenges of convergence and the policies designed to face them successfully havethus gained new and demanding dimensions in the enlarged Europe that will come about in2004. It seems clear that we are not faced with a simple process of catching up, nor with asimple “handing over of the baton”, in the concentration of Community support to the nationaland regional processes of convergence, between the “old” cohesion countries (in which manyregions of Portugal, Greece and Spain continue to need attention) and the “new” enlargementcountries (where specific leverages must be found to accelerate the process of convergence).

In this context the revision of the European convergence and cohesion policies, basedon the “lessons of experience”, in respect of the 15, and on the basis of the newchallenges, in respect of the 25, constitutes a task of great economic, social, political andinstitutional significance in relaunching the European construction that the enlargementprocess itself is designed to foster.

Table 7-1: GDP per capita, at Current Prices, in PPS

Wage and Productivity Disparities in Enlarged Europe

The evolution in productivity and hourly labour costs allows an evaluation of theprospects of sustainability of economic growth in the candidate countries and in Portugal,within the wider context of the EU15.

Countriess UE15=1002000 2001 2002 2003 2004

EU15 100 100 100 100 100D 102 101 100 99 99

GR 66 67 71 74 76E 83 84 86 87 88Irl 115 118 125 122 122P 70 71 71 69 68

ACO12 39 40 41 43 44ACO10 46 46 47 49 50EU25 91 91 91 92 92

BG 24 26 26 28 30CY 76 78 77 78 79CZ 60 61 62 63 63EE 37 39 40 42 45HU 49 51 53 55 57LT 35 37 39 41 43LV 32 33 35 37 38MT 71 69 69 69 70PL 42 41 42 43 44RO 23 24 27 29 30SI 66 68 69 70 71SK 44 45 47 49 49

Source: Project Team, based on NewCronos data; estimated data for 2003 and 2004

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Hourly labour costs, from a compared static perspective, suggest that in candidatecountries, clearly lower than in the EU15 – hourly costs in the candidate countries as awhole (€3.47) stood on average at about 15.3% of the average costs in the Euro Area(€22.70) in 2000 – and, in most cases (with the exception of Cyprus and Slovenia,which, at this level, differ from the other candidate countries), were also clearly lowerthan in Portugal (€8.13), where they stood at about 35.8% of the average for the EU15.

Analysis of the hierarchy of relative wage costs in the candidate countries comparedto Portugal shows the existence of three major groups, i.e., Poland, the Czech Republicand Hungary (at around 41-43% of the hourly labour cost for industry in Portugal),standing above Slovakia, Estonia and the other Baltic countries (27-33%), with Romaniaand Bulgaria, even more distant (13-15% of the costs in Portugal).

The minimum monthly labour costs enacted in the various countries of the enlargedEurope show current wage disparities even more expressively. The figures are €1150 in themost developed central countries of the Euro Area, €520 in the “cohesion countries” ofSouthern Europe (415 in Portugal), €200 in the CEECs, €125 in the Baltic countries and €60in the Black Sea region countries.

Average labour productivity in candidate countries is clearly lower than in the EU15 –current GDP, in euros, per full-time employee stood in 2003 at about 25.6% of the EU15 figure– and than in Portugal, where the corresponding figure was 45.7% of the EU15 average.

Portugal’s position, intermediate between the benchmark of the most developedcountries of the Euro Area and of the candidate countries, is very vulnerable more as aresult, as we have seen, of the closer approach by the candidate countries to Portugal interms of productivity (the average for the 10 EU Accession Countries stands at 56.1% ofthe figure for the Portuguese economy) than as a result of labour costs (the average ofthe 10 EU Accession Countries stands at 42.7% of the figure for the Portuguese economy).

The differences compared to the better prepared and more advanced candidate countries,which are therefore more of a threat to Portugal as far as competition is concerned, haverecently waned. In fact, Slovenia, Hungary, the Czech Republic and Slovakia are now close toPortugal in productivity terms. It must be said, however, that the deterioration of the unit labourcost indicator in the Portuguese economy compared to that of the candidate countries also hasto do with the sharp downturn in the economic growth in Portugal since the 3rd quarter of 2000.

Table 7-2: Hourly Labour Costs, in Euros, 2000

Portuguese and Candidate Countries’ Productive Structures

Analysis of the configuration of the productive structure in candidate countries, inPortugal and in EU15 involved finer analysis of the breakdown of economic activities,

NACE EU15 D GR E Irl P BG CY CZ EE HU LT LV PL RO SI SK

Industry, Energy,Construction & Services,excl. Public & CollectiveServices 22.21 26.34 11.62 14.38 17.31 8.13 1.35 10.74 3.9 3.03 3.83 2.71 2.42 4.48 1.51 8.98 3.06Industry, Energy& Construction 22.38 27.57 11.37 14.5 17.64 7.13 1.36 9.9 3.7 2.91 3.74 2.65 2.28 4.32 1.43 8.3 3.02Services, excl. Public& Collective Services 22.05 23.89 11.84 14.3 17.04 9.34 1.34 11.16 4.22 3.16 3.95 2.78 2.56 4.71 1.68 10.07 3.12

Source: Project Team, based on NewCronos data

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through zooming in on the industry, energy and construction sectors, taking productionand employment indicators into account.

The main conclusions show that the relative importance those industries that base theirefficiency on economies of scale, product differentiation and greater R&D expenditure, suchas Transport Materials, Machines & Equipment, Electrical & Optical Equipment, and ChemicalProducts, is already greater, especially in the better prepared and more developed candidatecountries (Slovenia, Hungary, the Czech Republic and Slovakia, in particular), than that ofthese same industries in Portugal. Indeed, despite recent developments especially in the autoand respective component sector, and in the electronics chain sector, the Portugueseeconomy continues to be excessively centred, compared to the EU15 pattern, on industries inwhich the main competitive factor is the low labour cost or easy access to natural resources.

Comparison of productive structures of some of the most developed Accession Countrieswith those of the “cohesion countries”, and with Portugal in particular, based on the benchmarkof the “Lisbon Strategy”, measuring for the purpose the weight of knowledge-intensiveindustries and services as a proportion of total GVA, confirms the essential aspects of theconclusions linked to the analysis of the prevailing competitive factors in each economy.

Table 7-3: Technology and Knowledge Intensive Industries as % of Total GVApb, current prices

Source: Project Team, based on STAN, OECD data (therefore, only countries belonging to the organisation

are involved in this analysis, with the exception of Poland, which is not a member)

The Czech Republic, Slovakia, Poland and, above all, Hungary, have a weight in the GVAof high and medium-high technology industries that is already greater not only than thatof Greece and Portugal, but also than that of Spain. However, candidate countries alsoreflect a position that is not favourable in advanced services to companies.

The fact that the origin of a good part of the production, turnover, GVA, exports andemployment of the best-prepared candidates lies in the subsidiaries of multinationalshaving their decision centres abroad, particularly in the European Union, should lead to acertain relativisation of these conclusions, to the extent that the rate of investmentachieved during the stage of preparation for accession will probably not be sustained inthe future, on exhaustion of the opportunities provided by the transition and also by theprivatisations.

Technology & Knowledge Intensive IndustriesHigh- Medium-high Communi- Financial Services Health Total including

-technology technology cation Services to Companies Total & Education HealthIndustries Industries Services & Insurance & Education

ISIC Rev. 3 2423, 30, 32, 24 less 2423, 64 65-67 71-74 80, 8533, 353 29, 31, 34,

352+359

CZ 2000 1.7 8.3 4.3 4.5 6.9 25.7 7.1 32.8GR 2000 0.5 1.2 3.3 5.0 7.0 17.1 10.1 27.2HU 2000 11.8 3.8 3.9 8.6 28.1 9.2 37.3Irl 1999 8.6 10.4 - 4.5 - - 8.3 -I 2000 1.9 5.6 2.3 6.2 9.1 25.0 9.7 34.7

PL 1999 6.4 2.1 2.2 - - 8.4 -P 1999 1.1 2.8 2.9 6.4 - - 12.7 -

SK 1999 7.7 2.7 3.6 6.0 20.0 7.4 27.5E 2000 1.2 4.8 2.6 5.2 5.9 19.8 10.2 29.9

EU15 2000 2.3 6.0 2.4 5.3 11.0 27.0 11.0 38.0199

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The Major Competitive Factors in Portugal and in Candidate Countries

The so-called strategic factors of competitiveness are increasingly relevant to thoseeconomies that are fully integrated into the major supranational regional blocs that mould theevolution of the global economy, particularly those that have to do with innovation andtechnological development and with education and qualifications able to consolidate distinctiveskills insofar as human resources are concerned. Appraisal of their configuration in thecandidate countries and in Portugal, within the context of an enlarged Europe allowed a deepercomparative analysis of the quality and sustainability of the respective competitive models.

Research & Development

R&D intensity in Portugal is considerably below the EU15 average, standing at the levelof the average of the 10 EU Accession Countries and lower than that of Slovenia and theCzech Republic (Chart 7-1). Evolution during the second half of the 90s was favourable toPortugal, one of the countries that (like the Czech Republic) has improved most since 1995.

Chart 7-1: R&D expenditure as % of GDP (1995-2000/1)

Source: Project Team, based on NewCronos dataNote: In candidate countries the indicator (axes) refers to 2000 and the growth rate to 1995-2000 (in the caseof CY, EE and 10 EU Accession Countries the evolution refers to 1998-2000)In EU15 the indicator (axes) refers to 2001 and the growth rate to 1995-2001 (for I the period considered is1995-2000; estimated figures for B, D, GR, A and P)

R&D personnel accounted for 1.4% of the active population of the EU15 in 2001, thefigures ranging from 0.74% for Portugal and 2.6% for Finland. In candidate countries,Slovenia was the country closest to the Community average in R&D expenditure.

The breakdown of human resources in this area, analysed on the basis of the number ofresearchers included in personnel assigned to R&D, provides additional data. The cohesioncountries and almost all the candidate countries surpass the Community average in thisindicator (54%). Portugal, which has a smaller number of R&D workers compared to the EU asa percentage of the active population, has the largest number of researchers (in FTE – FullTime Equivalent) as a proportion of the total number of personnel allocated to this area (77%),and is the EU country with the highest figure for this indicator.

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In terms of sectors involving R&D expenditure it can be seen that, in Portugal, thecontribution of the corporate sector is lower than that of the EU (32% compared to 56%)and below the average of the 10 EU Accession Countries (41%). Taking into account thepositive relationship in the EU between corporate execution and R&D intensity, thisindicates a need for far greater investment in this area by the business sector. Personnelassigned to R&D is to be found particularly in the public sector (70% in the Governmentsector and Higher Education sector, notwithstanding the fact that a part of the latter isworking in private education), contrary to the situation in the EU where the businessstructure employees 55% of the R&D personnel.

With regard to the number of patents registered per million inhabitants, Portugal alsostands close to the average of the candidate countries (and even at the level of those in a worseposition), clearly below the Community average. This indicates that as far as R&D results areconcerned – particularly with regard to inventions – there has been less evolution.

Information and Communication Technologies

Investment in information and communication technologies (ICT) has seen unprecedentedgrowth rates over the last decade, constituting an important indicator in evaluating the degreeof development of the economies. In the EU this growth was interrupted in 2001 as a result ofthe slowdown in economic growth in the area. Between 2000 and 2002 there was a decline ofIT expenditure, while communication expenditure remained stable as a percentage of the GDP.In candidate countries there were differences in terms of evolution, although, on average, the10 EU Accession Countries showed positive performance in both these indicators.

With regard to investment in IT as a percentage of the GDP, the Accession Countries in 2003were very close to the EU average (2.7% and 3% respectively), while the Czech Republic wasclose to the two leaders in terms of this indicator (Sweden and United Kingdom), and Estonia,Hungary and Slovakia stood very close to the Community average. In cohesion countries, thefigure varied between 1.2% (Greece) and 1.9% (Portugal), ranking them below the largemajority of candidate countries, with the exception of Romania and Turkey.

Chart 7-2: Information Technologies Expenditure (2000-03)

Source: Project Team, based on Eurostat and NewCronos dataNote: 10 EU Accession Countries does not include Cyprus and Malta; Turkey, not shown in the chart,had a figure of 0.8% in 2003 and an average annual growth of -38%

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The communication expenditure indicator as a percentage of GDP shows that allcandidate countries, with the exception of Turkey, and with emphasis on Bulgaria, Estoniaand Latvia with the highest figures, stand above the EU15 average, when, in 2003,communication expenditure accounted for 3.2% of the GDP (4.4% in Portugal). Since itreflects at one and the same time both the level of prices and the volume of use oftelecommunications networks, this indicator should be “read” with no little care, to theextent that it tends to inflate the relative position of countries whose markets are lesscompetitive and have relatively higher prices (as in Portugal and some of the candidatecountries).

The number of Internet users and computer owners per 100 inhabitants in the 13candidate countries stood, in 2001, at about 1/4 of the average figures for the EU.Slovenia, Malta and Cyprus had a number of personal computers per 100 inhabitantsclosest to the Community average and similar to that of Portugal (22 computers per 100inhabitants). Mobile telecommunications penetration rate (number of subscribers per100 inhabitants) is higher in the EU (the average penetration rate stands at 85%) than inmost candidate countries, of which the Czech Republic and Slovenia have the highestrates, approaching those of the Community.

Human Resources: Education, Qualifications and Costs

Education and Vocational TrainingCandidate countries’ human resources have a high level of education, considerably

higher than in Portugal. This is the main structural weakness of our country compared tothe Accession Countries. Although these differences can be seen in higher education,they are considerably more significant at the lower levels of education (in Portugal 80% ofthe population in the field aged between 25 and 64 did not complete secondaryeducation, compared to 22% in the Accession Countries). This difference seen ineducation is all the greater when considering the employed population. This is a structuralproblem, reflecting accumulated shortcomings in education that will be attenuated onlyin the long term, such are the present differences between the situation in our countryand in some of the candidate countries.

The most recent situation seen in Portugal, where school education is higher amongthe younger members of the population, reflected in higher enrolment rates than in thepast, will tend to shrink the present difference compared to the candidate countries in themedium to long term, the most so since at present the latter generally have enrolmentrates close to those in Portugal. This trend could be partially impaired if measures are nottaken to reduce the number of early school leavers, which is very big in Portugal, callingfor a focus both on improving the quality of education and fostering education of avocational nature to ensure adequate insertion into professional life, and on othermeasures of a more transverse social nature.

Generational replacement takes a long time and therefore aspects involving training andimproving the qualifications of the adult population cannot be neglected. Lifelong learning isfundamental to Portugal in its use of the structural funds available in the current and nextCSF. On the other hand, future access by candidate countries to structural funds, the ESF(European Social Fund) in particular, will also allow them to implement updating training andrecycling for the active population – on which they have focused less than the EU15.Associated with the modernisation that they come to introduce to their productivestructures, this will bring about considerable competitiveness gains as a result of theiradvantages in terms of human resources.

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The latest survey undertaken by the European Commission with the scope ofContinuing Vocational Training (CVT), leads to the conclusion that the number ofcompanies organising CVT courses – especially through external entities – within the EU(54%) was far higher than in the Accession Countries. If, in addition to frequency, oneconsiders the rate of participation and the intensity of the courses (Chart 7-3) it can beseen that of the candidate countries the Czech Republic has the greatest number of CVTcourses, involving a significant number of employees, though with less training hours;Romania and Lithuania are at the other end of the spectrum, with less courses directed ata smaller number of workers, though with greater intensity per worker. Ireland and Spainclearly focus on lifelong learning, with good results in every variable. The Portuguesesituation regarding training the active population could be substantially improved if the“company incidence base” of the courses given were enlarged, since it is in a betterposition in terms of participation rate and intensity.

Chart 7-3: Participation Rate & Intensity of Continuing Vocational Training Courses - 1999

Source: Project Team, based on Eurostat data - Statistics in Focus and NewCronos* Number of workers taking part in Continuing Vocational Training Courses as % of the total number ofworkers of the companies organising them

Labour Qualifications and SkillsThe panorama of professional qualification in Portugal is also at a disadvantage

compared to that of the enlargement countries, although it must be pointed out that thedifferences are not as great as those seen in schooling.

The average qualification index5 of the Portuguese economy6 is relatively low (1.74 in2000) – with a coexistence of activities in which this ratio is lower than unity andactivities in which the figure is quite high, as in the case of financial activities (21.6) –indicating potential difficulties in introducing the economic restructuring and vocationalrecycling essential to the modernisation of the organisational and production system.

5 Ratio between skilled and highly skilled labour, taken together, and semi-skilled and unskilled labour.6 For all activities, with the exception of Agriculture and Fishing.

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Crossing the skills and enrolment structures of the personnel in Portuguesecompanies (Table 7-4)7 reveals a disadvantage, with a big proportion of skilled workers(a qualification that covers 40% of all workers) having very low schooling (nearly 60%having just the 2nd cycle of primary education, or less), coexisting with 50% of seniormanagement whose schooling is below secondary. It can also be seen that middlemanagement, though it generally has more schooling, constitutes a category that haslittle weight as a proportion of total workers.

Table 7-4: Workers’ educational levels by professional qualification (2000, as %)*

In the Manufacturing Industry the schooling situation is even worse, and 58% ofmanagement have less than secondary education and about 72% of the skilled andhighly-skilled workers only have schooling up to the end of the 2nd cycle of primaryeducation (not complying, therefore, with current compulsory education requirements).Situations differ, however, and as a rule it is worse in labour-intensive, low-wage industriesthan in more capital-intensive industries where qualifications are higher.

It must be pointed out that not all the information concerning qualifications is statisticallymeasurable. Indeed, Portuguese labour has certain uncertified skills acquired in a non-formalmanner, through experience, allowing Portuguese workers to perform better than might beexpected in the light of their education and qualifications. Portugal should seek to takeadvantage of and optimise these skills, both by certifying and recognising them and byinvesting in the improvement of the organisational contexts of the companies.

It would therefore appear that inequalities compared to the candidate countries couldmore easily be overcome in this way. Nevertheless, the fact that the workers inenlargement countries have a better education makes them potentially better able toacquire up-to-date knowledge in new technical and technological fields, even admittingthat some of their skills may be partially obsolete.

Sen. Man. Mid. Man. Foremen Highly Skilled Semi Unskilled Trainees Unknown TOTALskilled skilled Apprentices

< Primary ed. 0.0 0.2 1.2 0.3 1.6 2.7 4.9 1.0 1.0 1.81st Cycle 23.9 5.6 35.6 11.6 35.1 42.4 47.7 18.1 12.8 32.52nd Cycle 12.6 5.7 19.5 10.4 24.9 27.6 22.8 31.6 9.7 22.23rd Cycle 14.0 14.4 19.3 22.2 17.0 15.0 14.3 24.4 16.1 16.8Secondary Ed. 15.9 26.0 17.4 35.6 17.5 10.3 8.3 20.2 35.3 16.9Baccalaureate 4.7 14.0 1.9 5.4 0.8 0.2 0.1 0.8 4.7 1.9Degree 26.1 32.4 3.9 12.8 1.5 0.3 0.1 1.7 18.2 6.1Unknown 2.8 1.7 1.3 1.8 1.7 1.5 1.8 2.2 2.3 1.8TOTAL 100 100 100 100 100 100 100 100 100 100

*All activities, except for Agriculture and FishingHighest figure (reading by column)2nd highest figure (reading by column)

Source: Personnel Tables, of the Deep (ex- DETEFP) of the MSST

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7 It was essential that a breakdown be undertaken similar to that of the candidate countries, although the lackof similar data for the enlargement countries did not permit such an analysis.

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Labour CostsFrom a standpoint of compared static analysis, the hourly labour costs are clearly

lower in candidate countries than in the EU15. In most cases (with the exception ofCyprus and Slovenia, which differ from the other candidate countries) they were alsolower than those in Portugal, which stood at about 35.8% of the EU15 average.

Comparative analysis of hourly labour costs in industry in candidate countriescompared to Portugal shows three groups: Poland, the Czech Republic and Hungary (withcosts amounting to some 41-43% of the hourly wage cost in industry in Portugal),standing above Slovakia, Estonia and the other Baltic countries (27-33%) and Romaniaand Bulgaria lagging further behind (13-15% of the costs seen in Portugal).

Generally speaking, the breakdown of these costs by branches of activity does notshow any significant differences. There are, however, slightly sharper deviations incapital-intensive industries (in the vicinity of 69%) compared to labour intensiveindustries (around 63% both in textiles and in clothing, in companies with between 50and 249 workers), with the exception of the wood and furniture industry, in which theaverage deviation is about 70%. The reason for this is likely to be found in the lower wagesin labour intensive industries in Portugal, and for this reason the difference compared tothe average wage in the Accession Countries is slightly attenuated.

The combination of a higher level of education and a better professional qualificationstructure and labour costs far lower than in Portugal, further boosts the advantages ofcandidate countries with regard to the Labour Market, encouraging displacement ofmultinational companies to these countries.

Company Taxation: Tax Policy as an Instrument for Promotion of Competitiveness andInvestment

Corporate income tax has increasingly been used as a means to increasecompetitiveness in economies, influencing investment decisions particularly insofar asmultinational companies are concerned.

In recent years, both Member States and candidate countries have enacted significanttax reforms leading to the reduction of taxation on company income. The real average rateof taxation of this income in the EU15 is currently 10.7 percentage points higher than inthe ACO12, and the rates of most of the latter are lower than in Portugal.

Comparison of nominal rates is inadequate to classify the tax burden associated with eachcountry (which is also dependent on other taxes, on tax incentives and of the way by whichcorporate tax base is determined). However, these rate differences have opened up the way todiscussion within the EU of the need for tax harmonisation, though this has not yet beenaccepted by the European Commission and Parliament, which continue to support theapplication of the principle of subsidiarity in this matter. The fact is that decisions regarding thelocation of investments and income are sensitive to differences between existing tax systems.In addition to their lower rates, the candidate countries also benefit from the use of transitorytax reliefs and incentives that, allied to their low labour costs, cannot but constitute a powerfulincentive in attracting foreign investment in their economies.

As far as value added tax is concerned, EU15 and candidate countries are in harmony,both in terms of rates and in tax rules.

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Table 7-5: Corporate Income Tax - EU15 and 12 EU Accession Countries (2004)

7.2 Allocation of Support Infrastructure as a Restraint on Locating Economic Activitiesin the New Context of the Enlarged Union

Affirmation of territorial reasoning in promoting competitiveness, giving emphasis toinitiatives linked to the development of national, regional and/or local areas through thereinvention – particularly in crossing corporate competitiveness with territorialcompetitiveness, “old” concepts such as that of “industrial districts” (closely linked to thecompetitive model of Northern Italy and of the SMEs) or lending territorial thickness tonew concepts such as the cluster – constitutes a powerful and sustained form ofeconomic development and of wealth creation, particularly if specific answers areobtained in response to crucial challenges such as:

• the development of new factors in attracting and retaining structural economicactivities, in which traditional infrastructure supporting the material movement ofpeople and goods give way to the new infrastructure of affirmation of experienceand know-how, reflected in the creation of positive externalities for companies;

• setting up in a participated manner forms of productive and organisationalflexibility and excellence designed to enhance the qualifications of humanresources in keeping with the technological development required by ongoingimprovement of competitive capacity; and

• International promotion of the image of the national, regional or local area and ofits main activities, within the framework of a wider communication strategycredibly detailing the forms of process and product quality certification.

In this connection it would appear particularly important, within the framework of thequalitative analysis and characterisation of the competitive models of the candidate countriesand of Portugal, to understand the extent to which the respective national and regionalavailability of support infrastructure, not only for the movement of people and goods – as in thecase of transport infrastructure – but also for the creation of positive externalities for the

Notes: Effective rates take into account surcharges and regional/municipal extras applied in somecountries (e.g., municipal surcharge in Portugal); some countries apply nominal rates lower than thoselisted, for certain types of companies or for lower incomeSource: KPMG's Corporate Tax Rates Survey - 2004; Corporate News, PWC, Feb. 2004

Country General Effective rate (%) Country General Effective rate statutory rate (%) statutory rate (%) (%)

Ireland 12.5 12.5 Cyprus 10 10Luxemburg 22.88 30.38 Bulgaria 15 16.5Germany 25 38.29 Latvia 15 15Portugal 25 27.5 Lithuania 15 15Sweden 28 28 Hungary 16 16Finland 29 29 Slovakia 19 19Denmark 30 30 Poland 19 19United Kingdom 30 30 Estonia 24 24Italy 33 37.25 Slovenia 25 25France 33.33 34.33 Romania 25 25Belgium 33.99 33.99 Czech Rep. 28 28Austria 34 34 Malta 35 35Netherlands 34.5 34.5 EU27 Average 25.5 26.6Spain 35 35 EU15 Average 29.4 31.3Greece 35 35 ACO12 Average 20.5 20.6

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respective business structure, linked to logistics and to the promotion of know-how, influencethe location of economic activities and investment within the new enlarged Union. This issue isof particular importance when discussing, for example, the deviation of flows of directinvestment from one location to another. This point is therefore also fundamental to anunderstanding of the evolution of the competitive model and position of the various candidatecountries by comparison with what is happening in Portugal.

In this connection, it is important to study in this report the availability in Portugaland, on a compared basis, in candidate countries, of the following support infrastructure(here understood as a factor conditioning the respective ability to attract and retaineconomic activities and investment):

• Transport Infrastructure• Industrial Parks• Logistics Infrastructure:

— Linear Infrastructure (Accesses)— Logistic Platforms (Nodal Infrastructure)

• Science & Technology Parks• Technology Centres• Higher Education Centres (Universities & Polytechnics)In addition to characterising the availability of this type of support infrastructure in

Portugal, the analyses provide a perspective of Portugal’s situation compared to that ofthe candidate countries.

In the absence of statistical data on this type of infrastructure (with the exception oflinear and nodal transport infrastructure), the basic sources of information underpinningthese analyses are studies and documentation provided chiefly by official bodies linkedto economic development and to attracting investment in Portugal and in the candidatecountries. Since there is no knowledge of exhaustive surveys based on universallyestablished criteria and concepts, the results of the studies are subject to the naturallimitations stemming from the absence of a common statistical base.

It was there possible to come to the following summary conclusions:• With regard to transport infrastructure, particularly the highway networks and

with the exclusion of the railway networks, Portugal is at an advantage comparedto the CEECs. This competitive advantage of Portugal is lessened, however, by thegreater geographic proximity of a large part of the CEECs to the major centres ofconsumption of the EU and will progressively be eliminated with the developmentof the TINA network, which, in linkage with the trans-European transport networks,will significantly diminish the current deficiencies of the transport networks ofthe CEECs over an horizon up to 2015, though this will require a remarkablefinancial effort by the enlargement countries and major help by the EU;

• With regard to intermodal interface nodal infrastructure and logistics platforms, thereare well known shortcomings in the Portuguese logistics system. In the absence ofinvolvement of Public Administration in promoting appropriate areas, there has beena proliferation of logistics facilities scattered around the country. A need has long beenfelt for putting an end of this situation of “logistic disorder” that is a source ofenvironmental aggression and of inefficiencies and lack of economies of scale for thelogistics system and does not open up the way to advanced, modern and competitivelogistics services. Compared with the most advanced CEECs (Hungary in particularand, to a lesser extent, the Czech Republic and Slovenia), this is an area in whichPortugal is competitively weak, meaning that the implementation of a nationallogistics platform network is both urgent and a priority;

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Chart 7-4: Highway network Density vs. Growth Rate

Source: Drawn up by the Project Team based on Eurostat data

Figure 7-1: Logistics Platforms in Portugal and in Some CEECs

Note: Size of the bubbles proportional to the total area of the Logistics PlatformsSource: Drawn up by the Project Team based on information provided by various CEEC countries

• With regard to the infrastructure required for companies to set up (IndustrialParks), though with the reserves inherent in the lack of a common statistical basisresting on uniform concepts, and in the fact that the information is probably ofgreater scope in Portugal than in the enlargement countries, it would appear thatfrom a pure quantitative point of view, their availability in Portugal also compares

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well with the majority of the CEECs. Nevertheless, there are few Industrial Parks inPortugal suitable and attractive for companies to set up and have effective,dynamic management, since the overwhelming majority of the so-calledIndustrial Areas have no equipment and offer practically no support services tothose companies that do set up. They can been seen as simple parking spaces forcompanies, typically the result of local government initiatives, that therefore haveno articulated, integrating reasoning transcending local scope and servingobjectives directed at industrial fomentation and planning, while attracting FDI.This situation contrasts with that of several CEECs (Hungary and the CzechRepublic in particular), where public policy is directed at the development ofproperly equipped, quality Industrial Parks (not forgetting instruments regulatingthe certification of these infrastructure) that constitute an important aspect inattracting FDI. In this way, the offer of Industrial Parks in Portugal will not be acompetitive advantage, particularly in respect of the most developed of the CEECsthat tend to have a better offer;

• The availability, in Portugal, of Science and Technology Parks, TechnologicalCentres and Innovation Centres compares favourably, in purely quantitativeterms, with most of the CEECs, though it is surpassed by the Czech Republic andHungary, particularly with regard to the first of this kind of infrastructure.Additionally, it should be underscored that the Portuguese Science andTechnology Parks act as company incubation centres, though none is located inan Industrial Park, which does not create conditions favourable to a desirablelinkage with the productive centres and to fostering technology transfermechanisms. This contrasts with the orientation seen in Hungary (which in thisparticular case is exemplary), directed at locating this type of infrastructurelinked to innovation, research and development in Industrial Parks that constituteMultipurpose Activity Areas (including industrial areas, logistic platforms and R&Dcentres), allowing synergies and complementary activities to be generated andconstituting an infrastructure pillar very relevant to active, selective policiesdirected at attracting FDI aiming at attracting the R&D Centres of themultinationals, together with their respective production sectors;

• Higher Education infrastructure in Portugal, both in terms of quality, capacity andgeographic cover and in terms of the variety of course options available, put thecountry at an advantage compared to the CEECs. In these countries, as a result ofthe inheritance of the Communist period, the quantity of the higher educationsystems was sufficient, but they are showing signs of deterioration and difficultyin adapting to new needs and present challenges, requiring significant efforts toadjust to the new European reality. Thus, though starting off from a position ofdisadvantage with regard to the qualifications of the upper level of its humanresources, the system of higher education in Portugal has the potential to correctthis handicap over time, and it is far from constituting a limitation to theconvergence efforts in this matter.

Lastly, it should be pointed out that in the CEECs the areas linked to the developmentof infrastructure and to the environment absorb the lion’s share of the funds supportingaccession and it is to them that the national plans give greater emphasis. Once this stageof development has come to an end and after the gaps of infrastructure availabilitybetween the CEECs and Portugal (and other EU15 countries) have been overcome(particularly in the field of the transport and access networks), the questions ofcompetitiveness will be posed at another level. The most developed CEECs (of which

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Hungary and the Czech Republic will be paradigmatic cases) appear to be better preparedfor this other level of competitiveness, in addition to enjoying a more advantageousgeographic position.

Table 7-6: Brief Comparison of the Availability of Economic Activity Support Infrastructure- Portugal versus CEEC

Legend: ++ Situation very advantageous to Portugal; + Situation advantageous to Portugal; 0 Balanced situation; - Situation disadvantageous to Portugal; --Situation very disadvantageous to Portugal

7.3 Evaluation of the Impact of the Economic Model Prevailing in Candidate Countrieson the Competitiveness of the Portuguese Economy

The analysis confirmed the relative similarity of the patterns of productive andcommercial specialisation of Portugal and of many of the candidate countries. It alsoconfirmed the existence both of an appreciable shortcoming in the education of humanresources and of a labour cost differential considerably higher than the differentialbetween their productivities, when comparing Portugal with the candidate countries,creating well-founded risks particularly with regard to the relative production costs oftradable goods.

The conclusions systematised above, on a par with the increase of Portugal’speripheral position with regard to the enlarged EU, provide reasonable expectations thatenlargement could cause a negative “shock” for the competitive position of thePortuguese economy and for its ability to attract foreign investment, particularly in acontext of redistribution of access to Community Structural Funds advantageous to thenew Member States in the forthcoming cycle of EU financial framework (2007-13).

Within the framework of the implementation of the EU enlargement, the process ofaccession by the candidate countries, particularly by the countries of Central and EasternEurope, will require a new concept of competitive reality at European and global level,reflected in the appearance of high-education, low-wage economies.

The concept of this new reality, developed throughout this report to allow a strictevaluation of the enlargement effects – particularly with regard to the dimension of thethreats hanging over the less competitive economies of the South (which includesPortugal) and to the redirection of FDI flows within Europe – also allowed severalqualitative limits to be established in respect of the potential of this new competitivemodel in conjunction with the configuration of the level of education of the human capitalof the Accession Countries when compared to the leading economic poles in an enlargedEurope; that is to say, powerful advantages in the major production and distribution, but

Support Infrastructure Current Situation Medium-term Situation

Highway infrastructure ++ +Railway infrastructure - - -Logistic platforms - -Industrial parks 0 -Science & technology parks 0 0Technological & innovation centres + 0Higher education centres (universities & polytechnics) + +

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clear disadvantages in the most demanding and advanced activities of the “knowledge--based economy”.

However, the Accession Countries have a new competitive model that they are fully ina position to implement during the initial stage of consolidation of the EU enlargement. Itis a specific, fast economic growth model that has also involved several major imbalancesas from the mid 90s, which, if not corrected in good time, cannot but limit this veryeconomic growth sooner or later.

Indeed, in this stage the Accession Countries have found in inward FDI their maincatalyst (on average, FDI accounted for some 4% of the respective GDP), followed by asignificant level of foreign debt (about 1/3 of the GDP) and a public deficit higher, inseveral cases, than that of the countries subject to the Stability and Growth Pact.

The “shock” of the competitive power of the new competitive model, involving acombination of low wages and high qualifications in the Accession Countries, on thepresent Member States with their less competitive economies should not be understoodas a generic “shock”, rather a specific “shock” that is relatively segmented at sectoral andalso regional level. In fact, certain sectors and corporate segments seem to beparticularly sensitive to the “play” of threats and opportunities triggered by enlargement,especially those that involve the dichotomies of labour intensive vs. capital/qualificationintensive, material vs. immaterial, and conventional services vs. knowledge-linkedservices, on the one hand, and those that involve different combinations of specificproduction factors to arrive at products that are more or less differentiated, on the other.

The main risk of enlargement at this level, as far as the Portuguese economy isconcerned, is that is could come to be a sort of “no man’s land” in its competitivespecialisation for want of dynamism of public policies and of business strategies, that is,insufficiently close to the competitive leaders, centred on a reasoning of non-cost ofenhancement of knowledge, and insufficiently removed from competitive reasoningcentred on cost to be able to adequately bear the new competitive pressures of theAccession Countries.

In addition to their advantage of relative costs, the Accession Countries are involvedin forms of specialisation that are not entirely focused on material factors. The destructivepower of this reality in vulnerable exports of products, including several in the Portuguesecase, is relatively strong; just as it is in vulnerable exports of conventional services, suchas transport, tourism, warehousing and information processing.

The “battlefield” of bringing about the gains and losses induced by the enlargement istherefore located in a significant though specific number of economic activities, moreparticularly in more global or partial segments of these activities, accurately identified inthe expected quantitative evaluation of the impact of the enlargement, involving issuessuch as conditions of access proximity to markets, corporate dimension and the level ofproductive activity and the management of productivity and competitiveness in thoseactivities involving more direct labour.

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8. QUANTITATIVE EVALUATION OF THE IMPACT OF EU ENLARGEMENT ON THE PORTUGUESEECONOMY: GLOBAL EFFECTS

The use of relatively sophisticated models to quantify the predictable impact of EUenlargement on the Portuguese economy, undertaken in this chapter, should beunderstood as an axis of analysis that, though using the results of the transverseanalysis of a more qualitative nature undertaken in the foregoing chapter, combines withit to generate an overview of the complex effects of the enlargement.

Quantitative analysis of the impact of EU enlargement on the Portuguese economywill be undertaken in this framework, in two main areas:

• Evaluation of the impact of enlargement on Portugal’s bilateral trade with countries ofthe enlarged EU, undertaken on the basis of a double estimation of gravitational models(export models and import models) both for EU27 and for EU15. The aim is to“discount” from the global enlargement effects (EU27) the effects of the deepeningprocess (EU15) within the scope of the present configuration of the European Union.Therefore, one will obtain a more precise evaluation of the sense and dimension of thespecific impacts arising from the enlargement. Next, a breakdown of these effects ismade, in sectoral terms, identifying those activities more sensitive to threats andthose in which more opportunities are generated as a result of the enlargementprocess. This analysis, in conjunction with that undertaken within the scope of Chapter4, will provide an understanding of the adequacy and the matching of the structure ofPortuguese exports with regard to the import structures of the markets targeted by ourexports, from a perspective compared always with that of our Community partners(present and future members of the EU); and

• Evaluation of the global impact of enlargement on the Portuguese economy –based on a macro-econometric model incorporating the information obtained inthe previous chapters and that resulting from the estimation of the gravitationalmodels insofar as trade flows are concerned – particularly at macro-econometriclevel (GDP, unemployment rate, balance of trade), and, lastly, a sectoral andregional breakdown will be made of impacts observed.

8.1 The Impact of Enlargement on the Portuguese Intra-communitary Trade in View ofGravitational Models

Gravitational Model in the EU27 Area

The essential objective of the use of a gravitational model to study the impact of EUenlargement is to study bilateral trade relations between Member States and candidatecountries and to identify major trade adjustments connected both with the removal of tradebarriers and the deepening of the overall relationship within the EU, as a great regionaleconomic bloc8. For the purpose, an overview was constructed of all the results obtained onthe basis of the estimation of two gravitational models (export flows and import flows) asa means of obtaining a more robust evaluation and more sound conclusions as to potentialtrade flows to and from Portugal within the context of the enlarged EU.

8 The option was taken to use the EU27 as the benchmark, i.e., to include in addition to the 10 newmembers as from 2004, Bulgaria and Romania, which are very likely to become new members of the EUin the not too distant future. Negotiations with Turkey, have, as is known, specific political difficultiesthat everything suggests will lead to a longer and more complex access process, and the decision wastherefore taken not to include Turkey.

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Comparison of global export and import potential of the Portuguese economy withinan EU enlarged to 27 countries (Table 8-1) consolidates the vision of the probableevolution of the area of its trade relations for a configuration dominated by a “rarefaction”of the respective intensity within the central area (Belgium-Luxembourg, Denmark,Germany, Poland, the Czech Republic and Hungary, in particular) offset by the“densification” of the respective intensity in areas of the peripheric crown of this samecentral area (Ireland, the United Kingdom, Spain, Italy, Slovenia, Greece and Romania, inparticular).

Table 8-1: Portugal’s GLOBAL Export & Import Potential within EU27

Observation of results obtained through weighting the calculated trade potentials bythe relative weights of each trading partner, in the export structure and in the importstructure respectively (Table 8-2) leads to the conclusion, through the export model, thatthe aggregate effect of the process of enlargement could result in a sharp deviation oftrade totalling -19.90% for the “old” EU15 partners and to a very small creation of tradetotalling +0.04% for the “new” ACO12 partners, that is, an overall aggregate loss of-19.86%: While leading to very similar results for the ACO12 countries – creation of tradeof +0.37% – analysis of the figures provided by the import model indicates for the oldEU15 partners, contrary to the figures provided by the export model, the possibility of amajor creation of trade totalling +12.04%, that is, an overall gain of +12.41%.

The analysis of results obtained (Table 8-3) leads to the conclusion, within aframework of convergence of the two models used (exports and imports), that theaggregate effect of the enlargement process on Portuguese imports could lead to adeviation in trade from the “old” EU15 partners, which will probably be offset by thecreation of trade with the “new” ACO12 partners, involving deviation of a part of ourimporting orientation to products from the new Member States.

Trade Partner Global Export Potential Global Import Potential

Portugal vs EU15Spain (+ +) ? Italy (+ +) (-)Ireland (+ +) (+)Greece (+) (+)United Kingdom ? (-)France, Finland, Netherlands, (-) (- -)Sweden (-) (-)Austria (-) (+)Germany, Belgium-Luxembourg (- -) (- -)Denmark (- -) ?

Portugal vs ACO12Romania (+ + +) (- -)Latvia, Slovakia, Slovenia (+ + +) (+ +)Lithuania (+ + +) (+ + +)Estonia, Bulgaria, Czech Rep. (+ +) (- -)Malta & Cyprus (+ +) (+ +)Poland (+) (+ +)Hungary (- -) (-)

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The first quantification of the aggregate effects expected of the evolution of thebilateral intra-European trade of the Portuguese economy within the new frameworkcreated by the implementation of the EU enlargement provides a sufficiently clear pictureto establish a first benchmark scenario that can be summed up as follows:

• The enlargement process seems to have a relevant potential to deviate tradefrom our EU15 trading partners driven by factors of proximity, relative cost, sizeand economic divergence (considered as explicative variables in models used)that tend to direct sourcing options (both intermediate goods and end goods,consumer goods in particular, as well as manufacturing activities) to the newmembers that are direct competitors of relevant segments of Portuguese exports;

• The enlargement process likewise seems to have significant trade creationpotential, though considerably less relevant overall, reflecting both the newopportunities in the markets of the candidate countries, where a very smallstarting base could give rise to fairly high growth rates, and the advantages ofproximity, in the markets of the present EU15 members, particularly in SouthernEurope (France, Italy and, most of all, Spain), generated by the dislocation of the“centre of gravity” of economic flows within EU27 to the North and to the East;

• In terms of export potential of the Portuguese economy, the enlargement processalso appears to have a clear difference of intensities between the “supply”dynamics (revealed by the export model) and demand dynamics (displayed bythe import model) in the evaluation of the most possible effects9. Indeed, thedemand-driven modelling logics (see Table 8-2) generally tends to generatemore positive effects (especially in the case of Spain, +20.2%, the UnitedKingdom, +3.4% and Italy, +1.9%) or less negative effects (especially in the caseof Germany, +2.4% Belgium-Luxembourg, +1.0% and France, +0.9%), as comparedwith a supply-driven modelling logics. This result warrants consideration for itsstrategic dimension to the extent that it suggests a significant advantage–strategies of maximizing opportunities and minimizing threats – ofapproaches of adaptive response to the stimuli of “external” demand overapproaches of defence of the inertia of “internal” supply;

• Finally, the enlargement process seems to contain a reasonably complex “play” interms of the aggregate effect of trade deviation and creation movements, which,though resulting from the new organisation of the post-enlargement Europeansingle market, should not be viewed as separate, autonomous or watertight,since implementation will take place in a framework of strong interpenetrationand interactivity, leading to public and private initiatives, these, too, quitedifferentiated, that cannot but mould, catalyse, moderate and even reverse theprobable partial effects referred to above.

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9 Leadership in the “production” of trade flows depends, however, on the predominance of more activeconduct (“flow-maker”: the exports of pole i correspond essentially to a “sales effort” by its producersand/or distributors on the intermediate or final market of pole j) or of less active conduct (“flow-taker”:the exports of pole i correspond essentially to a “purchase effort” by the producers and/or distributorsof pole j directed at the producers of pole 1), the former having a far greater capacity to take advantageof opportunities revealed by demand.

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Table 8-2: Effects of Trade Deviation vs. Creation (through exports) - EU27

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Bilateral Export Model Import ModelTrade Potentialvs Indicator Weight of the Trade Indicator Weight of the TradeActual (EVOL_x

ij) Export Structure Deviation/Creation (EVOL_m

ji) Export Structure Deviation/Creation

(as %) (%) (as%) (%) (as %)

Exporting Country – Portugal Importing Countries - EU

Germany -67.32 19.28 -12.98 -54.71 19.28 -10.55Austria -18.92 1.20 -0.23 -43.43 1.20 -0.52Belgium-Lux. -68.35 5.69 -3.89 -51.03 5.69 -2.90Denmark -63.55 1.43 -0.91 -50.08 1.43 -0.72Spain 36.80 17.94 6.60 149.58 17.94 26.83Finland -48.89 0.71 -0.35 -33.07 0.71 -0.24France -38.59 13.44 -5.19 -32.20 13.44 -4.33Greece 9.16 0.45 0.04 26.81 0.45 0.12Netherlands -47.20 3.73 -1.76 -5.38 3.73 -0.20Ireland 37.79 0.53 0.20 79.34 0.53 0.42Italy 22.55 4.30 0.97 66.46 4.30 2.85United Kingdom -15.47 11.29 -1.75 15.11 11.29 1.71Sweden -41.86 1.57 -0.66 -27.64 1.57 -0.43

Aggregate Effect (EU15) -19.90 Aggregate Effect (EU15) 12.04

Exporting Country – Portugal Importing Countries – ACO

Bulgaria 10.46 0.04 0.00 71.51 0.04 0.03Slovenia 354.97 0.02 0.05 360.61 0.02 0.05Estonia 31.53 0.01 0.00 79.88 0.01 0.01Slovakia 186.17 0.02 0.04 173.90 0.02 0.04Hungary -70.87 0.36 -0.26 -50.40 0.36 -0.18Latvia 123.40 0.01 0.02 140.85 0.01 0.02Lithuania 172.72 0.02 0.03 262.67 0.02 0.05Malta & Cyprus 38.68 0.10 0.04 117.78 0.10 0.11Poland 5.23 0.33 0.02 20.92 0.33 0.07Czech Rep. 13.88 0.11 0.02 84.95 0.11 0.10Romania 202.04 0.04 0.07 202.22 0.04 0.07

Aggregate Effect (ACO12) 0.04 Aggregate Effect (ACO12) 0.37

Aggregate Effect Global(EU27) -19.86 Aggregate Effect Global (EU27) 12.41

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Table 8-3: Effects of Trade Deviation vs. Creation (through Imports) – EU27

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Bilateral Export Model Import ModelTrade Potentialvs Indicator Weight Trade Indicator Weight TradeActual (EVOL_x

ji) of the Export Deviation/Creation (EVOL_m

ij) of the Export Deviation/Creation

(as %) (1) Structure (%) (as %) (1) Structure (%) (as %)

(1) The Potential Flows/Actual Flows figures shown in this column correspond to a weighting of thePotential Flows/Actual Flows figures shown in Table 8-21 of the Final Report, taking into account theexisting differential between the marginal propensities to be imported from Portugal and from the EU,leading to an overall correction of the potential figures.

Exporting Countries - EU Importing Country - Portugal

Germany -44.23 15.26 -6.75 -29.64 15.26 -4.52Austria -23.58 0.68 -0.16 90.86 0.68 0.62Belgium-Luxemburg -38.83 4.18 -1.62 -21.17 4.18 -0.88Denmark -19.94 0.65 -0.13 30.37 0.65 0.20Spain -14.72 26.57 -3.91 27.16 26.57 7.21Finland -26.57 0.72 -0.19 -17.74 0.72 -0.13France -38.48 11.85 -4.56 8.74 11.85 1.04Greece 23.76 0.13 0.03 196.22 0.13 0.26Netherlands -31.66 4.09 -1.29 -16.36 4.09 -0.67Ireland 26.93 0.64 0.17 30.69 0.64 0.20Italy -29.31 8.13 -2.38 -11.79 8.13 -0.96United Kingdom -16.37 6.48 -1.06 12.62 6.48 0.82Sweden -22.85 1.24 -0.28 -22.70 1.24 -0.28

Aggregate Effect (EU15) -22.14 Aggregate Effect (EU15) 2.90

Exporting Countries – ACO Importing Country – Portugal

Bulgaria -25.25 0.05 -0.01 -23.93 0.05 -0.01Slovenia 37.91 0.03 0.01 129.75 0.03 0.04Estonia -37.01 0.02 -0.01 -17.66 0.02 0.00Slovakia 66.51 0.02 0.02 172.32 0.02 0.04Hungary -21.58 0.17 -0.04 -16.99 0.17 -0.03Latvia 66.34 0.01 0.00 138.30 0.01 0.01Lithuania 171.34 0.00 0.01 202.90 0.00 0.01Malta & Cyprus 63.94 0.01 0.01 171.95 0.01 0.01Poland 65.43 0.10 0.06 96.08 0.10 0.09Czech Rep. -32.72 0.24 -0.08 -24.78 0.24 -0.06Romania -31.46 0.06 -0.02 4.37 0.06 0.00

Aggregate Effect (ACO12) -0.05 Aggregate Effect (ACO12) -0.10

Global Aggregate Effect(EU27) -22.19 Global Aggregate Effect (EU27) 3.00

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Gravitational Model in the EU15 Area

The aim of estimation of a gravitational model within EU15 is thus to study majorfactors explaining the bilateral trade relations established between the present MemberStates of the European Union, both as a means of understanding the direction and pathsof the evolution of the European deepening process and as a means to view the trends ofevolution in these trade relations, to be able to establish the framework for resultsobtained for the EU27 area10.

The trade effects on the export and import models resulting from the estimatedbehaviour of exports, for the EU15 (Table 8-4), diverge in the overall sense of the flows ofPortuguese exports to the present Member States. In fact, while the export modelidentifies a global neutralisation of the partial phenomena of trade creation and deviation(global aggregate effect of +0.98%), the import model indicates a global trade deviationphenomenon (global aggregate effect of -15.42%). The discrepancy in these global results“provided” by the two models is largely caused by a reduction in the value of estimatedpotential export flows to the markets of Germany, France, Italy and Spain, in the importmodel, which deteriorates the potential deviation of trade, in the first two of thesemarkets by about 6.2%, and reduces the potential creation of trade in the latter two byabout 5.8%, compared to the like effects in the export model.

Estimates of potential export flows in the Portuguese economy, using thegravitational model of imports, systematically appear, within EU15, lower than theestimates provided by the gravitational model of exports. This result is exactly theopposite of what was encountered within EU27, and is caused by the greater dimensionand far greater heterogeneity of the EU27.

Results obtained “for 15” and “for 27”, convergent in sign and divergent in intensity,should thus be taken as the limits of a band of Portuguese export fluctuation, i.e., as theheights of any evolution scenario, the actual result of which will, however, dependingdecisively on the quality of public policies adopted and, above all, on the capacity ofPortuguese companies and the business community to moderate threats and takeadvantage of the opportunities suggested by estimates, ensuring the feasibility andsustainability of their presence in the various areas of the European market.

The results also confirm both the vulnerability of the Portuguese position within thecentral axis of the EU (Germany-France) and its potential reinforcement within thespace of geographic proximity with the South (Spain-Italy), providing strong signs ofthe relevance of the future evolution of these four markets, as far as Portuguese exportsare concerned.

Estimates of potential flows of Portuguese imports within the context of EU15(Table 8-5) reveal thus a convergent behaviour of the direction of results provided by bothmodels – both suggest a global effect of potential deviation in trade – though based ondiffering intensities (-13.18% in the export model and -3.31% in the import model). Theevolution of imports from Spain (to a greater extent) and from Germany and France (toa lesser extent) is seen to be decisive to this result, not only for the variation potentialthat they present but also for their considerable weight in Portugal’s import structure.

10Essentially, the aim is to ensure that the results of the gravitational model within the EU15 allow oneto relativise and calibrate the results obtained within EU27, lending greater consistency and reliability tothe estimates of the impact of the EU enlargement on trade relations between Portugal and its tradingpartners of the enlarged EU, especially in terms of potential flows.

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Table 8-4: Effects of Trade Deviation vs. Creation in EU15 (through Exports)

Table 8-5: Effects of Trade Deviation vs. Creation in EU15 (through Imports)

Bilateral Export Model Import ModelTradePotential Indicator Weight Trade Indicator Weight Tradevs (EVOL_x

ji) of the Export Deviation/Creation (EVOL_m

ij) of the Export Deviation/Creation

Actual (1) Structure (%) (as %) (1) Structure (%) (as %)(as %)

Exporting Country – Portugal Importing Countries – EUGermany -38.51 19.28 -7.43 -48.36 19.28 -9.33Austria 41.75 1.20 0.50 -22.36 1.20 -0.27Belgium-Luxemburg -54.28 5.69 -3.09 -57.33 5.69 -3.26Denmark -24.77 1.43 -0.35 -42.39 1.43 -0.61Spain 37.90 17.94 6.80 12.72 17.94 2.28Finland 17.34 0.71 0.12 -18.01 0.71 -0.13France -10.19 13.44 -1.37 -42.11 13.44 -5.66Greece 173.91 0.45 0.78 84.24 0.45 0.38Netherlands -12.56 3.73 -0.47 -19.66 3.73 -0.73Ireland 98.72 0.53 0.52 17.33 0.53 0.09Italy 93.94 4.30 4.03 64.47 4.30 2.77United Kingdom 6.95 11.29 0.78 -6.76 11.29 -0.76Sweden 9.57 1.57 0.15 -11.97 1.57 -0.19

Aggregate Effect (EU15) 0.98 Aggregate Effect (EU15) -15.42

Bilateral Export Model Import ModelTradePotential Indicator Weight Trade Indicator Weight Tradevs (EVOL_x

ij) of the Import Deviation/Creation (EVOL_m

ji) of the Import Deviation/Creation

Actual (1) Structure (%) (as %) (1) Structure (%) (as %)(as %)

(1) The Potential Flows/Actual Flows figures shown in this column correspond to a weighting of thePotential Flows/Actual Flows figures shown in Table 8-21 of the Final Report, taking into account theexisting differential between the marginal propensities to be imported from Portugal and from the EU,leading to an overall correction of the potential figures.

Exporting Countries – EU Importing Country – PortugalGermany -23.14 15.26 -3.53 -12.61 15.26 -1.92Austria 13.50 0.68 0.09 156.63 0.68 1.06Belgium-Luxemburg -16.45 4.18 -0.69 -10.76 4.18 -0.45Denmark 24.05 0.65 0.16 89.11 0.65 0.58Spain -29.24 26.57 -7.77 -24.04 26.57 -6.39Finland 21.56 0.72 0.16 26.03 0.72 0.19France -26.83 11.85 -3.18 10.77 11.85 1.28Greece 61.36 0.13 0.08 251.44 0.13 0.33Netherlands -0.89 4.09 -0.04 -4.16 4.09 -0.17Irelend 121.17 0.64 0.78 56.01 0.64 0.36Italy -13.15 8.13 -1.07 0.83 8.13 0.07United Kingdom 22.26 6.48 1.44 25.03 6.48 1.62Sweden 31.05 1.24 0.38 11.06 1.24 0.14

Aggregate Effect (EU15) -13.18 Aggregate Effect (EU15) -3.31

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The Impact of EU Enlargement on the Portuguese Economy considering its Linkagewith the Deepening Process

The study of the impact of enlargement on the economies of the present MemberStates in general, and on the Portuguese economy in particular, cannot be carried outwithout addressing its linkage and interdependence with the deepening process of theEuropean Union itself, to the extent that both mould the process of Europeanconstruction. Therefore, the approach used in this study has taken into account the factthat in the present European single market there are time lags between actual andpotential trade flows, that means that some of the behavioural trends suggested by theEU27 benchmark may already exist, or have started to be outlined in the EU15benchmark.

Effects of Trade Deviation and Creation on the Portuguese Economy stemming from theLinkage between “Enlargement” and “Deepening”

Analysis of the effects of trade deviation/creation on Portuguese exports to eachMember State (Table 8-6, Figure 8-1) allows the various bilateral relations to be gatheredinto homogeneous effects’ groups of the enlargement on the deepening, by crossingresults obtained using the two models estimated (export model and import model):

• Portugal’s bilateral relations with Germany, to a greater degree, and withDenmark, to a lesser degree, show potential negative deepening dynamics,leading to a situation of “Augmented Losses” according to both export and importmodels;

• Portugal’s bilateral relations with Spain, to a greater extent, and with Italy andIreland, to a lesser extent, show potential positive deepening dynamics, leading,respectively, to a situation of “Limited Positive Potential” (according to the exportmodel) or of “Catalysed gains” (according to the import model);

• Portugal’s bilateral relations with Greece is characterised by potential positivedeepening dynamics, leading to a situation of “Limited Positive Potential”according to both the export and the import models;

• Portugal’s bilateral relations with France, Belgium and Luxembourg, to a greaterdegree, and with the Netherlands, to a lesser degree, reveal potential positivedeepening dynamics, leading, respectively, to a situation of “Augmented Losses”(according to the export model) or of “Attenuated Negative Potential” (accordingto the import model);

• Portugal’s bilateral relations with the United Kingdom reveal potential deepeningdynamics that differ according to the model (positive for the export model andnegative for the import model), which are counteracted by equally divergentpotential dynamics in terms of enlargement (negative for the export model andpositive for the import model), and the combined effect can therefore fluctuatebetween a situation of “Strong Deductive Losses” (using the export model) and asituation of “Strong Inductive Gains” (using the import model);

• Portugal’s bilateral relations with Finland and Sweden show potential deepeningdynamics that differ according to the model (positive for the export model andnegative for the import model), which are counteracted, in both models, by strongnegative dynamics in terms of enlargement, and the combined effect cantherefore fluctuate between a situation of “Strong Deductive Losses” (using theexport model) and a situation of “Augmented Losses” (using the import model);

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• Portugal’s bilateral relations with Austria unveil potential deepening dynamics thatdiffer according to the model (positive for the export model and negative for the importmodel), which are counteracted, in both models, by weak (export model) and strong(import model) negative dynamics in terms of enlargement, and the combined effectcan therefore fluctuate between a situation of “Weak Deductive Losses” (using theexport model) and a situation of “Augmented Losses” (using the import model).

Table 8-6: Effects of Trade Deviation vs. Creation (through Exports)

Taken together, bilateral trends differing in direction and intensity mean that, in globalterms, the effects of trade deviation/creation between Portugal and its EU15 partners –with regard to the potential behaviour of Portuguese exports, under the impact of the newenlargement process on the present deepening process – show, based on the exportmodel, “Strong Deductive Losses”, which, however, based on the import model, could bereversed, leading “Weak Inductive Gains”. In addition to the open character of the overallnature of the impact of enlargement on Portuguese present trade relations within theEU15, the main consequence of this result is that it suggests increased difficulties forPortuguese exports, should the phenomena of mere passive reaction by production todemand from the EU15 markets (revealed better by the export models) continue toprevail over active conquest of new opportunities to sell within the European singlemarket (revealed better by the import models).

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Model of Exports Model of Imports

Trade Trade Trade TradeDeviation/Creation Deviation/Creation Enlargement Deviation/Creation Deviation/Creation Enlargement

(as %) (as %) effects (as %) (as %) effectsEU 15 EU 27 EU 15 EU 27

Exporting Country – Portugal Importing Coutries – EU

Germany -7.43 -12.98 Augmented Losses -9.33 -10.55 Augmented LossesAustria 0.50 -0.23 Minor Deductive Losses -0.27 -0.52 Augmented LossesBelgium-Luxemb. -3.09 -3.89 Augmented Losses -3.26 -2.90 Attenuated Negative PotentialDenmark -0.35 -0.91 Augmented Losses -0.61 -0.72 Augmented LossesSpain 6.80 6.60 Limited Positive Potential 2.28 26.83 Catalysed Gains Finland 0.12 -0.35 Strong Deductive Losses -0.13 -0.24 Augmented LossesFrance -1.37 -5.19 Augmented Losses -5.66 -4.33 Attenuated Negative PotentialGreece 0.78 0.04 Limited Positive Potential 0.38 0.12 Limited Positive PotentialNetherlands -0.47 -1.76 Augmented Losses -0.73 -0.20 Attenuated Negative PotentialIreland 0.52 0.20 Limited Positive Potential 0.09 0.42 Catalysed GainsItaly 4.03 0.97 Limited Positive Potential 2.77 2.85 Catalysed GainsUnited Kingdom 0.78 -1.75 Strong Deductive Losses -0.76 1.71 Strong Inductive GainsSweden 0.15 -0.66 Strong Deductive Losses -0.19 -0.43 Augmented Losses

EU15 0.98 -19.90 Strong Deductive Losses -15.42 12.04 Minor Inductive Gains

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Figure 8-1: Enlargement effects on Portuguese Potential Exports for each Member State(Exports Model / Imports Model)11

Source: Augusto Mateus & Associados

Figure 8-2: Enlargement effects on Portuguese Potential Imports from each Member State(Exports Model / Imports Model)12

Source: Augusto Mateus & Associados

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11 and 12 The “solid circles” correspond to figures given by the export model and the “circles with stripes”to figures provided by the import model.

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Table 8-7: Effects of Trade Deviation vs. Creation (through Imports)

The analysis of the effects of trade creation/deviation in Portugal’s imports from eachMember State (Table 8-7 & Figure 8-2) likewise allows the various bilateral relations to begrouped together into homogeneous effects’ groups of enlargement on deepening, by crossingresults obtained by the estimated models (export model and import model). Taken together,bilateral trends differ themselves in direction and intensity meaning that, in aggregate terms,the effects of trade deviation/creation between Portugal and its present EU15 partners – withregard to the potential behaviour of Portuguese imports, under the impact of the newenlargement process on the present deepening process – unveil, on the basis of the exportmodel, a situation of “Augmented Losses”, in which the negative dynamics of deepening areworsened by an even more negative dynamics of enlargement, and a situation of “WeakInductive Gains” on the basis of the import model, in which the negative dynamics ofdeepening are reversed by a positive dynamics of enlargement.

The results also suggest interesting potential that could stem from the evolution oftrade relations, via imports, with Spain (where a reversal of the negative potentialassociated with the deepening would be possible), with France and the United Kingdom(where a partial reversal of the negative potential of the deepening would be possible)and with Austria, Greece and Ireland (where positive potential could still be found, eventhough limited by the enlargement).

The Impact of the Linkage between “Enlargement” and “Deepening” Processes uponPortuguese Intra-European Trade Trends

The potential effects of the linkage between enlargement and deepening upon thePortuguese economy are complex in this framework, and one can gauge that, in the exportmodel, the aggregate figures without enlargement (EU15) are higher than the aggregate

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Model of Exports Model of Imports

Trade Trade Trade TradeDeviation/Creation Deviation/Creation Enlargement Deviation/Creation Deviation/Creation Enlargement

(as %) (as %) effects (as %) (as %) effectsEU 15 EU 27 EU 15 EU 27

Importing Country – Portugal Exporting Countries – EU

Germany -3.53 -6.75 Augmented Losses -1.92 -4.52 Augmented Losses Austria 0.09 -0.16 Strong Deductive Losses 1.06 0.62 Limited Positive PotentialBelgium-Luxemb. -0.69 -1.62 Augmented Losses -0.45 -0.88 Augmented LossesDenmark 0.16 -0.13 Minor Deductive Losses 0.58 0.20 Limited Positive PotentialSpain -7.77 -3.91 Attenuated Negative Potential -6.39 7.21 Strong Inductive GainsFinland 0.16 -0.19 Strong Deductive Losses 0.19 -0.13 Minor Deductive LossesFrance -3.18 -4.56 Augmented Losses 1.28 1.04 Limited Positive PotentialGreece 0.08 0.03 Limited Positive Potential 0.33 0.26 Limited Positive PotentialNetherlands -0.04 -1.29 Augmented Losses -0.17 -0.67 Augmented LossesIreland 0.78 0.17 Limited PositivePotential 0.36 0.20 Limited Positive PotentialItaly -1.07 -2.38 Augmented Losses 0.07 -0.96 Strong Deductive LossesUnited Kingdom 1.44 -1.06 Minor Deductive Losses 1.62 0.82 Limited Positive PotentialSweden 0.38 -0.28 Minor Deductive Losses 0.14 -0.28 Strong Deductive Losses

EU15 -13.18 -22.14 Augmented Losses -3.31 2.90 Minor Inductive Gains

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figures with enlargement (EU27) and that, in the import model, the aggregate figures withoutenlargement (EU15) are lower than the aggregate figures with enlargement (EU27).

Most of Portugal’s present European partners (9 of 14) reveal, in both models, fairlyconvergent estimates, indicating, on enlargement, a possibility of a slight accentuation of thetrade deviation phenomena (Austria, Belgium, Luxembourg, Denmark, Netherlands, Finland,Sweden) or a slight reduction in trade creation phenomena (Greece, Ireland), neither of thesecases greatly affecting Portuguese exports as a whole. In this context, the estimates providea more or less relevant margin of lesser convergence only in respect of Portugal’s five otherpresent European partners. The following should therefore be pointed out:

• With regard to the cleavage of the benchmark areas to evaluate the flows in theexport model, four countries tend to harbour the greater part (71.6%) of the effectsof trade deviation on enlargement (EU27 vs. EU15), that is, Germany with 26.6%,France, with 18.3%, Italy with 14.7% and the United Kingdom, with 12.1%);

• With regard to the cleavage of the benchmark areas to evaluate the flows in theimport model, just one country, Spain, tends to harbour the greater part of theeffects of trade creation on enlargement (EU27 vs. EU15), followed only by Italywith any significant figure (9%);

• With regard to the cleavage of the evaluation dynamics just three countries tendto reveal significant discrepancies with regard to the estimates of potentialexports both within EU15 and within EU27, that is, Spain (-4.5% in trade creation inEU15 and +20.2% in trade creation in EU27 in the estimates provided by the exportmodel), the United Kingdom (-1.6% in trade creation in EU15 and +3.5% in tradecreation in EU27 in the estimates provided by the import model when comparedwith the estimates provided by the export model) and Italy (-1.3% in trade creationin EU15 and +1.9% in trade creation in EU27 in the estimates provided by theimport model when compared with the estimates provided by the export model).

The main conclusion, in this framework, is that although the most likely trend in theevolution of Portuguese exports under the impact of the linkage of the “new” process ofenlargement and of the “old” deepening process, is one of a significant deviation oftrade, that there is a “narrow path” that could come to allow either a moderation of theintensity of this effect of negative trade deviation or, less probably, a reversal of thenegative direction of the effects of the EU enlargement on the Portuguese economy.

The evolution of bilateral Portugal-Spain and Portugal-Germany relations and of therespective trade-off constitutes decisive terrain in which the direction and intensity ofthe effects of the adjustment of the Portuguese economy to European enlargementwill be determined and decided. Indeed, faced with the trend of relevant deviation oftrade with Germany (stemming from the deepening and worsened by the enlargement),the estimates suggest very clearly that only the relevant trend of creation of trade withSpain (stemming from the deepening and driven by the enlargement) will be strongenough to be able to counteract it. The Germany-Spain area can be extended, whilemaintaining the decisive protagonism of these two markets, to central and southernparts of the EU 15 where Portuguese exports are likely to see, respectively, stronger andprobable losses, and less strong and probable gains (Figure 8-3 & Figure 8-4).

Lastly, the results provided by the estimated gravitational models are very explicit withregard to the two major challenges of the enlargement as far as the evolution of Portugueseexports is concerned. That is, one will have to be able to moderate the potential losses on theGerman market and catalyse the potential gains on the Spanish market to be able to comeout of the enlargement without substantial losses. The changes required to overcome boththese challenges seem to involve, in the German case and given the geographic distance,

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rather a consolidation and qualification of German FDI in Portugal as a trade inducing factor(investment —> trade) and in the Spanish case, given the geographic proximity, rather agreater selling and distribution capacity underpinned of necessity by better productquality and greater value added (trade —> investment).

The size of the “Spanish challenge” may help to awake a wider interest forPortuguese products, capable of minimising or reversing the effects of potentiallynegative situations (France and the United Kingdom) or of catalysing the effects ofslightly positive situations (Italy in particular, and also Ireland and Greece) leading togreater actual flows. The ability to penetrate the Spanish market will, in practice,dictate to a large degree the extent of the benefits that the Portuguese economy willbe able to glean from the process of EU enlargement.

Figure 8-3: Potential Evolution of Portugal's Exports (EU27 vs. EU15)Potential Supply Dynamics (Leadership in the importer pole revealed by the export model)(Trade Creation (+) / Deviation (-), as % of Total Exports)

Figure 8-4: Potential Evolution of Portugal's Exports (EU27 vs. EU15)Potential Demand Dynamics (leadership in the exporter pole revealed by the import model)(Trade Creation (+) / Deviation (-), as % of Total Exports)

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Global Effects of the Enlargement

Having estimated the gravitational models for the present EU and for the enlarged EUand having assessed the enlargement effects on the deepening, the time has now cometo quantify the net effect of the process of enlargement on each of the bilateral relationsbetween Portugal and its trading partners, both in exports and in imports, and so tocomplete the framework of the study of the impact of the EU enlargement on thePortuguese economy in aggregate terms.

To determine the net effect of enlargement on each bilateral relation between Portugaland its intra-EU15 trading partners a system of equations was deduced from relationsthat could be identified between both processes of European construction (enlargementand deepening) and several academic hypotheses were drawn up with a view torepresenting them13 (see Table 8-8).

Table 8-8: Net effect of the Enlargement on Portuguese Exports & Imports to and from thePresent Member States

As far as bilateral export and import relations between Portugal and the AccessionCountries are concerned, gauging the net effect that the enlargement process will have interms of its impact on the competitiveness of the Portuguese economy assumes actualaccession by the new countries, that is, that each ACO is assumed to be an EU MemberState and that they therefore benefit from belonging to a preferential trade area and, morespecifically, to an internal market with no regulatory barriers hindering or restricting traderelations between these countries and the EU15 countries14.

13 In this connection see Text Box 8-1 - Determination of the Net Effect of Enlargement (taking intoaccount the gravitational models estimated for EU27 and for EU15), of the Final Report.14 In practical terms the use of these assumptions leads to the application of a value of “1” in the “EU”dummy variable used in the 27-country gravitational model to each country of Eastern Europe, that is, itinvolves the assumption that the Accession Countries come to be full members of the EU, leadingobviously to new deviation/creation potential with regard to Portugal (see 8-13, of the Final Report).

Net Effect of the Enlargement Net Effect of the Enlargementon Portuguese Exports on Portuguese Imports

Export Model Import Model Export Model Import Model

Exporting Country – Portugal Exporting Countries – EUImporting Countries - EU Importing Country - Portugal

Germany -10.85 -9.31 -5.59 -3.68Austria -0.10 -0.43 -0.11 0.62Belgium & Luxembourg -3.38 -2.67 -1.32 -0.73Denmark -0.73 -0.63 -0.07 0.23Spain 5.97 20.46 -4.10 4.45Finland -0.24 -0.20 -0.12 -0.07France -4.09 -4.09 -3.90 0.97Greece 0.15 0.15 0.04 0.24Netherlands -1.39 -0.26 -0.98 -0.53Ireland 0.23 0.33 0.25 0.20Italy 1.33 2.56 -1.95 -0.71United Kingdom -1.19 1.16 -0.58 0.86Sweden -0.47 -0.35 -0.15 -0.19

EU -14.77 6.72 -18.58 1.68

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Subsequently, three variation scenarios were constructed for the said trade flows,based on statistical dispersal measures. For the purpose, it was assumed that the resultsof the export models constitute the lower extremity of a variation interval and that theresults of the import model constitute the upper extremity of this interval, obtaining,consequently, a continuous variation interval, to which statistical dispersal measures canbe applied, providing the following scenarios: (i) Weak Scenario (given by the valuesituated at Percentile 25 of the continuous variation interval), (ii) Intermediate Scenario(given by the value situated at Percentile 50 (median value) of the continuous variationinterval), and (iii) Strong Scenario (given by the value situated at Percentile 75 of thecontinuous variation interval).

Analysis of the tables shows that the main idea that stands out in terms of Portugueseexports (Table 8-9) is a probable deviation of trade with the EU and a probable creationof trade with the Accession Countries, confirmed both by the weak scenario and by theintermediate scenario of variation, in the case of the present Member States, and by allthe scenarios in the case of the new Member States. Only in the strong scenario is therea possible trade creation potential with both EU15 and the new Member States. Onceagain, it can be seen that in the former case (EU), the challenge of the Spanish marketconstitutes the central element of these trade gains, followed at a distance by the Italianmarket, with the British and Irish markets lagging far behind. At heart, there appears theidea that the possibility of transforming the impact of enlargement on the Portugueseeconomy into an induced cause of competitive growth and international affirmation ofPortuguese products depends, solely, on the ability of Portuguese companies to respondaffirmatively to the need to give a qualitative leap forward.

If this goal is achieved, Portugal will be able to make a start to making its mark, in thefirst instance, on the Spanish market and, later, on the markets of the present and futureMember States. Otherwise, the weak and intermediate scenarios will be confirmed andthere will therefore be a trade deviation of Portuguese exports which will increasingly bereplaced by products from low-wage, high-skill countries (Eastern European countries).

With regard to results obtained for Portuguese imports (Table 8-10) any of thescenarios generates trade deviation potential with the EU (caused to a large extent bythe reduction of imports from Germany and Italy and trade creation potential with theAccession Countries, indicating that the overall trend will involve dislocation of ourimports to the East in an attempt to take advantage of the appearance of products ofidentical quality at lower prices.

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Table 8-9: Net Effect and Variation Scenarios (Portuguese Exports)

Net effect of the Enlargement Variation Scenarios

Export Model Import Model Weak Scenario Intermediate Strong Scenario (Percentile 25) Scenario (Median) (Percentile 75)

Legend:Trade DeviationTrade Creation

Exporting Country – PortugalImporting Countries – EU

Germany -10.85 -9.31 -10.46 -10.46 -9.70Austria -0.10 -0.43 -0.35 -0.35 -0.18Belux -3.38 -2.67 -3.20 -3.20 -2.85Denmark -0.73 -0.63 -0.71 -0.71 -0.65Spain 5.97 20.46 9.59 9.59 16.84Finland -0.24 -0.20 -0.23 -0.23 -0.21France -4.09 -4.09 -4.09 -4.09 -4.09Greece 0.15 0.15 0.15 0.15 0.15Netherlands -1.39 -0.26 -1.11 -1.11 -0.54Ireland 0.23 0.33 0.25 0.25 0.30Italy 1.33 2.56 1.64 1.64 2.25United Kingdom -1.19 1.16 -0.60 -0.60 0.58Sweden -0.47 -0.35 -0.44 -0.44 -0.38

EU -14.77 6.72 -9.40 -4.03 1.34

Exporting Country – PortugalImporting Countries - ACO

Bulgaria 0.08 0.17 0.10 0.13 0.15Slovenia 0.16 0.19 0.17 0.18 0.18Estonia 0.03 0.06 0.04 0.04 0.05Slovakia 0.15 0.16 0.15 0.15 0.16Hungary -0.09 0.17 -0.02 0.04 0.11Latvia 0.06 0.08 0.07 0.07 0.07Lithuania 0.11 0.17 0.12 0.14 0.16Malta & Cyprus 0.26 0.53 0.32 0.39 0.46Poland 0.57 0.84 0.64 0.70 0.77Czech Rep. 0.22 0.51 0.30 0.37 0.44Romania 0.25 0.29 0.26 0.27 0.28

ACO 1.80 3.17 2.14 2.48 2.82

Overall Effect -12.97 9.89 -7.26 -1.55 4.16

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Table 8-10: Net Effect and Variation Scenarios (Portuguese Imports)

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Legend:Trade DeviationTrade Creation

Net effect of the Enlargement Variation Scenarios

Export Model Import Model Weak Scenario Intermediate Strong Scenario (Percentile 25) Scenario (Median) (Percentile 75)

Exporting Countries – EUImportins Country – Portugal

Germany -5.59 -3.68 -5.11 -4.64 -4.16Austria -0.11 0.62 0.08 0.26 0.44Belux -1.32 -0.73 -1.17 -1.03 -0.88Denmark -0.07 0.23 0.00 0.08 0.16Spain -4.10 4.45 -1.96 0.18 2.32Finland -0.12 -0.07 -0.11 -0.09 -0.08France -3.90 0.97 -2.68 -1.46 -0.25Greece 0.04 0.24 0.09 0.14 0.19Netherlands -0.98 -0.53 -0.86 -0.75 -0.64Ireland 0.25 0.20 0.21 0.22 0.24Italy -1.95 -0.71 -1.64 -1.33 -1.02United Kingdom -0.58 0.86 -0.22 0.14 0.50Sweden -0.15 -0.19 -0.18 -0.17 -0.16

EU -18.58 1.68 -13.52 -8.45 -3.39

Exporting Countries – ACOImporting Country – Portugal

Bulgaria 0.03 0.04 0.03 0.03 0.04Slovenia 0.07 0.16 0.09 0.11 0.14Estonia 0.00 0.02 0.01 0.01 0.02Slovakia 0.07 0.15 0.09 0.11 0.13Hungary 0.11 0.17 0.12 0.14 0.15Latvia 0.02 0.03 0.02 0.02 0.03Lithuania 0.03 0.04 0.03 0.03 0.03Malta & Cyprus 0.02 0.06 0.03 0.04 0.05Poland 0.28 0.41 0.31 0.35 0.38Czech Rep. 0.09 0.18 0.11 0.13 0.16Romania 0.02 0.10 0.04 0.06 0.08

ACO 0.74 1.35 0.89 1.04 1.20

Overall effect -17.84 3.03 -12.63 -7.41 -2.19

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Portugal’s Intra-communitary Foreign Trade Following Enlargement to the East (ananalysis by sector)

The exercise of assessing enlargement impacts on the Portuguese economy alsoinvolved detailing the overall effects for a level of sectoral analysis designed to allow adistinction to be made between the behaviour of the trade flows of a large number ofsectors and, thus, to explore, on a prospective basis, which sectors will be affected toa greater or lesser extent (more sensitive or less) by the eastward EU enlargement,providing signs of potential adjustment problems and of initiatives with greatersuccess potential, sector by sector.

Thus, for each sector, an estimation was made of the model presented above based onPanel Data techniques, for 14 Member States (Belgium and Luxembourg = 1) and 11Accession Countries (Malta & Cyprus = 1), for the period from 1993 to 2000. For thereasons given earlier, a Fixed Effect Model and WITHIN estimation were used to obtainconsistent, efficient estimates. The CHELEM - Comptes Harmonisés sur les Échanges etL’Économie Mondiale - (2002) database was employed since it contains the bilateral flowsbetween 83 countries for 72 product categories, which were aggregated into 24 sectorsof tradable goods able to respond to two types of analysis increasingly used ininternational economic literature – Key Competitive Factors and Technological Levels.

Results and Analysis of Potential Trade Flows (by Sector)

In analysing potential flows, sector by sector, for the whole of our EU27 tradingpartners, consideration is given, as in the analysis by countries, to the trade flowestimates resulting from the gravitational models for each sector, in order to understandwhether the potential levels (of exports/imports) are higher or lower than those actuallyobserved. When the potential trade level is above (below) the actual trade level, the valueof the indicator is positive (negative), indicating that the medium-term trade potential inthat sector and for that pair of countries has been (has not been) exhausted15.

Sectoral analysis of potential flows of exports from Portugal to the present EUcountries leads to a number of considerations detailed hereunder:

• Bilateral relations between Portugal and Spain occupy an outstanding position,in that for 88% of the sectors (21 of 24) there is evidence of some trade potentialin the medium term, the outlines of which become even more interesting if weconsider the fact that over half of them (11 of 21) have medium to high potential(5 in the former situation and 6 in the latter);

• Bilateral relations between Portugal and Ireland occupy an equally outstandingposition, in that for 50% of the sectors (12 of 24) exports of Portuguese productsshow positive potential in the medium term, with 2/3 of them revealing mediumor high potential (4 in both cases);

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15 Given the length of calculations undertaken in this point of the methodology (24 sectors for the exportmodel and 24 for the import model, covering the 27 countries of the enlarged EU and the possibility thatthe EU dummy is or is not equal to “1”), a decision was taken to present only the summary tables in thebody of the Final report document (Tables 8-40 to 8-42, and Tables 8-45 to 8-47), portraying the mainresults found and providing the process with results. Complementing this, an appendix has been pre-pared, (see Appendix 8-2) comprising 48 sectorial sheets, 24 for Portuguese exports and 24 forPortuguese imports, providing the estimated potential flow figures, sector by sector, for Portugal's traderelations with all the other EU27 partners.

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• Bilateral relations between Portugal and Italy and between Portugal and theUnited Kingdom also warrant emphasis in that they have positive potential for 9of the 24 sectors studied. Italy is a paradigmatic case for it is the country thatshows the biggest number of sectors whose end result (stemming fromcrossing the export model with the import model), in terms of potential flows ofPortuguese exports, is uncertain (in 5 sectors), showing that the estimatedaggregate impact has no total correspondence at sectoral level;

• Bilateral relations between Portugal and Germany, Denmark, Greece, theNetherlands and Sweden stand out negatively since they reveal positive tradepotential only for 4 sectors of activity;

• Sectors A (Agriculture, Animal creation & Fishing), M (Other Chemical Products& Synthetic Fibres), Q1 (Non-electrical Machines & Equipment) and T(Miscellaneous Articles) are the sectors in which Portuguese exports showpositive trade potential with regard to the greater number of EU15 partnercountries (10 in the first case and 8 in the remainder);

• The Non-electrical Machines & Equipment (Q1) sector shows the most intensetrade potential – high for 3 countries (Denmark, Finland and Ireland) and averagefor 4 countries (Austria, Spain, Greece and the United Kingdom);

• The Precision Instruments (S2) sector has the most complicated situation interms of export potential, since the actual flows are greater than the potentialflows for every EU15 partner country.

Sectoral analysis of potential flows of Portuguese exports to the “new” MemberStates allows one to gauge the following conclusive aspects:

• Bilateral relations between Portugal and Poland constitute the most outstandingnote in that in 42% of the sectors (10 of 24) there is evidence of some tradepotential in the medium term, which becomes even more interesting on takinginto account the fact that 70% of these (7 of 10) have high trade potential –followed by bilateral relations between Portugal and the Czech Republic, wherethere is a positive trade potential in 8 sectors (4 of which have high potential forthe export of Portuguese products); and

• Sector D (Textiles & Clothing) is the sector in which Portuguese exports showpositive trade potential for the greater part of the ACO partners (more specifically for2/3 of the “new” Member States, followed by sectors N (Plastic Articles), E (Footwear &Other Leather Articles), R2 (Computers, IT & Office Equipment, Semiconductors andTelecommunications), M (Other Chemical Products & Synthetic Fibres) and P1 ( Non--Ferrous Metals & Metal Products), which have, respectively, positive trade potentialfor 4 Eastern countries in the first two of these sectors and for 3 in the latter three.

Sectoral analysis of the potential flows of imports from Portugal to the present EU15countries reveals some important aspects that must be mentioned, including:

• Bilateral relations between Portugal and Ireland clearly stand out above theothers – since in 50% of the sectors (12 of 24) there is evidence of positiveimport potential, which is all the most important on seeing that half (6 of 12)have high trade potential – followed by the trade relations between Portugal andGreece, in which there is positive trade potential for 8 sectors (of which just 2involve high import potential of Greek products);

• Bilateral import relations between Portugal and Spain reveal positive tradepotential in 5 sectors though they also show the biggest number of sectors

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whose end result (arising from crossing the export model with the import model),in terms of potential flows of Portuguese imports is uncertain (in 5 sectors);

• Bilateral relations between Portugal and Belgium, Luxembourg, the Netherlandsand France all have negative import potential for all the sectors under study,indicating that the actual flows surpass the potential flows, and this is probablyintimately linked with the strong importing bent of the Portuguese economy;

• Sectors A (Agriculture, Animal creation and Fishing) and R1 (Electrical machinery& Apparatus) have the biggest number of positive import potentials for the EU(from 5 partners in both cases).

Observation from a sectoral standpoint of the potential flows of imports by Portugalfrom the candidate countries reveals the following aspects:

• Sector D (Textiles & Clothing) is the sector in which ACO products seem to havegreater import potential into the Portuguese economy, since 2/3 (8 of 12) of theexports by the candidate countries reveal potential flows greater than the actualflows observed; this is followed by sector E (Footwear & Other Leather Articles)which also has positive trade potential from bilateral relations between Portugaland 5 Accession Countries;

• Bilateral import relations between Portugal and Poland stand out above theothers, not only for the number of sectors showing medium-term trade potential(12 of 24), but also for the fact that the greater part of them show high potential;

• Bilateral import relations between Portugal and the Czech Republic and betweenPortugal and Hungary show a certain predominance of positive trade potential(for 8 and 7 sectors respectively).

Sectoral Impacts of the Enlargement on the Portuguese Sectoral Trade Structure:a vision oriented by Key Competitiveness Factors and Technological Intensity Levels

In this section, the aim is to set out the main threats and opportunities identified atsectoral level, transposing them to a more general reasoning of competitiveness of thePortuguese economy, using for the purpose two fundamental instruments increasinglyenshrined in international economic literature – Key Competitiveness Factors andTechnological Intensity Levels.

In both cases, one starts by portraying the composition and relative weight of eachkey competitiveness factor (or of each technological intensity level) of the structure ofPortuguese exports and imports, taking as the reference period the last year of thesample (2000). Then, in a second stage, one gauges the consequences that theenlargement process will have on the competitive position of the Portuguese economyagainst the “old” and the “new” Member States. In this second stage, the potential flowsobtained if the foregoing point are weighted by the weight of each sector in the structureof exports and imports respectively, and, on the other hand, the sectoral results obtainedby the export model and by the import model are crossed by means of calculation of thesimple arithmetic mean of the two values. This provides a percentage variation for eachsector of activity, and therefore the partial percentage variations taken together will makeup a cumulative percentage variation for each key competitiveness factor (or for eachtechnological intensity level) and, in this way, allow an evaluation of the impacts of theenlargement process on the sectoral structure of the Portuguese trade flows.

Analysis of the relative weight of the Key Competitiveness Factors in the structureof Portuguese exports (Table 8-11) shows that Direct Labour-intensive Goods, at 25%,

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account for 3/5 of total Portuguese exports, and these figures are largely the result ofthe weight of Textiles & Knitwear (in the first case) and of Transport Materials (in thesecond). One should also note, within the scope of the structure of Portuguese exports,the little importance of sectors involving a greater incorporation of advanced productionfactors and technological sophistication (Product Differentiation-Intensive Goods andR&D-Intensive Goods) that together have the same weight as Natural-Resource IntensiveGoods (21%) – see Table 8-11.

Table 8-11: Relative Weight of Key Competitiveness Factors in the Portuguese ExportsStructure

Value of Exports Weight in KCF Weight Total(2000) USD 1000 (%) (%)

Total 22 360.38 100.00Goods intensive in Natural Resources 4 683.78 20.95A – Agricultur, Animal creation & Fishing 570.24 12.17 2.55C – Food & Beverages 1 258.10 26.86 5.63F – Wood, Cork & Furniture 1 221.94 26.09 5.46G – Pulp & Paper 1 103.33 23.56 4.93I – Coke & Refined Petroleum Products 378.79 8.09 1.69O1 – Cement & Other Construction Materials 151.38 3.23 0.68

Goods Intensive in Direct Labour 7 320.03 32.74D – Textiles & Knitwear 4 360.34 59.57 19.50E – Footwear & Other Leather Articles 1 657.37 22.64 7.41P1 – Non-Ferrous Metals & Metal Products 1 302.32 17.79 5.82

Goods Intensive in Economies of Scale 5 686.60 25.43H – Printing & Publications 38.22 0.67 0.17L – Rubber Articles 215.59 3.79 0.96M – Other Chemical Products & Synthetic Fibres 631.86 11.11 2.83N – Plastic Articles 542.10 9.53 2.42O2 – Glass & Ceramics 599.26 10.54 2.68

P2 – Iron & Steel 243.91 4.29 1.09

S1 – Transport Material 3 415.65 60.06 15.28

Goods Intensive in Product Differentiation 2 354.69 10.53Q1 – Non-electrical Machines & Equipment 746.77 31.71 3.34

R1 – Electrical Machinery & Apparatus 1 607.93 68.29 7.19

Goods Intensive in R&D 2 315.28 10.35J – Pharmaceuticals 220.68 9.53 0.99Q2 – Precision Instruments 134.18 5.80 0.60

R2 – Computer Equip., Office Equipment, semi-Conductors, Telecom. Equip. 1 834.61 79.24 8.20

S2 – Aeronautics 125.81 5.43 0.56

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Table 8-12: Relative Weight of Key Competitiveness Factors in Portuguese Exports to EU15and to Accession Countries

On crossing these results with the evolution predicted for the potential behaviour of eachKCF (key competitiveness factor) (Table 8-12), it is easy to see that the Key CompetitivenessFactors that have more negative potential in trade with the EU15 are exactly those thatweigh more heavily on Portuguese exports, that is, Goods Intensive in Direct Labour and inEconomies of Scale. This stems directly from a redirection of the imports of the presentMember States towards markets further to the East, which compete on the internationalmarkets with lower-priced products (based as they are on lower production costs) and of aquality not greatly inferior (conceived or made using highly qualified human resources).Inversely, the KCFs that have more positive trade potential are exactly those that weigh less inour export structure, that is, Goods Intensive in Product Differentiation and in R&D.

As far as export relations between Portugal and the Accession Countries areconcerned (see Table 8-12), it can be seen that 4 of the KCFs have positive, high intensityaggregate evolution potential, with a focus on Direct Labour-Intensive Goods, essentially

Potential vs. Actual Weighted by the weight of each sector in the structure of Portuguese exports

EU ACOExport Model Import Model Average Export Model Import Model Average

Total -106.82 -268.55 -187.69 662.90 511.89 587.40Goods intensive in Natural Resources 18.72 -18.08 0.32 130.29 198.81 164.55A – Agriculture. Animal creation & Fishing 3.11 61.14 32.13 1.41 3.59 2.50C – Food & Beverages -19.50 4.67 -7.42 112.68 219.70 166.19F – Wood, Cork & Furniture 70.42 -32.49 18.97 13.94 -14.27 -0.16G – Pulp & Paper -30.64 -46.88 -38.76 2.25 -10.21 -3.98I – Coke & Refined Petroleum Products -3.34 -0.13 -1.74 0.00 0.00 0.00O1 – Cement & Other Construction Materials -1.33 -4.40 -2.86 0.00 0.00 0.00

Goods Intensive in Direct Labour -7.13 -216.96 -112.05 423.03 217.81 320.42D – Textiles & Knitwear -27.39 -166.73 -97.06 335.69 214.92 275.31E – Footwear & Other Leather Articles 11.57 -57.90 -23.17 73.04 0.76 36.90P1 – Non-Ferrous Metals & Metal Products 8.69 7.67 8.18 14.30 2.12 8.21

Goods Intensive in Economies of Scale -136.64 -54.25 -95.44 62.77 45.61 54.19H – Printing & Publications -0.36 0.64 0.14 0.00 0.00 0.00L – Rubber Articles -4.30 -3.96 -4.13 -1.37 -3.69 -2.53M – Other Chemical Products & Synthetic Fibres 4.49 67.67 36.08 9.02 42.62 25.82N – Plastic Articles -1.36 -2.14 -1.75 14.77 4.09 9.43O2 – Glass & Ceramics -5.41 -15.18 -10.29 7.37 1.42 4.39

P2 – Iron & Steel -3.09 49.50 23.21 0.00 0.00 0.00

S1 – Transport Material -126.62 -150.78 -138.70 32.98 1.19 17.09

Goods Intensive in Product Differentiation 6.65 11.23 8.94 -1.08 -13.87 -7.48Q1 – Non-electrical Machines & Equipment 3.59 31.92 17.75 1.75 0.77 1.26

R1 – Electrical Machinery & Apparatus 3.07 -20.69 -8.81 -2.83 -14.65 -8.74

Goods Intensive in R&D 11.57 9.52 10.54 47.89 63.53 55.71J – Pharmaceuticals -5.96 6.76 0.40 2.68 17.44 10.06Q2 – Precision Instruments -1.30 0.04 -0.63 -0.54 -0.56 -0.55

R2 – Computer Equip., Office Equipment. 22.68 5.42 14.05 45.75 46.64 46.20

semi-Conductors. Telecom. Equip.S2 – Aeronautics -3.84 -2.70 -3.27 0.00 0.00 0.00

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of Sector D (Textiles & Knitwear). This finding means that one can conclude that, with theEU enlargement, there will be a phenomenon of replacement of the destination market ofour exports, and greater emphasis will be given to the potential arising in the East.

Table 8-13: Relative Weight of Technological Intensity Levels in the Structure ofPortuguese Exports

The analysis of the composition of Portuguese exports by Technological IntensityLevels (TIL) shows (Table 8-13) a large percentage of sectors using Low Technology(44%), compared to sectors using more advanced technology. Furthermore, sectorsusing advanced technology (High Technology) are the very sectors of less relativeimportance within the context of Portuguese exports (11%).

On crossing this statistical portrait with the dynamic evolution recommended for eachsector by the gravitational approach applied throughout this chapter, one can understandthat, in terms of the Portugal-EU15 export structure, the Technological Intensity Levelsthat have the most negative trade potential are, in fact, those that have greater weightin the context of Portuguese exports, that is, the Low Technology sectors and theMedium-High Technology sectors (see Table 8-14).

With regard to the bilateral export relations between Portugal and the “new” MemberStates as a whole of the enlarged European Union, one can see that the Technological

Value of Exports Weight in the NIT Weight(2000) USD 1000 (%) of the Total (%)

Total 21 790.1416 100.00Low technology 9 639.30 44.24C – Food & Beverages 1.258.10 13.05 5.77D – Textiles & Knitwear 4.360.34 45.23 20.01E – Footwear & Other Leather Articles 1.657.37 17.19 7.61F – Wood, Cork & Furniture 1.221.94 12.68 5.61G – Pulp & Paper 1.103.33 11.45 5.06H – Publishing 38.22 0.40 0.18Medium-Low Technology 3 433.36 15.76I – Coke & Refined Petroleum Products 378.79 11.03 1.74L – Rubber 215.59 6.28 0.99N – Plastic Articles 542.10 15.79 2.49O1 – Cement & Other Construction Materials 151.38 4.41 0.69

O2 – Glass & Ceramics 599.26 17.45 2.75

P1 – Non-Ferrous Metals & Metal Products 1 302.32 37.93 5.98

P2 – Steelworks (Iron & Steel) 243.91 7.10 1.12

Medium-High Technology 6 402.20 29.38M – Other Chemical Products & Synthetic Fibres 631.86 9.87 2.90Q1 – Non-electrical Machines & Equipment 746.77 11.66 3.43

R1 – Electrical machinery & Apparatus 1 607.93 25.12 7.38

S1 – Transport Materials (excluding Aeronautics) 3 415.65 53.35 15.68

High Technology 2 315.28 10.63J – Pharmaceuticals 220.68 9.53 1.01Q2 – Precision Instruments 134.18 5.80 0.62

R2 – IT & Office Equipment, Semi-conductors & Telecomms. Material. 1 834.61 79.24 8.42

S2 – Aeronautics 125.81 5.43 0.58

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16 This figure differs from that presented in Table 8-11, in that contrary to what occurred previously, thevalue exported by Sector A - Agriculture, Animal creation and Fishing, is not included.

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Intensity Level that has the most positive trade potential is connected with thosesectors that employ Low Technology. As in the case of the KCFs, there is an effortdirected at reorienting our exports in sectors C, D, E, F, G and H to the new CommunityMarkets that will be full members of the European single market as from May 1, 2004.

Table 8-14: Relative Weight of Technological Intensity Levels in the Structure ofPortuguese Exports to EU15 and to the ACO

To sum up in a conclusive manner that reconciles the KCF and the TIL results, it canbe seen that, as a rule, export relations between Portugal and the present MemberStates will lead to a loss of competitive capacity, and, symmetrically, export relationsbetween Portugal and the Accession Countries will lead to competitive gains thatcould, to some extent, compensate for the losses with the EU15 States. This conclusion isbased on the present composition of our competitive model (little predominance ofproductive factors inducing greater value added and little incorporation oftechnological sophistication in Portuguese products) that could therefore lead to itsexhaustion within a competitive context of 27 countries.

Potential vs. Actual weighted by the weight of each sectorin the structure of Portuguese exports

EU ACOExport Model Import Model Average Export Model Import Model Average

Total -87.31 -273.22 -180.27 550.21 292.20 421.20Low technology 26.72 -242.21 -107.75 426.33 194.80 310.56C – Food & Beverages 3.11 61.14 32.13 1.41 3.59 2.50D – Textiles & Knitwear -27.39 -166.73 -97.06 335.69 214.92 275.31E – Footwear & Other Leather Articles 11.57 -57.90 -23.17 73.04 0.76 36.90F – Wood, Cork & Furniture 70.42 -32.49 18.97 13.94 -14.27 -0.16G – Pulp & Paper -30.64 -46.88 -38.76 2.25 -10.21 -3.98H – Publishing -0.36 0.64 0.14 0.00 0.00 0.00Medium-Low Technology -10.13 31.35 10.61 35.07 3.93 19.50I – Coke & Refined Petroleum Products -3.34 -0.13 -1.74 0.00 0.00 0.00L – Rubber -4.30 -3.96 -4.13 -1.37 -3.69 -2.53N – Plastic Articles -1.36 -2.14 -1.75 14.77 4.09 9.43O1 – Cement & Other Construction Materials -1.33 -4.40 -2.86 0.00 0.00 0.00

O2 – Glass & Ceramics -5.41 -15.18 -10.29 7.37 1.42 4.39

P1 – Non-Ferrous Metals & Metal Products 8.69 7.67 8.18 14.30 2.12 8.21

P2 – Steelworks (Iron & Steel) -3.09 49.50 23.21 0.00 0.00 0.00

Medium-High Technology -115.47 -71.88 -93.67 40.92 29.93 35.43M – Other Chemical Products & Synthetic Fibres 4.49 67.67 36.08 9.02 42.62 25.82Q1 – Non-electrical Machines & Equipment 3.59 31.92 17.75 1.75 0.77 1.26

R1 – Electrical machinery & Apparatus 3.07 -20.69 -8.81 -2.83 -14.65 -8.74

S1 – Transport Materials (excluding Aeronautics) -126.62 -150.78 -138.70 32.98 1.19 17.09

High Technology 11.57 9.52 10.54 47.89 63.53 55.71J – Pharmaceuticals -5.96 6.76 0.40 2.68 17.44 10.06Q2 – Precision Instruments -1.30 0.04 -0.63 -0.54 -0.56 -0.55

R2 – IT & Office Equipment, Semi-conductors

& Telecomms. Material 22.68 5.42 14.05 45.75 46.64 46.20S2 – Aeronautics -3.84 -2.70 -3.27 0.00 0.00 0.00

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That is, if it is true that without changing the intrinsic content of our pattern ofspecialisation it is probable that, in the short term, we shall secure a certain market in someof the “new” Member States as a result of the lesser development of this group of countriesand of a lesser degree of sophistication of their demand, this option would constitute an ill--considered measure in that we would also lose these markets in time, as integration of theAccession Countries becomes more complete and the intra-EU27 development levels becomemore heterogeneous. In addition to being rash, this “evolution in continuity” would be impossibleto implement since our competitive position within the EU15 would continue to deteriorate and,most probably, the costs of catching-up would be far greater, both in time and in difficulties.

That said, it would appear to us that the best solution, in that it could lead to real gainsover time, would be to sow the seeds of “sustainable change”, that is, to focus differentlyon different markets, which, in practice, involves an effort to correct the weight of themost evolved KCFs and of the most advanced TILs in our export structure in order toincrease the actual value of the Portuguese products and, consequently, theirdifferentiation from other products manufactured within the enlarged EU. During theperiod in which the bases of this change of competitive attitude are laid real gains may beachieved in the Eastern markets, though in the knowledge from the outset that when therequirements change Portugal will be prepared to face these markets also, since, in themeantime, a solid focus will already have been established on intangible factors ofcompetitiveness, minimising and even reversing the less positive situation predicted forthe evolution of trade relations with the present Member States.

In terms of Portuguese imports, the set of tables presented above (see Tables 8-29 to8-32 of the Final Report) shows that Portuguese relations with the Accession Countrieshave positive trade potential for all the Key Competitiveness Factors and for all theTechnological Intensity Levels, clearly suggesting a redirection of the markets oforigin of the products that we import to the countries situated farther East.

This affirmation can also be confirmed by viewing the trade potential shown byPortuguese imports from the present EU Member States. Indeed, on observing theevolution of the relative weight both of the KCFs and of the TILs, it can be seen that only inone of the groups in each case (Product Differentiation-Intensive Goods in the case ofthe KCFs and Low Technology in the case of the TILs) is there positive trade potential.

In this context of imports there is really no better strategy than to satisfy customerpreferences and company requirements as quickly as possible and at the lowest cost.

Competitiveness Indicator (Portuguese Exports Adequacy to Imports of the MemberStates of the Enlarged EU)

Portugal’s capacity to direct its trade to the other Member States of the enlarged EuropeanUnion depends on its ability to provide competitive exports meeting the import needs ofthese economies, that is, on its ability to adapt its products (domestic offer) so as to satisfyEuropean demand. In a context in which the talk is of trade deviation and creation betweenPortugal and its EU27 partners, we believe that the introduction of a product swap compositionindicator (COS) is important, that could act as an indicator of the degree of adequacy betweenPortuguese exports and European imports, that is, one that could indicate the extent to which“what we have to sell to Europe” is or is not “what Europe wants to buy”17.

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17 COS figures lie between 0 and 1. Therefore, if the composition of exports by product for country i is identi-cal to the import structure of country j, the structures match perfectly and consequently not only is there apossibility of trade between the partners but also the intensity of the expected trade is high.

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The analysis undertaken, using average cosines shows that Portugal, in terms ofrelative position, stands at the bottom of the table. It has the lowest average cosine (0.57)of the countries having COSij>0.5, meaning, on the one hand, that approximately 2/3 ofour exports have the potential to satisfy European demand within the context of anenlarged Europe and, on the other, that more than 40% of our exports have no intra-EU27market potential. If to this we add the finding that there are Eastern European countries(the Czech Republic, to a greater extent, and Poland and Slovenia, to a lesser extent)whose export vectors already have a degree of adequacy greater than ours in respectof European imports, it is possible to gauge the need for changes to our competitivemodel, more specifically, a need to change the relative weights of the variouscategories of products of our export vector, focusing increasingly on products ofgreater value added (more differentiated or more R&D intensive) able to “thrive” in theEuropean market.

Looking, now, at Portuguese exports within the EU15 context, it can be seen thatPortugal has no cosine greater that the maximum of the average cosines, that is, ourproducts have more or less transverse characteristics that have the potential to satisfy apart of European demand, but there is no country with the capacity to become the primedestination market for our exports (COSij>0.8), which, in practice, points to insufficientdifferentiation of Portuguese products compared to those produced in other Europeancountries and, in wider terms, to a change of competitive positioning and of the valueincorporated into the offer provided by Portugal.

Chart 8-1: Adequacy Rankings of the Export and Import Structures in the Enlarged Europe(EU27)(*)

(*) The various countries are represented by points the size of which is proportional to their population, to theextent that the international specialisation structures, while reflecting the degree of industrialisation andcompetitive development of the various national economies, also reflect the differences between the “large”,the “small” and the “very small” economies.

0 5 10 15 20 25

COS(X) Ranking EU-27

0

5

10

15

20

25

COS

(M) R

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Netherlands

Denmark

GermanyAustria

Belgium-Luxemburg

United Kingdom

France

Czech Rep.

Italy

Lithuania

Bulgaria Ireland

Romania

Malta & Cyprus

Finland

Latvia

Estonia

Spain

Greece

Sweden

Slovakia

HungaryPoland

Slovenia

Portugal

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Turning to the characteristics of Portuguese import demand within the context ofthe EU15, the emphasis is on the high capacity of the products exported by Spain,France and Germany to meet the preferences of Portuguese consumers (when dealingwith end-consumer products) and the needs of industry (in the case of intermediateconsumer goods), in that more than 5/6 of the exports from these countries have marketpotential in Portugal. At the opposite extreme, Ireland and Finland, countries that areclearly engaged in the export of technologically-advanced, R&D-intensive products, areseen to be the countries whose exports are less suited to Portuguese demand, indicatingthat the preferences and needs that have to be satisfied in our country have not yetreached the demand patterns seen in other European countries.

Considering Portugal’s relations with the new acceding countries in terms of tradepotential, it can be seen that Portuguese products have greater market potential inSlovenia, the Czech Republic, Romania, Estonia and Poland. If, on the other hand, welook at the degree of adequacy between ACO exports and Portuguese imports, it can beseen that the Czech Republic, Slovakia and Slovenia have an export vector with highmarket probability in our country, since 3/4 of the products exported by these countriesare, indeed, products that Portugal looks for abroad.

Chart 8-2: Adequacy of the Export and Import Structures in the Enlarged Europe (EU27)(*)

(*) The various countries are represented by points the size of which is proportional to their population.

To sum up, Portugal occupies one of the last positions among the present MemberStates, in terms of exports (poor qualitative seller, and therefore little capacity to satisfyEuropean demand) and one of the leading positions in terms of imports (major purchaser).

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8.2 Results of the Approach based on a Macro-econometric Model: the “Shocks” ofEnlargement over the 2004-09 Horizon

The fundamental aim of this section is to analyse the enlargement effects on a set ofmacroeconomic balances of the Portuguese economy, such as growth, employment,public accounts, foreign accounts and the performance of prices.

The exercise involved the use of a macro-econometric model – MACRO-2002 –designed to model exogenous or endogenous shock transmission mechanisms and/orPortuguese economic or structural policies, so as to assess the respective direct, indirectand induced effects, both at macroeconomic level and at the level of the respectiveregional and sectoral impact.

Within the framework of this quantification exercise, evaluation of macroeconomicimpacts took into account four types of effects stemming from EU enlargement: globalenlargement effects on the European internal market (gains of efficiency and increasedcompetition); trade creation and deviation effects; effects on the movement of factors(alterations to foreign direct investment flows and to migratory flows of assets); andrestrictive effect on Community financing for Portugal during the coming financialframework, 2007-13 (reduction of the level of investment induced by the structural funds).

Evaluation of Macroeconomic Effects resulting from Enlargement

Having established in the foregoing sections the main shocks and the respectivequantification, as well as a number of other aspects relevant to the exercise involvingevaluation of macroeconomic effects resulting from enlargement, one can now proceedwith an evaluation of these impacts.

The simulations involve consideration of four overall scenarios of impact of theenlargement that stem from the four scenarios connected with the impact of theenlargement on Portuguese foreign trade, and they are combined with the FDI flowscenarios, while the hypotheses of quantification of the other shocks are kept constant:

• Passive Dynamics (“Flow Taker”) Enlargement Scenario: this scenario is theresult of combining the corresponding scenario connected with the impact ofenlargement on exports with the low scenario in terms of FDI flows – it is the“worst” enlargement impact scenario;

• Passive Dynamics (“Flow Taker”) Deepening + Enlargement Scenario: thisscenario is the result of combining the corresponding scenario connected with theimpact of enlargement on exports with the medium scenario in terms of FDI flows;

• Active Dynamics (“Flow Maker”) Deepening + Enlargement Scenario: thisscenario is the result of combining the corresponding scenario connected withimpact of enlargement on exports with the medium scenario in terms of FDI flows;

• Active Dynamics (“Flow Maker”) Enlargement Scenario: this scenario is theresult of combining the corresponding scenario connected with impact ofenlargement on exports with the high scenario in terms of FDI flows – it is the“best” enlargement impact scenario.

The initial simulation of the impacts of enlargement, in the four scenarios, considersthat the shocks are implemented as an overall alteration at the initial moment and remainon a permanent basis, except in those cases in which the shocks are estimated perannum, as in the case of FDI and Community funding.

The scenarios with a negative impact on exports are then combined with 3 scenariosper response pattern of Portuguese exports to the shock of enlargement, in which the

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following alternatives are considered with regard to the time pattern of the shock and/orreaction of the economic agents to the enlargement shocks, in an endeavour to illustratetheir influence on the results:

• Scenario 1 (readjustment): between 2004 and 2007 exports see an overall declinecorresponding to the effect estimated using the gravitational model in the variousscenarios, followed by a readjustment of the conduct of those economic agents able tofind the means to offset the lost competitive capacity, culminating in a situation inwhich, in 2009, exports will have recovered to a trend higher than that prior toenlargement;

• Scenario 2 (definitive loss): between 2004 and 2007 exports see anaccumulated loss corresponding to the effect estimated using the gravitationalmodel in the various scenarios, the loss being definitive; and

• Scenario 3 (temporary loss): between 2004 and 2007 exports see an overall declinecorresponding to the effect estimated using the gravitational model in the variousscenarios, then recover in 2009 to a trend equivalent to that prior to enlargement.

The scenarios with a positive impact on exports are, in turn, combined with an exportresponse pattern whose trend is more realistic, to the extent that, implying an alterationto the production specialisation of the Portuguese economy and to the very trading modelof the exporting companies, a time pattern of the “big bang” type cannot be simulated,rather a time pattern of the “mounting wave” type. In these simulations it is assumed thatexports will initially suffer a decline equal to that of the Passive Dynamic (“Flow Taker”)Deepening + Enlargement Scenario, but that, in view of the adjustment of the conduct ofthe economic agents, a start is made to a trend of progressive catching-up allowing themto achieve, by the end of the period, the gain indicated by the gravitational models of theimport flows of our EU 27 partners. For each scenario the impacts of enlargement on a setof macroeconomic balances of the Portuguese economy are retained: GDP growth,evolution of the unemployment rate, and balance of trade as a percentage of GDP.

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The major macroeconomic scenarios of the enlargement impact

The results of the simulation undertaken using the MACRO-2002 model to assess thecombined effects of the enlargement shocks considered in this approach are presentedhereunder.

Chart 8-3: Scenario A Passive Dynamics (“Flow Taker”) [Negative Enlargement]Impacts of Enlargement on GDP, Unemployment & Balance of trade

(annual effects)

(cumulative effects)

Source: Project Team

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Chart 8-4: Scenario BPassive Dynamics (“Flow Taker”) [Deepening + Enlargement]Impacts of Enlargement on GDP, Unemployment & Balance of trade

(annual effects)



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Chart 8-5: Scenario CActive Dynamics (“Flow Maker”) [Deepening + Enlargement]Impacts of Enlargement on GDP, Unemployment & Balance of trade

(annual effects)



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Chart 8-6: Scenario DActive Dynamics (“Flow Maker”) [Positive Enlargement]Impacts of Enlargement on GDP, Unemployment & Balance of trade

(annual effects)



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Chart 8-7: Impacts of Enlargement on GDP considering three patterns of behaviour ofPortuguese exports

Scenario A Scenario B

Chart 8-8: Impacts of Enlargement on the Unemployment Rate considering three patternsof behaviour of Portuguese exports


Chart 8-9: Impacts of Enlargement on the Balance of Trade considering three patterns ofbehaviour of Portuguese exports



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Chart 8-10: Impacts of Enlargement on GDP considering progressive readjustment ofPortuguese exports

Scenario C Scenario D

Chart 8-11: Impacts of Enlargement on the Unemployment Rate considering progressivereadjustment of Portuguese exports


Chart 8-12: Impacts of Enlargement on the Balance of Trade considering progressivereadjustment of Portuguese exports



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The results of the simulations using the MACRO-2002 model to assess the effects ofthe set of enlargement shocks considered in this approach, presented in a systematicmanner in the foregoing tables and charts, provide a significant number of conclusions onthe macroeconomic impact of enlargement on the Portuguese economy over a medium--term horizon (2004-09), particularly:

• the macroeconomic impact of enlargement on the Portuguese economy can stillbe considered to a large extent as an ongoing process that will surely be negativefor production, for employment and for the unemployment rate, if Portuguesecompanies do not alter their trading models (towards a fuller involvement in therespective value chains and a more dynamic role in markets of greater geographicand economic proximity, though it could be positive if, on the contrary, such analteration of the business models is quick enough and, above all, sufficient tosatisfy in quality, price and specifications the demand requirements of themarkets of our European partners in which the enlargement creates betteropportunities;

• the macroeconomic impact of enlargement on the Portuguese economy can alsobe considered a process that ought to be assessed within the framework of itslinkage and inter-penetration with the deepening, that is, the results obtainedthrough the comparison of the gravitational models for 15 and for 27 countries aresufficiently expressive to lend greater credibility, not only to the scenarios of“pure” enlargement but also to those scenarios in which lessons of experienceact as moderators of the worst expectations (Scenario B) or of the bestexpectations (Scenario C);

• the macroeconomic impact of enlargement on the Portuguese economy can beestimated, in this framework, as leading to a situation in accumulated (2009)Gross Domestic Product terms of somewhere between a loss of 2.1% and a gainof 0.6%, although the most credible scenarios suggest an interval between a lossof 1.5% and a gain of 0.3%. The results suggest, with considerable certainty, astrong probability of the enlargement generating within the Portugueseeconomy, even in a framework of taking considerable advantage of itsopportunities, a negative impact on economic growth over a time horizon up tothe end of the decade;

• the macroeconomic impact of enlargement on the Portuguese economy can beestimated, in this framework, as leading to a situation in accumulated (2009)employment and unemployment terms of somewhere between a loss of 2.3%and a gain of 0.1%. The results suggest, with considerable certainty, a strongprobability of the enlargement generating within the Portuguese economy, evenin a framework of taking reasonable advantage of its opportunities, a negativeimpact on employment and unemployment (the median point of the mostprobable scenarios suggests an increase of about 54,000 jobless);

• the simulations of the trends of response to the most negative shocks of loss ofexport share (Scenarios A & B) are sufficiently expressive to constitute groundsfor an absolute need to combat any prospect of passive adaptation, which wouldconvert these shocks into definitive losses, through active readjustmentprocesses that, in addition to their specific difficulties, might not fully offset theinitial negative shocks; and

• the simulations of the trends of response to the most probable negative shockof loss of export market (Scenario B) through readjustment processes able tolead the Portuguese economy to taking full advantage, in 2009, of the positive

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opportunities suggested by the import models of our partners are quiteexpressive, leading to a potential accumulated gain in Gross Domestic Product ofbetween 1.5% and 2.2%. In our view, this result constitutes grounds for theimportance and relevance of adopting relatively radical changes to theorientation of public policies in support of corporate development able todecisively stimulate the said changes to the prevalent business models,particularly in keeping with the objectives of the “Lisbon Strategy”, directedtowards innovation, technological development and real generation of newskills in learning processes, and towards a dynamics of internationalisation,exports and distribution capable of lending Portuguese companies greaterinitiative in the “production” of trade flows.

Evaluation of the Sectoral Impact of the Enlargement: an Approach based on theIntersectoral Relations Matrix

Secondly, an estimation was undertaken of the sectoral impacts stemming fromenlargement on the performance of value added (GVA at constant prices), sourced in themajor sectors of activity under consideration, from a standpoint of obtaining a sectoralview able to clarify the positioning of its specific evolution in the global macroeconomicframework estimated in the first step. The modelling instrument used was the input-output approach based on the most recent inverse matrix of national productioncoefficients (“Leontief inverse matrix”) available through the national accounts system ofthe National Statistics Institute. The sectoral impact study is completed with a regionalview of the implications of the impacts in view of the structure of the activities of eachregion.

Evaluation of the sectoral impact of the enlargement is undertaken using intersectoralrelations matrices, that is, tables that record the relations established between theproductive sectors of a given economic area over a fixed time span with the sales madeby each sector to meet end demand and the primary inputs used. Multi-sectoralmodelling adapts to an evaluation from a perspective of fluctuation of production directedat the various sectors of activity that can be satisfied by domestic or foreign companyproduction, in an endeavour to determine increases of value added (GVA) that can in thisway be directly or indirectly attributed to the enlargement.

On the basis of quantification of the effects described above, one can simulate thesectoral effects stemming from enlargement. The results in terms of differences, inpercentage points, of the GVA of the various sectors, attributable to enlargement,considering the medium FDI scenario, are presented in Chart 8-13 and Table 8-15.

The results show that the essential part of the negative potential sectoral impact ofenlargement is concentrated in secondary activities, that is, in construction and,particularly, in industry, where the threat can be quantified as an 8% reduction of valueadded and as a loss of about 85,000 jobs (in construction, declines are a few less than3% for GVA and about 13,000 for jobs). The remaining activities have weak or moderatetendentiously positive growth impacts, leading to an overall negative effect that can beestimated as a reduction of about 1.8% of the GDP and of about 84,000 jobs.

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Chart 8-13: Sectoral Impact of enlargement (Variations to GVA by Volume and to Employment in the Sector)


Table 8-15: Sectoral Impacts Induced by Enlargement (results of simulations using the multi-sectoral model)


A Regional View of the Sectoral Impacts

The analysis therefore uses the sectoral impacts on value added, calculated in theprevious section, and calculates the regional impact on the basis of the sectoralspecialisation on the activities of each region, providing an understanding of the regionalconsequences in terms of the indirect potential of enlargement.

Activities GVA EMPLOYMENT

difference in percentage points difference in thousands

Primary activities 0.1 0.400Industry -7.9 - 85.461Construction -2.7 - 12.707Commerce 0.8 5.340Tourism -0.3 - 0.656Transport 0.9 1.331Services 0.5 7.491

Total -1.8 - 84.261

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Chart 8-14: Regional View of the Sectoral Impacts of Enlargement(Variations to GVA by Volume and to Employment in the Region)

Table 8-16: Regional View of the Sectoral Impacts of Enlargement(results of simulations using the multi-sectoral model)

Scenario 1 (C1): The sectorial effects on GVA are split in accordance with the sectorial structure of theGVA of each regionScenario2 (C2): The sectorial effects on GVA are split in accordance with the sectorial structure of theGVA of each region corrected for productivity differencesSource: Project Team

The estimate of the regional impact of enlargement, based on information provided by thevarious sectoral impacts, also took into account determination of the “productivity effect”, thatis, since in the same activity there can be appreciable differences in the various Portugueseregions, the sectoral effects were viewed taking these differences into account. Thiscorresponds to considering the hypothesis that the negative sectoral impact will be all thestronger (weaker) the lower (higher) the region’s sectoral productivity.

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on GVA (%) on Employment (thousand)

Effect of Enlargement C1 C2 productivity C1 C2 productivityeffect effect

North -2.34 -3.27 -0.93 -37.143 -51.931 -14.788Centre -2.25 -1.79 0.46 -17.549 -13.934 3.615Lisbon & Tagus Valley -1.00 -0.77 0.24 -16.465 -12.586 3.879Alentejo -0.82 -0.85 -0.04 -1.713 -1.787 -0.074Algarve -0.25 -0.41 -0.16 -0.413 -0.678 -0.265Azores -0.49 -0.99 -0.50 -0.508 -1.027 -0.519Madeira -0.38 -2.04 -1.66 -0.438 -2.344 -1.906

Total -1.50 -1.83 -0.33 -74.229 -84.287 -10.058

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Chart 8-15: Regional View of the Sectoral Impacts of Enlargement(Variations in GVA by Volume and in Employment in the Region)The effect of productivity on moderating or worsening the regional impact of Enlargement


The regional view allows a clear hierarchy to be established of the potential indirectimpacts within the 7 regions under consideration. Indeed, the results of this regional viewof potential sectoral impacts of enlargement lead to the following conclusions:

• as a result of its industrial specialisation and low productivity the North regionappears as the “great problem region” in which the threat can be quantified as a3.3% reduction of value added and a loss of about 52,000 jobs;

• the Centre region, which has a specialisation structure similar to that of the Northregion though with greater productivity in those activities under greater threat,benefits from this “productivity effect” in minimising the negative impact,which can be estimated as a 1.8% reduction of value added and a loss of about14,000 jobs;

• the Madeira region appears as the reverse of the Centre region, that is, despitehaving a more favourable sectoral specialisation structure, the lowerproductivity in those activities under greater threat means that the threat ofenlargement is all the greater and can be quantified as a 2% reduction of valueadded and a loss of about 2300 jobs;

• the Lisbon region benefits both from its specialisation and from its higherproductivity in the most threatened activities achieving a fairly small negativepotential impact, that is, a reduction of value added of about 0.8% with a loss ofabout 12,000 jobs;

• the other three regions have similar but even more moderate potential negativeeffects.

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9. ECONOMIC POLICY RECOMMENDATIONS

The analysis was designed to establish, in a complete, deep and detailed manner, thegrounds for the construction of an integrated overview of the major characteristics of thecandidate countries – within the dynamic framework of their transition to democracy andto market economy – of the certain, probable and predictable transformations of theEuropean Union brought about by enlargement, and of the qualitative and quantitativeoutlines of the respective impacts, be they general (at Community level) or specific anddifferentiated (at national, regional and sectoral level).

Against this background, a special attention, required by study reasons, paid both tothe qualified characterisation of the “game” of threats and opportunities that enlargementmay bring to the Portuguese economy and to the conditions and instruments of publicpolicy necessary to successfully streamline them and to take advantage of them,respectively, was carried out with regard to the general framework described above.

Public policy recommendations were drawn up on the basis of two relevant assumptions,in addition to a concern for feasibility, to be detailed prior to their presentation:

• challenges of enlargement require an additional effort of coherence andarticulation between national and Community policies that, in the case ofPortugal, is even more important given the special difficulties and therequirements of budget rigour and of innovation in action instruments and goalsdemanded by the Portuguese authorities as a result of the preparation for the nextcycle of financial framework for 2007-13 (the new competitive pressures on thePortuguese economy imposed by enlargement require profound structuralreadjustments); and

• modern public policies will have to be developed within a renewed framework ofconception of the action of public powers, in which the quality of rules andregulations, underpinned by transparent strategies capable of “rendering accounts”,will clearly take the place of discretionary interventionism, and in which a newgeneration of horizontal and structural policies will induce new forms of enhancementof efficiency and cohesion at the most decentralised level (the microeconomy, atmarket level, and the local and regional spheres, at territorial level).

The approach used conceives public policies, in this framework, in direct articulationwith private strategies and conduct, that, in a context of progressive development of areasoning of partnership and co-operation, is able to adequately articulate the progressmade at political-institutional level (quality of the democratic systems) and at economiclevel (efficiency and equity in market economies).

Although they do not establish the public powers as the major players in responding toenlargement challenges – the role is, at heart, of citizens and companies fully involved in theprocesses of qualification and responsibility – the recommendations presented herein doprovide an agenda of targets and measures of decisive importance in overcoming difficulties,very considerable in the Portuguese case, and in taking advantage of opportunities, onlypossible in the Portuguese case should there be substantial gains in the fields of acceptingrisks, taking the initiative and accelerating internationalisation.

9.1 Enlargement Challenges on the Agenda of Great Strategic Guidelines for theEuropean Construction

As we have seen, enlargement of the European Union poses a number of challenges,addressed throughout this study in a manner as complete and profound as possible, of

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greater or lesser complexity, some more direct and specific pursuant to their strictpreparation and implementation, others more indirect and general pursuant to theirarticulation with the pursuit of the deepening process.

The starting point of recommendations, in respect of the reorientation of publicpolicies set out in this report is the systematisation of these two kinds of challenges. Theobjective is to identify major lines for strategic and operational response totransformations required in the design and implementation of public policies tosuccessfully face up to problems, needs and opportunities raised by enlargement.

9.1.1 Major Enlargement Challenges

European Union enlargement challenges have already been systematised in theconclusions of the study. It is now a question of processing them and presenting themfrom a standpoint of public policies organisation, i.e., focusing on the organisation of thepublic decision process, on the nature of major objectives and goals, and, above all, onintervention areas adequate for responsibilities that can and should be assumed bypublic powers at Community, national and regional level.

First and foremost, European Union enlargement is a deep alteration in the dimension,geographic area, population (383.6 million inhabitants in EU15, 457.6 million in EU25 and559.37 million in the probable EU28), in institutional terms (the operation of a supra--national government involving 25 or more States is the main negotiating difficulty of thefuture constitutional framework) and, lastly, in terms of economic and socialresponsibilities facing citizens and governments (the enlarged Europe will see an 8.2%decline in the average life span, a 12.3% decline in PPS in current euros, and a significantburst in its imbalances and internal inequalities).

In the second place, European Union enlargement constitutes a new form of overallinsertion into competition processes and the restructuring of economic activities as a resultof the acceleration of globalisation and of technological development, with major repercussionson the organisation of cultural models, life styles and global demographic cycles. The majorchallenges for public policies posed by EU enlargement are pinpointed hereunder.

• DiversityThe increasing diversity in the various regional and national economic areasforming part of an enlarged Europe, particularly in respect of specialisation,competitive models, living standards and consumption models, wages andqualifications and productivity levels will, at least in the first stage, still beleveraged by the need to face global challenges and to strive for internationalinvestment primarily through access to public promotion infrastructure and“fiscal competition” models.

• ComplexityAs emerges from the study, the EU25 (EU27 or EU28) area will be far morecomplex than the EU15, which was already more complex compared with the EEC6(or EEC9). This enlargement will likely bring about a new “quality” linked to theconsiderable heterogeneity achieved that will be able to create a lastingcombination of processes of integration “at various speeds”, rather than theknown experience of processes of integration referred to a reasonably common“standard” and “speed”. The new challenges for national and Community publicpolicies are therefore fundamental, especially with respect to their specialisationand co-ordination, on the one hand, and to their selectivity and multi-dimensionalnature, on the other.

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• GovernabilityThe enlarged EU clearly appears as an economic, social, institutional and politicalarea where the issue of government forms and model is of the utmost importancefor the adequate management of predictable impacts of this enlargement. In fact,a new twofold challenge would emerge, that of centralising and co-ordinatingcertain policies at European level, to meet greater complexity, and that ofdecentralisation and autonomy of other policies at national and regional level tomeet greater diversity.

• Cohesion Promotion of cohesion, in its threefold meaning of economic, social and territorialcohesion, constitutes a milestone for the European construction anchored onprinciples and mechanisms of the objectives and motivations of redistributionand correction of imbalances and disparities that have shaped the development ofmodern public policies within economic and social scope. This enlargement raisesnew challenges for cohesion policies, both at Community level (in which, inaddition to responding to the significant increase in internal lags and, therefore, tothe significant increase in the required budgetary redistribution effort, it shouldprogressively involve dynamic processes designed to render feasible fast,sustainable means of economic growth), and at national and regional level (inwhich enlargement “shocks” within the “old and the “new” Member States, will bequite asymmetric, requiring new cohesion promotion instruments to be tried andtested).

• Economic GrowthBy creating a potential for economic growth in the Union through gains ofefficiency stemming from the dimensional enlargement of the internal Europeanmarket, enlargement requires, at one and the same time, that these conditions betransformed into results. Indeed, in the absence of a new cycle of faster, sustainedand relatively lasting economic growth, this enlargement will hardly be able torespond to motivations and expectations that have justified and fed it (this, too, isa significant challenge in the short term, in that enlargement, preparation of whichbegan during an upward stage of the “business cycle”, is actually taking place ata time of economic growth crisis).

• ConvergenceThe main condition for successful processes of economic and social integrationresides, perhaps, in the production of economic and social convergenceprocesses. The empiric evidence of the EU15, taking into account the differingconcepts of convergence, reveals imbalances between results achieved atcountry level (better) and at regional level (not as good, with various intra--national speeds and regional development models). To these imbalances mustbe added, upon enlargement, new issues of nominal and real convergence, to theextent that disparities do not allow economic convergence within the EU to beviewed as a more or less simple, automatic catching-up process.

• SustainabilityThe enlargement also raises new issues in the “sustainability” area, speeding upthe urgency of definitively setting aside partial short-term visions (attempting tolessen the damage caused on natural resources and to maintain social protectionlevels, without, however, truly questioning the economic and institutional aspectsthat lead to “unsustainability” phenomena) to construct and put into practice astrategic overview (based on in-depth structural reforms both in economic

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organisation models and in processes involving public policy “re-engineering” or“redesign”, able to establish respect for the environment and the nature and topromote social cohesion as endogenous – built-in – characteristics of economicdevelopment, underpinned by consistent information in the medium and longterm and by adequate pricing and regulatory systems).

Enlargement challenges also represent challenges of articulation betweenenlargement and deepening, i.e., overall challenges for the European construction. Themanagement of these problems and challenges will be made throughout the time, in aEurope at various speeds involving countries moving forward at different speeds, someof which also with regions at different speeds. Taking into account that the managementof these various “speeds” was already important in EU15, it is absolutely crucial in anenlarged EU both from the standpoint of the European reality and from the standpoint ofthe national realities.

This enlargement “instils” complexity and diversity as permanent characteristics ofthe “new” European Union.

Enlargement, albeit addressed in a partial dimension more focused on economic andsocial aspects, does not allow the non-enhancement of aspects that are more strictlypolitical and institutional enhanced, especially those having to do with identification ofwhat is governed at European level and what is governed at national level: the process ofenlargement brings with it the need to clarify sovereignty problems.

Joint management of diversity and additional complexity requires enhanced modelsof political governance and legitimation of a downward trend, i.e., dominated bydecentralisation and by the construction of governability based on proximity, and of anupward trend, i.e., dominated by the strengthening of the co-ordination of choices anddecisions. However, both improvements to governability require better-educated andinformed and more able citizens, companies and organisations.

9.1.2 Strategic Guidelines for the European Construction and the Challenges in theEnlargement Process: Major Guidelines

Recommendations, in the field of public policies, arising from major conclusions ofthis study, presented in a systematised manner in this chapter, were drawn up within aframework that deliberately gave pride of place to articulation between enlargement anddeepening processes, on the one hand, and public policies of a national base and those ofa Community base, on the other.

As we have observed, enlargement is closely linked with European Union deepening,which raises problems, challenges and opportunities of a general and strategic naturewithin the scope of which the specific “shocks” to each country in particular take shapeand gain dimension. In addition to the respective characterisation emerging from theeconomic, social and political “rationale” present in the enlargement process (cf. analysisof motivations in the chapter dealing with conclusions), these problems, challenges andopportunities have warranted increasing attention from Community authorities. This isreflected very particularly in the positions and proposals adopted by the EuropeanCommission in almost every intervention area for which it is responsible.

Systematisation of these major strategic guidelines produced by the EuropeanCommission, in articulation with the Council, especially in respect of incorporation of theenlargement process in the European construction, thus naturally constitutes thestarting point for our recommendations:

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“The gap with the EU average is still wide and in spite of experiencing higher growthrates than EU countries over the past few years the progress in catching-up with theEU in income levels has been limited in most acceding countries. Catching-up inincome levels is a long-term process, but the challenge is to speed up the narrowingof the productivity gap and the gap in employment rates between the accedingcountries and the EU Member States. (...) The Lisbon strategic goal of “becoming themost competitive and dynamic economy” remains unchanged in an enlarged Union.Yet the Lisbon targets are likely to be more difficult to achieve, simply because inmost cases the average EU starting base is statistically lowered by the fact that mostacceding countries are less well placed vis-à-vis the Lisbon targets than the existingMember States. It should also be recognised, though, that at least in some areas anumber of acceding countries are already equally or even better placed than (some)present Member States. (...) The acceding countries have, in particular relative totheir income levels, achieved high levels of educational attainment. However, they lagsubstantially behind present Member States in regard of the transition to aknowledge-based economy as reflected by lower investment in R&D. In regard ofeducation, the lack of high skilled labour could indicate potential long-term difficultiesin the light of the Lisbon agenda”.

in “Key structural challenges in the acceding countries: The integration of the acceding countriesinto the Community’s economic policy co-ordination processes”,Economic Policy Committee (EPC), European Economy, Occasional Papersnº4, July 2003

“Enlargement will contribute to new economic dynamism with mutually reinforcingeffects. (...) With income levels of less than half of those of the EU-15 on average, themain challenges for the acceding countries are to secure real convergence in the longrun, whilst at the same time achieving nominal convergence in the short to medium-term. (...) The structural challenges faced by the new Member States do not differfundamentally from those of the present ones, even if some challenges are moredemanding. The existing economic policy strategy would thus appear to be broadlyappropriate. The scale of the challenges faced by these countries makes it crucial tofind an appropriate balance between different policy requirements. For instance, inview of the still incomplete structural shift to a modern service oriented marketeconomy, most acceding countries need to pursue policies favouring realconvergence”.

in “Commission Recommendation on the 2004 update of the Broad Guidelines of the EconomicPolicies of the Member States and the Community (for the 2003-2005 period)”,COM (2004) 238, April 2004

“The accession of ten more countries also adds a dimension of complexity andheterogeneity that was not present in the previous round. At that time, enlargementincreased the number of members by one third, whereas now the EU faces acumulative doubling of its membership.Because of the gap in income, convergence between the new Member States and thecurrent EU members is more than ever the key to successful enlargement. Neithertheory nor the experience of earlier enlargement convincingly supports a hypothesis

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of automatic convergence. Convergence occurs only in the presence of certain keygrowth factors and supporting policies. (...) On the one hand the new Member States haverelatively high levels of human capital. On the other hand, they have a legacy of oldindustrial investment, environmental damage and poor public administration to remedy.The new Member States are not only poorer; they are also structurally different. Againstthis background, it may be assumed that their economic priorities can differ, not only fromthose in the EU15, but also among themselves. This poses a double challenge withrespect to EU wide macroeconomic policy: first, how to ensure the necessary degree offiscal discipline and co-ordination in a grouping of 25 countries with quite diversemacroeconomic and structural characteristics; and, second, how eventually to conduct asingle monetary policy in a euro area with increased economic heterogeneity”.

in “AN AGENDA FOR A GROWING EUROPE, Making the EU Economic System Deliver”,Report of an Independent High-Level Study Group established on the initiative of the President of the European Commission,July 2003

“The recent lacklustre economic performance confirms the need for our ambitiousLisbon agenda for economic, social and environmental renewal. These reforms mustbe vigorously pursued, so that their contribution to raising Europe’s growth potentialcan now be felt. Reform at a national and European level is essential, but notenough on its own to consolidate progress. It must be backed by action now torekindle investment. This action should reinforce the Union’s capacity to grow andcontribute to setting it on a sustainable path.(...) The European Council last October therefore called on Member States to maintainsound macroeconomic policies, accelerate structural reforms and promoteinvestment in networks and knowledge. It highlighted the importance of speedingup the roll out of European transport, energy and electronic communication networksand of increasing investment in human capital. These are crucial steps to boostgrowth, better integrate an enlarged Europe and improve the productivity andcompetitiveness of European businesses on global markets.(...) This Initiative seeks to mobilise investment in areas that will reinforce on-goingstructural reforms, stimulate growth and create jobs. Energy and transport links areneeded to bind together an enlarged internal market and to promote greatergeographical and social cohesion. Broadband communications can provide aphysical backbone for bringing the knowledge economy to every part of the Union.Boosting our ability to generate and use knowledge – be it through science, skillsor people - is the key to ensuring that European businesses can continue to innovateand compete and that our citizens can participate more fully in society”.

in “A European Initiative for Growth, Investing in Networks and Knowledge for Growth and Jobs”,Communication from the Commission, COM (2003), 690 final,November 2003

“The enlargement of the Union to 25 Member States, and subsequently to 27 or more,will present an unprecedented challenge for the competitiveness and internalcohesion of the Union ..., enlargement will lead to the widening of the economicdevelopment gap, a geographical shift in the problem of disparities towards the east

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and a more difficult employment situation: socio-economic disparities will double andthe average GDP of the Union will decrease by 12.5%.At the same time, the whole of the Union faces challenges arising from a likelyacceleration in economic restructuring as a result of globalisation, trade opening, thetechnological revolution, the development of the knowledge economy and society, anageing population and a growth in immigration.(...) Cohesion policy is also necessary in a situation where other Community policieshave important benefits combined with limited but localised costs. Cohesion policyhelps to spread the benefits. By anticipating change and facilitating adaptationcohesion policy can help to limit the negative impacts.For this reason, Cohesion policy in all its dimensions must be seen as an integral partof the Lisbon strategy, even if today, as the Commission pointed out in the financialperspective, the policy design underlying Lisbon needs to be completed and updated.In other words, cohesion policy needs to incorporate the Lisbon and Gothenburgobjectives and to become a key vehicle for their realisation via the national andregional development programmes”.

in “A new partnership for cohesion, convergence competitiveness cooperation”,European Commission, Third Report on Economic and Social Cohesion,February 2004

“The share of the services sector in EU output has increased from 52% in 1970 to 71%in 2001, while that of manufacturing has decreased from 30% to 18% in the sameperiod. As a result of this “tertiarisation”, policy makers’ attention has not maintaineda sufficiently strong focus on manufacturing, comforted by the widespread, buterroneous, assumption that in the knowledge economy and the information andservice societies manufacturing industry no longer plays a key role.(...) Although industry in the future Member States is broadly ready to compete in anenlarged EU, deeper integration will inevitably entail some localised problems.Further restructuring will be necessary, particularly in the steel sector where over-capacity problems remain. In other traditional sectors, large firms that have not yetbeen privatised are finding it difficult to deal with increased competition.Furthermore, in a number of areas or sectors, the cost of complying with theCommunity ‘acquis’, especially environment legislation, may in the short termhave negative implications for the cost structure of businesses, although transitionperiods should help alleviate this problem and candidate countries will more easilyaccess sustainable technologies from current Member States. Entrepreneurship and SMEs have developed slowly in the candidate countries.Amongst the causes of this situation are the lack of managerial, organisational andtechnological know-how, difficult access to finance, insufficient supportinginstitutions and difficulties to integrate in production networks. In some countries,the business environment still makes life too difficult for smaller businesses. Supportin particular to SMEs in meeting the challenges of contemporary societal andenvironmental demands would be crucial in ensuring that they too can fully benefitfrom the advantages of a stable, accepted and predictable business environment”.

in “Industrial Policy in an Enlarged Europe”, Communication from the Commission to the Council,the European Parliament, the Economic and Social Committee and the Committee of the Regions,COM(2002) 714 final,December 2002

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“Since March 2000 the Lisbon strategy has provided the Union with an effectivegovernance tool and an appropriate action framework for achieving its goals. Theoverall progress already made in four years is proof of this. However, despite theseinitial positive and encouraging results, there is still much to do to achieve the aimsthe Union has set itself for 2010. An analysis of the progress made highlights therelatively positive developments but also the major problems which need to betackled urgently.(...)The Commission’s analysis identifies four factors: the need for public finances tobe viable, the unsatisfactory contribution of employment and productivity togrowth, the disappointing development of the internal market and, finally, the lackof sustainability of growth. “By way of defined common objectives, the Lisbon strategy should give powerfulimpetus to the convergence and integration elements underpinning enlargement.These objectives thus remain perfectly valid and relevant in terms of the Union’soverall development. A further point to emphasise is that the Lisbon strategy can insome ways be seen as an extension of the structural reforms already accomplishedby those countries over a period of ten years and more, and as a catalyst for the workstill to be done to attain the current standards and performance of the Union. (...) The analysis of the current situation enables a distinction to be made betweenMember States with relatively better overall achievements to date (Denmark,Luxembourg, the Netherlands, Austria, Sweden and the United Kingdom) and thosethat — according to the latest data available — are performing relatively poorly(Greece, Spain, Italy and Portugal). After four years of the Lisbon strategy it is alsoimportant to compare progress of Member States since 1999. Belgium, France andGreece have made rather good progress, while progress in Germany, Luxembourg,Austria and Portugal has been rather disappointing. The detailed analysis indicatesmore clearly that there are still problems in all Member States and that all of themneed to make a greater effort to achieve results. (...) Competitiveness is a key element of the Lisbon strategy and remains a majorsource of concern for some Member States and businesses. (...) Along withservices, Europe’s industrial competitiveness is of cardinal importance for oureconomy. Sterner competition from our competitors across the globe, the transitionnow under way towards the knowledge economy, plus enlargement of the Unionthrough the accession of new countries, once again raise the question as to whatplace industry occupies in our economy. In this context the phenomenon of de-industrialisation – highlighted by the European Council last October – might be anincreasingly acute problem”.

in “Delivering Lisbon Reforms for the Enlarged Union”,Report from the Commission to the Spring European Council, COM (2004) 29 final/2,February 2004

“Over the past decade the process of European economic integration has witnessedconsiderable institutional success, with the establishment of the Single Market in 1993,the launch of the euro in 1999 and the decision to welcome ten new Member States intothe European Union (EU) in 2004. The economic performance of the EU, however, is morevaried. While macroeconomic stability has considerably improved and a strong emphasison cohesion has been preserved, the EU economic system has failed to deliver asatisfactory growth performance.

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Europe needs to grow, not only in area but also in dynamism. A more dynamicEuropean Union will help the integration of new Member States and strongly growingnew members will contribute to more dynamism. A more dynamic EU will also be abetter partner for other European and Mediterranean neighbouring countries, and forthe global system. Faster growth is also paramount for the sustainability of theEuropean model, which puts a high premium on cohesion. Sustainability is underthreat from rapid developments in demography, technology and globalisation, all ofwhich increase the demand for social protection. Fortunately, however, technologyand globalisation, like enlargement, also hold the potential for faster growth.(...) The EU system of economic policies is very complex. It encompasses not only alarge number of instruments, but also a wide array of decision-makers, ranging from localto national and supranational actors, which often share responsibilities for the manyinstruments. Moreover, these instruments and actors often operate with different timehorizons. Coherence – across instruments and objectives, across decision-makers andjurisdictions and over time – is therefore difficult to achieve inside the EU system. At thesame time, however, coherence is absolutely necessary in order to ensure that thesystem delivers.(...) Enlargement will further increase the heterogeneity of the EU. The model ofgovernance of the EU was initially conceived for a Community, which was smalland homogenous as regards level of economic development. Successive roundsof enlargement, increasing yet uneven market integration and the growing numberof policy domains and instruments have made the task of governance more andmore complex. Challenges are already apparent in a wide range of policy domains,ranging from regulatory policies to the macroeconomic field. They could trigger ahollowing out of the intermediate layers of governance based on commitment andcoordination to the benefit of the two “corner solutions” of delegation and MemberStates autonomy, unless the EU is able to achieve significant efficiency gains inmaking coordination and cooperation work”.

in “AN AGENDA FOR A GROWING EUROPE,Making the EU Economic System Deliver”,Report of an Independent High-Level Study Groupestablished on the initiative of the President of the European Commission,July 2003

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9.1.3 The “Common Thread” of Recommendations: Macroeconomic Stability, Economicand Social Cohesion and Competitiveness

The organisation adopted for the drawing up of public policy recommendations in thisstudy therefore followed a “meeting” path between identified challenges and responses,more explicit or implicit, contained or sketched out on the agenda of the discussion of themain strategic (re)orientation guidelines of European construction.

The strategic agenda for European construction, which has considerably evolved morerecently, retains, however, as we have seen (cf. 10.1.2), a likewise significant oscillationbetween “visions of continuity” (in which enlargement imposes almost no changes) and“visions of change” (in which enlargement requires consideration to be given to relativelymajor changes to the objectives set up and to the measures undertaken).

The analysis led us to select a “tripod” of central issues raised by enlargement with regardto European and national public policies, centred on the articulation between macroeconomicstability, competitiveness and economic and social cohesion (cf. Figure 9-1).

The reasoning underlying the adoption of this “tripod” is one of recognition, all themore necessary within the framework of enlargement, both of a support for thecompetitive progress of the European Union, in guaranteeing macroeconomic stabilityand cohesion (economic, social and territorial), and of the search for timely positiveretroaction effects of gains of competitiveness on stability (especially in respect ofconditions required for the consolidation of sustainable financial policies) and oncohesion (particularly with respect to the conditions required for the essential renovationof the European social model).

It also has to do with the acknowledgment of the fact that the European Union as awhole, and the countries that constitute it, are facing serious competition problems withina more general framework of globalisation (probably acknowledged not in all itsdimensions and difficulties, though with a powerful impact on the overall agenda of theEU). Overcoming these problems depends both on a lasting relaunch of a sound economicgrowth (decisive for “deepening”) and on the pursuit of a general path to structuraleconomic convergence (decisive for the “enlargement” process).

Lastly, it has to do with the fact that the possibility of achieving the adequate anddesirable sustainability levels depends, after all, on their harmonious articulation.

Figure 9-1: Public Policies & Enlargement - from a European Standpoint]

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The question of sustainability has, moreover, been increasing in importance in theprocess of conceiving, implementing and evaluating public policies. This is evident in theadoption of more general benchmarks, i.e., less centred on problems restricted toenvironmental issues (even those in transverse approaches) and anchored to a greaterextent on relations between environment, the economy and society (the GothenburgSummit, in 2001, was an important step in this direction, linking environment protectionto sustainability of the development model pursued).

On the other hand, recent proposals of the European Commission, within the “initiative” or“agenda” framework for growth came to re-enhance the issue of the consistency of publicpolicies over time and of their results, linking “sustainability” to the soundness and durabilityof economic growth processes, with reflexes that can also be seen in proposals forreorientation of the cohesion policy and of the management of structural funds within thenext financial framework (2007-2013 programming period).

9.2 The Agenda of Community-Based Policies and Enlargement Challenges: Major Issues

Enlargement generates new disparities and increases diversity and heterogeneitywithin the EU, thus altering the configuration of the real and nominal convergenceprocesses. The key to sustainable management of the articulation between enlargementprocesses and the deepening of the European Union will largely involve theharmonisation of the essential reforms to be introduced into structural of Community--based policies and the necessary adaptations to the macroeconomic coherence policiesassociated both with the consolidation of EMU and with rules of budget rigour anddiscipline.

The first major issue stemming from this framework on the agenda of economicpolicies within an enlarged Europe is therefore the strengthening of the co-ordination ofCommunity-based policies and the co-ordination of the latter with policies of a nationalbase, essential to catalyse economic growth and to make structural convergencefeasible.

Figure 9-2: Public Policies & Enlargement – the Community Table

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9.2.1 The Need for a New Coordination of Economic Policies in the Enlarged Europe, MatchingMacroeconomic Stability with Competitiveness

European construction, resulting from and, at the same time, inducing the process ofglobalisation of economies and markets, has evolved, for political and globalcompetitiveness reasons, towards the form of a Europe of economic, social and politicalexpression, underpinned by a wide internal market, promoting the progressive freemovement of goods, services, people and capital and, in particular, by an economic modelcharacterised by Economic and Monetary Union (EMU), the Stability and Growth Pact(SGP) and by the introduction of a single currency, though within the framework of arelatively long transition stage until achieving its full dimension as a regional andinternational currency.

Implementation of Economic and Monetary Union in Europe marked an importantturning point in the very organisation of public policies at national scale, representing thefirst major attempt to accompany the power of the enlarged markets with economicpolicy instruments (monetary and foreign exchange, in this case), they, too,strengthened in their power of intervention, even though at the cost of a certain sacrificeof national sovereignty.

Conditions surrounding definition and implementation of economic policy in theEuropean Union countries tend, in fact, to undergo substantial alterations to the extentthat Economic and Monetary Union in Europe enshrines a specific, complex and difficultcoexistence between European-based policies (monetary and foreign exchange),national-based policies – subject to strict rules (budget policy) or mechanisms ofcompetition harmonisation (tax policy) – and national policies with greater autonomy.Economic and Monetary Union in Europe has also contributed to an acceleration of thecomplete institutionalisation of the internal European market.

With the disappearance of the exchange-rate mechanism, adjustments required byasymmetric shocks have come to be directed at real variables such as productivity andemployment. The labour market tends to appear as the main area of adjustment,particularly in those economies with less innovation, flexibility and competitiveness.However, the labour markets still retain a highly national dimension, considering the stillsmall mobility of European workers between the various Member States.

Implementation of the process of EU enlargement is taking place over a long period offairly low economic growth, with the problems of “Monetary Europe” (ever ambivalent, asclearly revealed by the oscillation trends by cycles of the value of the euro against thedollar and other major currencies used in world trade, which, challenging the commonmonetary policy of the Central European Bank, act, on depreciating, as a mechanism toprotect the less competitive European economic agents and, in the event of appreciation,as a factor lessening the competitive capacity of its major export bases, even though itcan contribute to a certain imported deflation) added to the problems of “Social Europe”(such as unemployment, social exclusion, poverty, population ageing, the crisis of theEuropean Welfare State, among others), thus hindering the implementation of structuralreforms.

EMU and globalisation bring about important new challenges for the European Union,both for companies (greater globalised competition, growing integration of markets,institutions and groups, dimension, stiffness and constant innovation, greater demandfor quality and adaptation to customer tastes, common currency with differentiated priceand costs systems), and for public policies (greater complexity, articulation betweennational and Community policies, need to develop new forms of market supervision and

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regulation, essential structural reforms in health, education, social welfare and taxationand competition, among others).

The conclusions of this study provide the grounds for the need, in the enlargedEurope, not only for a new co-ordination of economic policies, at one and the same timemore “balanced”, i.e., less hierarchic and descendent, and more “precocious”, that isdeveloped right from the time of conception, particularly with regard to articulationbetween the pursuit of financial objectives and structural objectives, but also of closerarticulation between public policies directed at macroeconomic stability, and policiesdirected at competitiveness, i.e., between initiatives connected with the improvement ofthe framework of the execution of the “Stability and Growth Pact” and initiatives linkedwith the development of the “Lisbon Strategy” (see Figure 9-2).

The translation of any impacts of the enlargement, identified in this study, intoreorientation of European stability, growth and competitiveness policies is reflectedparticularly in the following objectives:

• Encouraging entrepreneurship and business initiative and promoting a“knowledge-based economy” through an all-embracing, realistic reasoning ableto strengthen the role of the SMEs as a source for innovation and jobs:— Strengthening measures designed to create environments better fit to the

business world, to increase management skills, to encourage risk andinitiative and to obviate administrative, financial and informational barriers tothe move by the SMEs into the markets as a whole;

— Stimulating the overall public and private effort in R&D, technological developmentand innovation, combining more selective priorities through wider co-operationnetworks (institutionally and geographically) and ensuring that those Europeancompanies more involved in research act as a “hinge-pin” between scientific andtechnical knowledge and the EMS business structure, simplifying the transfer anddiffusion of technology (realism in focusing on R&D is decisive to obtaininggeneral and transverses effects of innovation within the corporate structure); and

— Pursuing initiatives aimed at the intensive, widespread use of information andcommunication technologies by companies, schools, the administration andhouseholds, based on open, efficient infrastructure subject to forms ofregulation able to adequately combine competitive prices and services withsustained rates of innovation and quality.

• Improving the performance of labour markets on the basis of sustainableemployment goals and pursuing the consolidation of the internal Europeanmarket on the basis of reforms that will promote the efficiency and integration ofproducts and services markets:— Renewing active employment policies based on a reasoning of faster evolution

towards greater use of qualified resources, creating conditions for awidespread use of “life-long learning” practices, greater efficiency and internalflexibility in the organisation of work, and better harmonisation between thedemands of security and competitiveness, underpinned by adequate reformof the tax and social security system; and

— Maintaining high priority directed at full implementation of the internal Europeanmarket, increasing attention within the new framework generated by enlargementboth on ensuring balanced through strict forms of competition contributing to thewell-being of consumers and to the overall competitiveness of the Europeaneconomy, and also on the development of adequate models of regulation of the so-called network industries and of the collective efficiency services.

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• Maintaining macroeconomic policies directed towards stability, though betterarticulated with initiatives designed to promote competitiveness and economicgrowth, without slowing the budget consolidation effort towards forms of“sustainable finances”:— Strengthening forms of establishing a multi-year framework of national

budget and tax policies, avoiding deviations in the sense of pro-cyclicorientations and improving the policy mix through close articulation betweenthe “major guidelines of economic policy”, defined by the Council, and themain guidelines of monetary and foreign exchange policy pursued by theEuropean Central Bank;

— Improving the quality of public investment (human capital, knowledge, efficientnetworks of collective-efficiency infrastructure), closely articulated with theobjectives of the “Lisbon Strategy” and with new growth-promotion initiatives;

— Systematically seeking forms of long-term sustainability for public finances,especially ensuring paths towards reducing public debt, reform in health andwelfare financing systems, and timely adaptation to new problems raised bythe ageing of the population; and

— Deliberately braking the development of tax competition within the EuropeanUnion, both through the relaunching of a coherent and feasible framework offiscal harmonisation and through new efforts in the co-ordinating tax systemreform initiatives, that could only win if geared towards efficiency rather thantowards a mere overall reduction in the tax burden.

9.2.2 The Need for a Redefinition and nt of the Cohesion Policy to meet more demandingChallenges in the Convergence Plan

Enlargement is a process of a strategic, global nature (economic, social andinstitutional) with a strong political motivation, not determined in this context by gainsand losses that the EU could immediately achieve, although the acquisition of aneconomic dimension will portend a more promising future within an area that is moreintegrated and therefore less vulnerable in the contest with other economic blocs.

Candidate countries constitute a new experience in fast economic growth, largelypolarised by industrial activity, though differing greatly both from the other Europeanexperiences and from the Asian experiences of the so-called “new countries undergoingindustrialisation”. The novelty, as the conclusions of the study clearly show, has to do withthe fact that the candidate countries have wage levels not comparable, in internationalterms, with the standards of qualification and education of their active population.

Growth in candidate countries, with low wages and high qualifications, is relevant bothin terms of the European economy and in terms of the global economy, bringing about aspecific competitive model with a lasting window for opportunities, further consolidatedby the European Union enlargement, especially in terms of their competitive capacity intaking part in trade and international investment flows.

Despite similarities with the enlargement to the South, during the 1980s, both ineconomic (competitive cost of candidates) and in political terms (linking full accessionwith the consolidation of transition to democracy), the European Union central andeastern enlargement has, however, remarkable differences in terms of political andeconomic challenges. This enlargement seems to have greater competitive potential forcandidate countries, as well as a slower and more difficult process of consolidation of atrue, democratically-regulated market economy.

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Enlargement cannot be viewed as a size-dominant process (bigger market, biggerpopulation, more Member States) not pressing to bring about major changes in theguidance of Community-base policies.

In fact, as it may be concluded, enlargement creates or opens up the way to newcompetitive realities and sharply increases disparities and diversities within theEuropean Union. In our view, this imposes a need for significant changes to Community--based policies more directly involved in the pursuance of objectives of convergence andof economic, social and territorial cohesion that have become more difficult, complex anddemanding as a result of the enlargement process.

The conversion of the probable impacts of enlargement, detailed in this study, into areorientation of the agenda of European cohesion and convergence policies, is reflected inthe following aspects, in particular:

• Economic, social and territorial cohesion should increase in weight in the greatpriorities of the enlarged European Union, not at the cost of other great goals orobjectives, but rather through greater articulation and co-ordination of each:— ensuring far greater integration of cohesion aspects in the development of the

“Lisbon Strategy” and, above all, achieving far greater interpenetration ofspecific competitiveness and growth goals that characterise the “LisbonStrategy”, in setting up targets and allocating resources of the next EUfinancial framework (2007-13). While it may contribute to lending greaterdynamism to the promotion within the enlarged Europe of a “knowledge-basedeconomy”, this articulation will be even more important in ensuring, on thebasis of cohesion reasons, that the “Lisbon Strategy” will not have a sort ofelitist drift, leaving on the “doorstep” a substantial part of SMEs and Europeanregions;

— Adapting the objectives and nature of measures that are part of the motivationfor cohesion to enlargement impacts, particularly through making feasibleexercises designed to limit the specific shocks of enlargement, throughgreater redistribution efforts directed at those areas worse positioned and, inparticular, through by not implementing programmes and policies based on asimplistic severance between the EU15 and ACO10 blocs, that is, enhancingthe existing development differences both within the present Member Statesand the candidate countries; and

— Making ongoing efforts over a long time horizon to counteract any increase ofdisparities in income, productivity and well-being within the enlarged Europe.

• Economic convergence, under the new conditions of the enlarged Europe, shouldbe pursued not on the basis of generic catching-up models fed by redistributionmodels, but through differentiated regional competitiveness strategies capableof gearing wealth creation:— Increasing attention given to the design and implementation of differentiated

regional competitiveness strategies able to correct greater imbalances in thecombinations of competitive factors and determinants (especially with regard toskills, mobilisation of knowledge, advanced collective infrastructure, mobility andgovernance networks and institutions), thus reducing disparities in productivity,employment, wages and remuneration of the other production factors;

— Creating an increasing global, structural framework for the convergencebenchmark, articulating more closely the concepts of real and nominalconvergence (it should be noted that evaluation of disparities in livingstandards, through purchasing power parities, leads to their underestimation

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and assumes an immobility in relative contradiction with major goals of theUnion), allowing the design of convergence programmes and policies,inducing better-balanced paths to progress with regard both to production andconsumption conditions and to the production conditions for tradable and non--tradable goods and services; and

— Enhancing the qualitative links between competitiveness, employment andgrowth as a key factor to improve articulation between cohesion policies andregional-development promotion, on the one hand, and more general policiesgeared to competitiveness and economic growth, on the other, admitting, atleast in part, that the challenge faced by the enlarged Europe is not just one ofthe relaunching of growth but also one of renewal of its qualitative bases andone of creation of new sustainability conditions.

9.2.3 The Need for a Strategic, Global Vision of Sustainability

Within this framework, the concept of sustainability, as a guide for action in the fieldof public policies, has acquired, in addition to greater in-depth combining factors anddeterminants generally disparate or opposed, a number of new dimensions relating bothto the configuration of growth rate cycles and to the quality of the economic growthmodels implemented.

Consequently, sustainability should not refer to a simple moderation of knownimpacts and effects – stemming from retaining economic models with negative long-termconsequences – on the nature, the climate and people, acting through partialadjustments imposed by reactive responses to situations of crisis, scarcity or need, in ashort-term approach (cf. Figure 9-3).

Figure 9-3:“Sustainability” as Short-term Partial Vision

Sustainability should rather refer to the implementation of the necessary changes toprevailing economic and social models, to be able to control and manage long-termeffects and impacts on nature, climate and people, acting through structural reformswithin the markets, the institutions and the States, in proactive procedures designed tomobilise intelligence, to prevent scarcity or crises, or through the efficient use of scienceand technology in confronting the growing demand expressed on the basis of human andsocial needs, in a strategic approach (cf. Figure 9-4).

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Figure 9-4: Sustainability as the Overall Strategic Vision

Sustainability, as an overall strategic approach, involves the following fields of actionor intervention in particular:

• Preservation of the hard core of resources of the economies and of the society,i.e., the natural, physical, real estate, human (health, education, knowledge) andsocial (institutions, networks) resources:

• Improvement of the use of technology and of the quality of the organisations tobetter respond to demanding needs posed by population dynamics anddemographic trends (growth, concentration, ageing);

• Adoption of an effective, systematic cost-benefit reasoning, underpinned byforms of long-term economic calculation, by decisions involving issues relating toenergy, the environment and social welfare, as a means of finding models that willharmonise “competitiveness” with “solidarity; and

• Concept and design of new policies to manage the most relevant externalities,both positive and negative, improving the interaction between “market” and“democracy”, with a view to promote forms of collective efficiency.

9.3 Agenda of National-Based Policies and Enlargement Challenges in Portugal: MajorRecommendations

The implementation of the European Union enlargement found the Portugueseeconomy in a difficult position, at crossroads both in its process of nominal and structuralconvergence within the EU and in its competitive model.

The dimension and complexity of competitive challenges faced as a result of theglobalisation of economies, greater density and complexity of the chains of value ofeconomic activities, the technological and organisational mutation, and the world tradeliberalisation under the aegis of the WTO, and also the specific impacts on Europeanconstruction of the very dynamics of the deepening and enlargement processes,analysed in detail in this study, should not therefore be underestimated.

Systematisation of the studies on the overall and specific impacts of enlargement bycountry, as well as the particular results of this study lead to the conclusion that, while,on the one hand, Portugal appears to be one of the EU15 countries most threatened by the

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enlargement – despite the fact that the candidate countries also provide businessopportunities for Portuguese companies – on the other hand, many of the effects ofenlargement have already been produced recently, particularly in terms of intra-Community flows of goods, services, people and capital.

In fact, for the Portuguese economy, in view of its specialisation structure andcompetitive factors prevailing in its corporate structure, enlargement marks the appearanceof a sort of competitive “pincer”, with Central European countries (the Czech Republic,Hungary and Slovakia) exercising greater competitive pressure on those activities moreintensive in technology and knowledge and based on competitive factors other than cost, onthe one hand, and Slovakia and, in particular, the Black Sea countries (Romania andBulgaria) bringing competitive pressure to bear in more labour-intensive activities based, toa greater extent, on competitiveness factors focused on cost, on the other hand.

What is therefore at stake is the additional, greater competition, at every level, inpractically every relevant sector of specialisation of the Portuguese economy, thoughwith the involvement of different national challengers.

The study on the impact of the European Union enlargement on the Portugueseeconomy points, in a cumulative manner, to a possible deterioration in its competitiveweaknesses and to an increase in its peripheral position, in the absence of anysubstantial response to the progressive exhaustion of a competitive model excessivelybased on extensive dynamics and factors that are both too basic and too generic,observed in the comparison, not only with the EU15 but also with the most developed ofthe ACO countries.

The most probable scenarios for which the study provides the grounds, leave no greatroom for doubt as to the considerable difficulties and demands posted by challengesfacing the Portuguese economy as a result of the EU enlargement. This leads to a need forunconventional reflection on the concept and design of more adequate strategies andpolicies to face the competitive challenges confronting the Portuguese, the Portuguesecompanies and the Portuguese State over a short- to medium-term time span.

Within the horizon covered by the conclusion of this cycle of financial framework ofstructural funds (2006) and the execution of the following one (2007-13), the publicpolicy agenda in Portugal will have to comprise a number of coherent, concentrated,selective initiatives and measures allowing the implementation of structural reforms andadjustments required for an in-depth renovation of the competitive model of thePortuguese economy, covering not only qualification, innovation and differentiation intraditional specialisation activities but also a move into new activities involving moreadvanced technologies, skilled personnel, knowledge and research.

The move from a predominantly extensive competitive model – characterised byundifferentiated production generally using resources involving rather unqualified supplydynamics, with little market power and, in many cases, dependent forms ofsubcontracting with little incorporation of value added – to a new, predominantlyintensive mode – marked by qualified, differentiated production, using more advanced,specific resources in response dynamics to increasingly sophisticated overall demand(national and international), with accrued market capacities – expresses the size of thetask to be performed in successfully facing challenges imposed on the Portugueseeconomy by this articulation between the deepening and enlargement of Europe.

Major challenges created for the Portuguese economy by the articulation betweenenlargement and deepening are particularly expressive, to the extent that, as aneconomy located at the heart of the second process (a member of the euro area, subjectto the discipline of the Stability and Growth Pact) it is nevertheless one of the EU15

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countries potentially most affected, in terms of employment and growth, by the sharpincrease in the competitive pressure of candidate countries in striving for trade andinternational investment flows, in the light of its development status and of itscompetitive model (closer, within the context of the EU15, to the situation of theeconomies of the new Member States).

While public policies in Portugal are confronted with the same “tripod” of centralobjectives that were identified for the European framework, they need to be highlyfocused in order to effectively contribute to structural adjustments that will induceproductivity gains and increases in the competitive capacity required to significantlyimprove its international position, essential to overcome the negative “shocks” and totake advantage of opportunities posted by the enlargement.

Figure 9-5: Public Policies & Enlargement – The National Framework

The main issue, in respect of the agenda of Portuguese economic policies in anenlarged Europe, is therefore that of an increasing co-ordination of macroeconomic andstructural policies, on the one hand, and of the regional and sectoral policies, on the other.The aim will be to strictly pursue budget consolidation efforts and enhanced efficiencyand selectivity in the management of structural funds and public investment under thestrategic command of full, realistic insertion into the “Lisbon Strategy”, i.e., in-depthrenewal of the competitive model of the Portuguese economy (cf. Figure 9-5).

Despite following, in this respect, the major guidelines identified for Community--based policies, the “tripod” of core issues raised by the EU enlargement with respect topublic policies in Portugal cannot but be specified and focused, as has been mentioned,to the extent that specific challenges unveiled by the study also need specific answers.In fact, budget consolidation in Portugal is required for the macroeconomic stability, justas territorial specialisation, i.e., “setting up” diversified decentralisation and“clusterisation” dynamics, is necessary to achieve more advanced economic and socialcohesion.

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Figure 9-6: Public Policies & Enlargement from a National Standpoint [The “Tripod” of core Issues]

Given the vulnerability of its situation and the dimension of the “shocks” unveiled by thestudy, the mere stimulation of enhanced competitiveness and of growth relaunching wouldnot be adequate, in Portugal. It will be absolutely essential to ensure a permanent focus ofefforts and resources on a deep renewal in competitive factors and the growth model of thePortuguese economy, aimed at major rebalancing its external insertion, underpinned byproductivity and by competitive capacity in globalised markets (cf. Figure 9-6).

Thus, public policy recommendations made follow the stated focus and specificationefforts, within a more general framework of enhancement of the harmonisation andcomplementarity of economic policies and corporate strategies.

9.3.1 The Need to Pursue and Deepen Budget Consolidation to Generate a MacroeconomicFramework Favourable to Structural Adjustments

In the medium term, the economic policy of macroeconomic regulation should be ableto ensure a stable macroeconomic framework based on public-accounts discipline and onlow, stable inflation and interest rates, thus simplifying medium- and long-terminvestment opening up the way to boosting dynamic, advanced factors ofcompetitiveness. The effect of the probable impacts of enlargement detailed in this studyon the orientation of this global effort directed at budget consolidation and structuralreforms in the goods and services market, will be particularly reflected in the followingaspects:

• Despite the urgency in mobilising public and private resources to boost thecompetitive position of the Portuguese economy, the budget consolidation effortshould not slow, and qualitative continuation and deepening both of control ofpublic spending and of tax reform will be decisive, ensuring the sustainability ofpublic finances. The following must occur within the framework of the response tothe specific enlargement challenges:— Use of a multi-year budget policy organisation to ensure the feasibility, under

controlled flexibility conditions, of selective, structural forms of publicinvestment in advanced infrastructure designed to support economicactivities, focusing on a reasoning of effectiveness connected withwidespread use, rather that the reasoning of simple accumulation of physicalcapital that has prevailed to date;

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— Use of fiscal policy as a selective instrument to stimulate wealth creation,rewarding private investment in the renovation of corporate competitivepotential, particularly in innovation and differentiation of their processes andproducts, in the ongoing training of their human resources and progressiveinternationalisation of their operations; and

— Implementation of a clear focus, through articulation between public and privateinvestment, increasingly associated with sharing responsibilities by the publicand private sectors with a view to co-operation and convergence of efforts.

• Promotion of competition in goods and services markets against a backgroundof efficient forms of regulation, allowing not only market failures and abuse ofdominant positions to be overcome, but also the creation of really equitableaccess to markets and to corporate activities, with due regard for the rights ofconsumers and labour force alike and for environment protection. Within theframework of the response to the specific enlargement challenges, where theattractiveness of the economies depends on, to an even greater extent, marketefficiency and transparency, there is a need:— to create conditions for the affirmation of the Portuguese economy as a dynamic,

efficient market economy, i.e., where it is easy to invest, work and export, lendingthe organisation of competition policy greater effectiveness and capacity to act,involving faster adaptation to growing demands, eliminating rules and practices ofexcessive, ineffective administrative regulations, and seeking to ensure real, faircompetition able to support Portuguese companies in confronting newcompetitive pressures in a balanced, profitable coexistence of the variouscorporate sectors (micro, small, medium and large enterprises); and

— to ensure active intervention in drawing up and executing competition policieswithin the context of the European Union, monitoring, with special attention,State aid within or without the context of the management of structural funds,to ensure an undistorted framework of competition within the enlargedEurope, especially with respect to processes of (re)location connected withforeign investment and to the process of corporate internationalisation withinthe Union or outside of it.

9.3.2 The Need for In-Depth Reshuffle in Competitive Factors and Growth Model to OvercomeEnlargement “Shocks”

The challenges facing Portuguese economic development within an enlarged Europehave as their major “battlefield” timely implementation of in-depth renovation of thecompetitive model to allow enlargement “shocks” unveiled by this study to be adequatelyconfronted, leading to a positive overall balance.

The heart of this renovation lies in patient, ongoing realisation of a new competitiveposition for the Portuguese economy, supported by more sustainable, dynamic wealth--creation factors and by structural reforms leading to new intensive forms of growth (acreation-of-value reasoning geared by efficiency and productivity gains, i.e., “more anddifferent”), progressively putting aside the still-prevailing more extensive forms ofgrowth (centred on what are no longer very low wage costs and not based on sufficientlyhigh levels of education and training, i.e., “more of the same”).

The potential negative enlargement “shocks”, though mainly transmitted via intra-European trade and investment mechanisms, on the one hand, and by the reform of theEuropean structural instruments designed to promote cohesion and convergence, on the

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other, essentially involve employment and the income of the population, and the rate ofgrowth of the Portuguese economy.

In this respect, enlargement has a specific combination of “internal” and “external”challenges that must be faced in an overall and coherent manner.

In this connection, the global strategy of response to enlargement challenges (cf. Figure9-7) calls for the adoption of measures, initiatives and actions articulated both with publicpolicies and corporate strategies and with the internal organisation of the economy and itsexternal projection in Europe and in the global economy, in order to develop:

• an “internal” strategy of competitive renovation and re-qualification aimed at theimprovement of the specialisation pattern of the Portuguese economy (branchingout into new activities and developing new business models for activities that arealready relevant), underpinned by a real effort for innovation and skill-creationcapable of correcting as quickly as possible major competitive weaknesses thathave been identified; and

• an “external strategy of sustainable differentiation aimed at obtaining a bettercompetitive position in the enlarged Europe and in the global economy for thePortuguese economy as a whole, and also for its regions (based on differentiatedspecialisation in the production and distribution of goods and services), supportedby an acceleration in internationalisation able to confront successfully the balanceof gains and losses in trade and investment flows induced by the reorganisation ofthe internal European area, and to take full advantage of new opportunities createdboth within the candidate countries and outside the European market.

Figure 9-7: Public Policies & Enlargement - the National Framework

Against this background, Portuguese public policies are faced with a fundamentalchallenge both of profound co-ordination and of increased efficiency and effectiveness inthe complete cycle of design, execution and evaluation, centred on the articulationbetween horizontal and structural policies, on the one hand, and between sectoral andregional policies, on the other.

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9.3.2.1 Recommendations to meet “Internal” Challenges

Major “internal” challenges posed by enlargement as far as renovation of thecompetitive model is concerned have to do, as we have observed, with making feasibleand catalysing a wide set of adjustments of a structural nature, in which qualification,differentiation, diversification and innovation in the production of goods and services, inproduction areas of wider value chains generating greater value added, play a prime role.

These competitive adjustments also involve enhancement in entrepreneurship andspirit of business initiative and co-operation, encouraging the emergence of newinitiatives and new entrepreneurs, better access conditions for companies, SMEs inparticular, to the results of research and development and to positive externalitiesgenerated by support infrastructure, and a better relationship with the environment andenergy, viewed as strategic factors for competitiveness.

The effects of enlargement impacts, unveiled in this study, on the orientation of this overalleffort of renovation of competitive models and of growth will be reflected in the following:

• Design and implementation of horizontal and structural policies directed atsustaining the basis of renovation of competitive model, and at the creation of betterinfrastructure to allow economic growth, on the assumption of a “better State” bothin respect of its internal competences (reform of public administration, more agile“state machinery”, reduction in bureaucracy) and of its external effectiveness(greater response capacity to the needs of citizens and enterprises). Within theframework of response to specific challenges posed by enlargement, emphasis isput on the following major priorities in policies of a structural and horizontal nature:— Fostering sustained production of new skills, within the more general

framework of education and vocational training policies, underpinning labourmarket’s needs for increasingly skilled human resources, giving specialattention to levels IV and VI, that is, professional careers not based on degreesnor on postgraduate cycles;

— Greater R&D and technological development efforts, within the more generalframework of increasing priority and resources allocated to knowledgepolicies as a whole (R&D, Innovation, Science & Technology, Higher Education)in articulation with the increase in financial and tax incentives to thosecompanies investing on a sustained basis in intangible competitivenessfactors, particularly corporate R&D projects;

— Fostering co-operation between companies and knowledge centres(technology centres, research centres and universities) capable ofaccelerating the diffusion, transfer and use of state-of-the-art technologies(including information and communication technologies, without neglectingothers), in a realistic framework fit to the country’s size and potential, seekingto generate far greater integration of knowledge and R&D results into day-to-day business activity;

— Fostering a general entrepreneurship culture, based on closer relations withchallenges of business initiative and with business risks, increasinglysimplifying the process of corporate creation, access to financial projects ofmerit at the right time and in appropriate amounts (neither more nor less,neither sooner nor later) beyond the scope of real guarantees, that is, withinthe framework of true forms of venture capital and of renovation andsuccession of ownership structures and management of family-basedcompanies and groups;

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— Redriving business competitiveness development support instruments, inwhich financial and tax incentives should undergo radical changes with a viewto their concentration (far fewer projects supported), selectivity (far greaterquality, reflected in more realistic, ambitious commitments, particularly interms of organisation, innovation and direct insertion into sales efforts, ofthose projects that are supported) and working reasoning (replacement of theex-ante “crutch” [opaque and complicated] of subsidies by on-going, ex-post[simplified and transparent] sharing of risks and benefits) generatingconditions for the appearance of structure-creating projects of critical massand sustainability sufficient to alter the specialisation pattern;

• Ensuring strong SME participation in the competitive adjustment created byenlargement “shocks” that, while demanding particular attention to the strengtheningand diversification of their financial structures (in which selective use of tax policycould play an as yet unexplored role, particularly in respect of self-financing,capitalisation and mergers, acquisitions, integration, MBO and MBI operations, and realdevelopment of mutual guarantee could allow access by SMEs and micro-companiesto better loan conditions, as far as term and interest rate are concerned), has as itsmain field of action encouraging investments revamping competitive advantageslinked to differentiation, specialisation, range and scale (especially in more demandingforms of internationalisation, marketing or innovation);

• Organising fast, temporary response, in articulation with structural adjustments ofmore relevant though slower effects, to moderate major vulnerabilities, whenfacing candidate countries, in the matter of employment (education, qualificationsand costs) and labour market (unemployment, immigration), promoting, inparticular, additional specific training for skilled and unskilled labour, especially inthose activities of greater export bent, for middle management in the manufacturingindustries and for workers who, having few or limited qualifications, have,nevertheless, acquired skills and qualifications through professional experience, onthe one hand, and a great effort directed and better, more complete integration ofskilled immigrants into the labour market, in accordance with their qualificationsand skills, meeting companies’ needs, on the other.

9.3.2.2 Recommendations to meet “External” Challenges

Major “external” challenges created by enlargement, involving an improvedcompetitive position and a more direct and active role in the European and globalmarkets, essentially have to do, as we have seen, with the acceleration ofinternationalisation initiatives within a wider framework of increasing marketing anddistribution efforts, supported by resorting to more advanced organisational models andmore intensive services in the areas of design, engineering, management, marketresearch and logistics, and distribution that induce greater flexibility and productivity anda greater ability to ascertain and more quickly meet the needs of increasingly diversified,sophisticated and demanding customers.

The effects of the probable enlargement impacts unveiled in this study, in terms ofinternational trade, lead to the following recommendations:

• Results obtained through estimated gravitational models were very explicit withrespect to the two main challenges of enlargement as far as the evolution ofPortuguese exports is concerned, i.e., one will have to be able to moderatepotential losses on the German market and to catalyse potential gains on the

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Spanish market, to be able to come through enlargement without substantiallosses. Priority actions in terms of Portuguese export markets must take thefollowing aspects into account:— Changes required to overcome these two challenges seem, in the German

case owing to the geographic distance, to call more for consolidation andqualification of German FDI in Portugal, as a trade inducing factor(investment —> trade) and, in the Spanish case, for its geographic proximity,more for greater capacity to sell and distribute in Spain, supported by theneed for greater product quality and value added (trade —> investment).

— The dimension of the “Spanish challenge” may help to defuse a wider interestfor Portuguese products, capable of streamlining or reversing the effects ofpotentially negative situations (France and the United Kingdom) or catalysingthe effects of potentially positive situations (Italy, in particular, and alsoIreland and Greece), turning them into greater flows. The ability to penetratethe Spanish market will in practice dictate, to a large extent, the size ofbenefits that the Portuguese economy will be able to manage to withdrawfrom the EU enlargement process.

• Results obtained, reconciling analysis of competitive factors and of technologicallevels, show that, as a rule, with enlargement, exports from Portugal to the presentMember States will lose competitiveness, a loss that can only practically be offsetby new export opportunities to the ACO markets. The more than probabledefinitive exhaustion of the present competitive model and specialisation ofthe Portuguese economy, within the context of the enlarged Europe, indicatedby these results, means that consideration must be given to: — “Evolution in continuity”, with no substantial changes to the specialisation

pattern, would, in addition to being rash, be impossible to implement, since thecompetitive position of the Portuguese economy within the central area of theenlarged European Union would continue to worsen (although it is probablethat, in the short term, it would be possible to secure new export opportunitiesin the “new Member States”), constituting a “headlong rush forward” that mustbe rejected not only for its high social costs but also for the strategicdifficulties into which the country would be in the process of Europeanconstruction;

— On the contrary, sowing the seeds of a “sustainable change” of the specialisationpattern, seems to be the hard but necessary path to follow, through adifferentiated focus on the various markets that form the enlarged Europe,capable of increasing the real value of Portuguese exports and, consequently,their competitiveness within the central area of the EU, and through preparingthe consolidation of real gains in the central and eastern markets, developingnew competitive factors and business models ahead of the greater competitivepressure that is likely in the evolution of intra-European trade relations.

• The development of a new coherent, integrated approach to enlargementchallenges, reflected in a reorientation of priorities and measures of foreign tradepromotion policies seems to be indispensable, against this background,especially in the following directions:— Sustained strategic enhancement of the Spanish market, as the main potential

axis of affirmation of Portuguese exports within the context of the enlargedEurope and strict attention to the defence of the positions achieved on theGerman market where, on the contrary, the more unfavourable potential effects

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appear to be concentrated, especially through initiatives designed to minimisethe effects of the dislocation of exports within the area of the EU15 in a moregeneral way;

— Pursuit of a selective strategy of approach to export opportunities in themarkets of the new Member States, particularly exports of products of textile,metal (metal articles, mechanical, automotive and parts), electrical (apparatusand electric wires) and plastics (articles and materials) industries.

— Development of initiatives ensuring improved monitoring of the potential of theenlargement of the European internal model, particularly in the case of the newaccession markets of the Black Sea region (Romania, Bulgaria and Turkey).

— Increase of initiatives of international projection beyond the area of theenlarged Europe, in an endeavour to reduce excessive concentration ofPortuguese foreign trade, encouraging the development of international tradeand investment flows to markets “outside” Europe, though relatively “close”(for their language, history or culture), such as Latin America and Africa.

The effects of the probable impacts of enlargement, revealed in this study in terms ofinternational investment, lead to the following recommendations:

• Results of the analysis very clearly show that enlargement has produced and willcontinue to produce a far more demanding and difficult framework in attractingdirect foreign investment to the Portuguese economy, because of far greatercompetition in which the new Member States, in addition to advantages providedby relative costs, industrial tradition and worker education and qualifications, havean additional asset involving the ability to grant investment incentives at a scalethat Portugal finds hard to match in view of the redistribution of Community funds,meaning that consideration must be given to:— growing adequacy of labour legislation and, above all, of human resource

management practices in the light of new requirements of adaptability andflexibility or the organisation of work (closer match between working hours andproduction cycles, forms of continuous or semi-continuous work in variousindustrial activities, part-time work), life-long learning and greater worker mobilitywith a view to adapting human resources to the challenges of globalisation,increasing the competitiveness of the economy and of companies;

— sustained enhancement of the infrastructure network supporting economicactivities, including technological, innovation, quality and vocational trainingcentres, and involving the business associations themselves increasingly involvedin the reorganisation of their associations designed to regenerate their role and tostimulate the efficiency and effectiveness of the services provided; and

— response to the additional difficulties accruing to Portugal in being included inthe long-lists and, all the more so, in the shortlists of alternative locations formobile international investment, particularly through greater focus andstructuring of FDI-attracting measures, benchmarking capacity and timelydetection of opportunities and instruments to monitor and support thosesubsidiaries that have already been set up, as well as encouragement of theintra-group affirmation of the respective projects and initiatives.

• A new coherent and integrated approach to the challenges of enlargement, involvingreorientation of the priorities and measures of the policies of internationalisationincentives and of attracting direct foreign investment would appear to be essentialin this connection, particularly in the following directions:

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— Creation of incentives for companies engaged in internationalisationinitiatives, rewarding the critical dimension and sustainability of theinvestments in a range of targets all the more complete the greater theambition of the initiatives (from simple exporting to setting up sales ormanufacturing branches, not forgetting strategic alliances):

— Development of initiatives to minimise the effects of dislocation ofinvestment to the candidate countries, vigorously combating aggressiveforms of tax competition; and

— Creation of mechanisms to support internationalisation initiatives (investmentguides, contacts, risk-sharing) in conjunction with campaigns to promotePortuguese products, skills and strategic objectives, and with initiatives designedto take advantage of investment and trade opportunities (complementarity ratherthan replaceability), in the candidate countries in particular.

9.3.3 The Need to provide for the Use of Structural Funds with far greater Effectivenessand Selectivity with Real Linkage to Regional and Sectoral Policies

If they are to be successfully overcome, the challenges of enlargement with whichPortugal is faced, revealed in this study, require, as we have seen, close articulationbetween more co-ordinated, selective public policies and renewed business strategies,both of them anchored on a new relationship between the goals of competitiveness,macroeconomic stability and social and territorial cohesion, in which the grand designs ofthe “Lisbon Strategy” play a central role, both in the definition of priorities and in theallocation of resources.

Over a medium-term horizon and in the light of the demands of the budgetconsolidation process, the rate and orientation of public investment in Portugal has been,and will continue to be, highly dependent on the orientation given to the management ofthe European structural funds, within the wider picture of the strategies set out in thesuccessive Community Support Frameworks for Portugal. The challenges of enlargementthus begin to be won or lost as a result of the quality of the interim reprogramming of thepresent CSF and, particularly, of the quality of the preparation of the next CSF (2007-13).

The strategy of approach to the challenges and “shocks” of enlargementrecommended in this study suggests (cf. Figure 9-5 to Figure 9-7) a far stronger focus onencouraging “clusterisation” processes or regional agglomeration of activitiesunderpinned by territorial specialisation strategies, supported by new models ofregional and sectoral policy co-ordination, leading to drastic reduction of the traditionalcomplexity of the programming instruments (number of programmes, axes, measuresand actions) and to an even more drastic reduction of the number of projects financed, inan attempt to achieve a far greater capacity to induce projects of great quality, size andsustainability and to ensure their feasibility and monitoring.

The enlargement imposes on the Portuguese economy a structural adjustment sodemanding that far greater attention will have to be given to the gravitational effects andsustainability of projects of real critical mass (greater co-ordination and selectivity) inenvironments that ensure real widespread, transverse diffusion of this effect (greaterdecentralisation of decisions and initiatives and more competitiveness of a regionalbase). Achieving this reorientation of the model of public investment and of use of thestructural funds will therefore be reflected in the following:

• Conceiving business, development, economic growth and employment supportinstruments based on strategies anchored to a greater extent on innovative,

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structural projects centred on advanced factors of competitiveness withdemonstrable gravitational effects on other organisations and activities, to allowgrowth and economic convergence to take root in lasting, structural factors (and notin volatile, momentary factors). This orientation could be based on the followingrecommendations:— Increased selectivity should be pursued through a progressive shift of the

benchmarks of efficiency and effectiveness from the national framework (lessdemanding) to the European and international framework (more demanding),possible only through far greater attention to stages upstream and downstream inthe life cycle of the projects, that is, lengthening project monitoring time within theframework of execution of the structural interventions;

— The systems of incentives and public-private partnerships within the presentCSF and, above all, the next CSF (2007-13) should include and cross horizontaldemand-management reasoning, based on transparent “industrial policy”criteria associated with the priorities of the “Lisbon Strategy”, with a morevertical reasoning directed more specifically at renovation of the pattern ofspecialisation, involving not only corporate investment but also collectiveefficiency infrastructure to provide, within a framework of cohesion andterritorial specialisation, attractive conditions (technology, skilled labour,qualified supplier networks) for flagship investments (domestic or foreign)that will sharply stimulate corporate competitiveness; and

— Negotiation of the 4th Community Support Framework for 2007-13 should lendspecial attention to the defence of Portugal’s interest in strengthening theinternational projection of its economy, especially within the context of itsAtlantic relations, accommodating forms of encouraging internationalisation andinternational investment in those markets lying outside the single Europeaninternal market, which was not satisfactorily achieved in the present CSF.

• Conceiving the structural instruments of the education and vocational trainingpolicies, decisively enhancing the reasoning of the “inbuilt” skills of the humanresources that can be mobilised by companies and by the administration, whichwill require greater co-ordination between the education and vocational trainingsystems, pursued on the basis of a strict, prospective evaluation of training andskill requirements of the labour market, involving participation by companies,business associations and unions, the public administration and the entitiesresponsible for providing training (schools, training centres, polytechnicinstitutes and universities, in particular). In this field, the agenda of therecommendations includes a whole range of items that have been successivelyannounced but never sufficiently implemented, including:— Training course flexibility so as to adapt in good time to changes in demand

for skills. The vocational training centres, which in this area have advantagesover the education system, could come to play an important part in the properidentification of the training requirements of companies and of the economicfabric in general, particularly through the creation of systematic requirementdetection systems;

— Greater focus on life-long learning to enhance alternating training, thedevelopment of diversified, flexible training courses directed at overcomingexisting skill shortages (middle and intermediate management), and the settingup and increase of ongoing training, in an endeavour to prepare employees for theessential modernisation of organisational and productive mechanisms;

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— Effective strategic planning of vocational training activities, closely linked tothe development of education and based on an agreed platform for thequalification of the active population in Portugal, allowing, on the basis of theidentification of the skill shortfalls of companies and of their respectiveeconomic activities and of the necessary key-skill benchmarks, systematicmeasures to improve them, especially in those sectors and companies moreexposed to international competition; and

— Far greater articulation between the education and vocational training andthe innovation and technological development systems, with a view toallowing the organisational and productive systems to be modernised andupdated while creating key-skill benchmarks in those fields in which fastertechnological mutations can be expected.

• Encouraging faster development of advanced economic activity supportinfrastructure, in an endeavour to strengthen competitive advantages and toovercome the handicaps revealed by the study, taking into account, in particular, thefact that, with regard to transport infrastructure, the present superiority seen inPortugal will tend to disappear, especially considering the improvements associatedwith the TINA process to the networks of the CEECs expected in the medium term, andthat, therefore, the development of the Trans-European Transport Networks providingthe country with fast, reliable and economic links to the centre of Europe will play afundamental role in moderating the effects of our peripheric geographic location. Therecommendations arising from the study also involve the following aspects:— Development of intermodal transport solutions, strengthening the role of the

railways and of short-sea shipping, along the lines of the White Paper on Transport,especially as a means of fighting growing highway congestion and the inherentnoxious environmental impacts, should constitute a national priority;

— Development and actual implementation of a national network of logisticsplatforms to eliminate the present shortcomings of the Portugueselogistics system, which should also open up the full potential of intermodaltransport, is an absolute priority. Within the present framework of industrialdislocation and production specialisation logistics is a sector of strategicimportance and growing weight in economic activity. Portugal is enormouslybehindhand compared to its EU15 partners and to the more advanced CEECs.In the field of infrastructure the priority area is considered to be thedevelopment of quality platforms that will:- encourage the integration of the Portuguese ports, the deep-water ports

in particular, into logistic supply chains, taking advantage of our “Atlanticcentrality” and extending their hinterlands through the provision ofadequate overland transport facilities linking up with Spain and the rest ofEurope, preferably by rail;

- allow the present “logistic disorder” to be fighted, especially in themetropolitan areas of Lisbon and Oporto, a source of lack of economy,inefficiency and environmental aggression, which would open up the wayto increasing the supply of logistics and externalise this area; and

- provide support to activities within the scope of the institutional and businesssurroundings that will encourage the supply of logistics and the creation of astrong, competitive logistics cluster, helping to develop sectoral policiesdesigned to ensure corporate strengthening, the increase of externalisation,training and technological modernisation.

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— Development of quality Business Parks, with adequate provision of equipmentand services, encouraging concerted-action mechanisms and the creation ofadvantageous conditions from a standpoint of making full use of synergies andcomplementarities that would be attractive for companies to set up and wouldattract FDI, appears as another priority area of activity. Such developmentsshould go beyond a strictly local reasoning (of municipal scope), to becomemechanisms of clearly regional scope (supra-municipal), for the purpose offostering corporate and industrial spatial planning;

— Setting up multipurpose “Economic Activity Complexes” – involving industrialareas of various kinds, logistics parks and platforms, transport centres,services areas, technological parks of appreciable size and high quality bothinsofar as basic infrastructure are concerned and with regard toenvironmental quality and widespread provision of support services – shouldbe a major item in the preparation of the next CSF, while also encouraging theintegration of R&D centres, in close co-operation with universities andresearch centres, opening up the way to the transfer of technology and thedevelopment of skills;

— Development of these advanced business activity support infrastructure(Industrial Parks, Logistics Platforms, Science & Technology Parks, andTechnological & Innovation Centres) should not be viewed as a task exclusiveto Public Administration, as it was in the past. Models involving purely publicinitiative are a thing of the past (as in the case of local government initiativesinvolving setting up a scattering of Industrial Zones/Parks during the past twodecades). The strategy for promotion of this infrastructure should be viewedrather as a shared responsibility, involving a multiplicity of economic agentsand entities, in which partnerships with the private sector should beencouraged and privileged.

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THE PORTUGUESE ECONOMY AND THE EU ENLARGEMENT · 2012-09-13 · THE PORTUGUESE ECONOMY AND THE EU ENLARGEMENT 150 1.1 HISTORICAL BACKGROUND TO CENTRAL AND EASTERN EU ENLARGEMENT:

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