PORTUGAL: CAETANO'S ECONOMIC POLICIES

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• Document Creation Date: December 22, 2016
• Document Release Date: May 18, 2010
• Sequence Number: 27
• Publication Date: May 1, 1971
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
(1/4 Ote/r/A1 7/-76
Secret
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DOCUMENT SfriTES
FILE BRANCH
COPY
DO NOT DESTROY
Intelligence Memorandum
Portugal: Caetano's Economic Policies
Secret
ER IM 71-76
May 1971
Copy No.
5 15
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1971
INTELLIGENCE MEMORANDUM
Portugal: Caetano's Economic Policies
Introduction
1. Dr. Salazar's relinquishment of power two
years ago, and his death in July 1970, set the
stage for change under Portugal's new leader, Dr.
Marcello Caetano. Although there has been little
political relief in the short period since his
accession, Dr. Caetano's economic policies are
promising. A significant facet of Portugal's new
economic outlook has been an inclination toward a
stronger European orientation -- that is, associa-
tion with the European Community (EC).
2. This memorandum reviews the economic prob-
lems inherited by Dr. Caetano, describes Portugal's
moves toward economic modernization, and assesses
the probable effects of the dissolution of the
European Free Trade Association (EFTA) 1/ on Lis-
bon's future international economic orientation
as well as the likely implications these events
will have for the government's colonial policies.
1. The European Free Trade Association (EFTA) con-
sists of nine member countries: Austria, Denmark,
Finland, Iceland, Norway, Portugal, Sweden, Switzer-
land, and the United Kingdom. A free trade area,
which is the underlying concept for the EFTA, differs
from a customs union in that it does not provide for
a common external structure of tariffs for trade
with non-members.
Note: This memorandum was prepared by the Office
of Economic Reoearch and coordinated within the
Directorate of Intelligence.
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Summary and Conclusions
3. For many years of Salazar's reign, Portugal
enjoyed political stability and moderate economic
growth. However, fiscal conservatism, widespread
government controls, and maintenance of a protective
environment for many industries held economic
development below its potential and below the
achievements of most other countries in southern
Europe. Portugal's entry into the European Free
Trade Association in 1960 stimulated the economy,
but the rising burden of a war in Africa combined
with growing emigration had the opposite effect.
4. Caetano, since his accession to power in late
1968, has publicly emphasized the need for economic
modernization. To this end he has begun to dis-
mantle Portugal's longstanding industrial licensing
control system, provided new incentives for foreign
investment in technologically advanced industries,
increased expenditures on education, and promoted
domestic investment by offering fiscal incentives
and initiating reforms of the financial markets.
However, he has not reduced Portugal's commitments
in the overseas territories.
5. In the next few years, Caetano will probably
proceed cautiously toward further economic liberaliza-
tion in order to avoid alienating the conservative
military and financial power structure on which his
political life depends. Nevertheless, he should
be able to bring about considerably higher economic
growth rates than the past average of 5%. Portugal's
continued backwardness in many economic areas pre-
sents opportunities for relatively rapid improve-
ment. Improved incentives and the more expansionary
fiscal policies being launched should raise invest-
ment. And, with foreign exchange reserves very
large, *%ere is little risk that more rapid expan-
sion of investment and production will soon lead
to balance-of-payments difficulties. Should the
United Kingdom, Denmark, and Norway be admitted to
the European Community (EC), Portugal's need to
reach an accord with the EC will become urgent.
Although Lisbon desires an association agreement
with the EC, so long as it rigidly uphclds its
present flolonial policy in Africa, it will most
likely have to settle for a preferential agreement
of the type extended to Spain.
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Discussion
Background
General
6. During the 40 years of economic tutelage
under Dr. Salazar, Portugal 2/ remained one of
Western Europe's poorest and least developed coun-
tries. In the post-war period, gross national
product (GNP) grew at an average annual rate of 5%
(see Table 1). Although per capita GNP equalled
Table 1
Comparison of Average Annual Growth
of GNP for Selected Countries
Percent
Country, 1951-60 1961-65 1966-70
Greece 6.2 8.0 7.0
Turkey 5.6 4.3 6.8
Spain 5.0 8.6 6.1
Portugal 4.5 6.4 5.5
that of Spain as re.zently as 1960, it is now the
lowest in Europe, excluding Turkey (see Table 2),
and significant structural impediments to growth
persist.
7. The relatively poor performance of the
economy under Salazar in great measure resulted
from his economic policies. These included a pre-
occupation with balanced budgets and tight money,
intended to assure the stability of the escudo; a
corporative system that accorded little opportunity
to potentially enterprising individuals outside the
privileged class; and, until the 1960s, a rather
mercantilist attitude regarding relations with the
outside world that led to the accumulation of large
gold and foreign exchange reserves.
2. Hereafter refers to metropolitan Portugal, which
includes the Asores and Madiera Islands.
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Table 2
Comparisons of Development
of Selected West European Countries in 1969
Country
GNP a/
per Capita
(US $)
Electric Power
per Capita
(Kilowatt Hours)
Literacy
(Percent)
Telephones
per Thousand
Persons
Turkey
370
115
55
N.A.
Portugal
570
630
65
65
Spain
870
1,380
90
99 b/
Greece
940
775
82
65 U/
Ireland
1,180
1,554
98
94 d/
Italy
1,550
2,155
94
143 a/
Austria
1,680
3,640
98
169
00
Finland
1,960
3,500
99
71
00
bl
I
United Kingdom
1,970
4,270
98-99
233
til
C)
XI
ib
Netherlands
Belgium
2,190
2,360
2,5-3
2,860
98
97
228
198
C)
PO
01
1
France
2,590
2,580
96
150
bri
oi
West Germany
2,,00
3,407
99
186
1-3
Norway
2,810
15,000
99
270
Denmark
2,850
2,400
99
309
Switzerland
2,960
4,210
98
434
Sweden
3,590
7,000
99
518
a. National currencies were converted at the official rate of ex-
change.
b.
1967.
c.
1966.
d.
1968.
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8. Budgetary policies were seldom designed to
stimulate economic growth and development. Portugal
was successful in balancing its budget until the
early 1960s, when it was forced to borrow 15% to
20% of total expenditures to meet rising military
outlays.
9. The government exercises an inordinate
amount of control over the private sector by making
all important decisions from the national down to
the company level through a corporative network
Salazar established in the mid-1930s. 3/ Each
Portugese industry is represented by a corporation,
comprising a guild that all employers are obliged
to join and a labor association with compulsory
membership for all employees. The extensive powers
of these corporations -- including decisions regard-
ing investment outlays, production levels, and new
plant locations -- are, in turn, subject to close
government supervision. The corporations' authority
to prohibit the entry of new firms has sheltered
existing industry from domestic competition, and
high tariffs have protected them from foreign com-
petition. A relatively small number of financial
holding companies own most of Portugal's productive
and distributive capacity.
10. Large gold and foreign exchange reserves
were accumulated during Salazar's reign, notwith-
standing the needs for investment capital. These
reserves were sufficient to pay for 20 months of
imports as recently as 1959, and since have been
consistently equivalent to more than a year's im-
ports. They were generated by a continuing series
of balance-of-payments surpluses achieved by the
Portugese escudo area. 4/ Because of a large deficit
3. In Spain, prior to the 1960s, Franco employed
a large network of quasi-government agencies toward
the same ends as C.ose served by Portugal's corpor-
ations.
4. Including, with metropolitan Portujal, the over-
seas provinces of Angola, Cape Verde, Macao, Mozam-
bique, Portuguese Guinea, Portt:%dse Timor, the Principe
Islands, and Sao Tome. The escudo area is both a
semi-free trade area and a semi-integrated monetary
system. The official stock of gold and foreign ex-
change, earned through non-escudo area tranaactions
of both the metropole and vhe overseas provinces,
are centralized in Lisbon with no distinctions made
among their contributors.
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b1,U11.k. 1
on trade account, metropolitan Portugal's balance of
payments with non-escudo countries was, until 1966,
usually in deficit. This deficit, however, was
more than offset by a favorable balance with the
overseas provinces. More recently, Portugal's over-
all balance with non-escudo countries has been in
surplus. Remittances from abroad, tourist receipts
for the metropole, and expanded exports to EFTA
countries account for much of the improvement (see
Table 3).
11. Salazar's dedication to stability entailed
a heavy price. The Portugese economy was adversely
affected by insufficient investment, a paucity of
skilled workers, and inadequate management. A
still primitive although important agricultural
sector -- which accounted for 18% of GDP in 1969
(see Table 4) -- expanded at an annual rate of
only about 1% in the 1955-68 period. The manufac-
turing sector, although growing 7.5% annually, has
had to be sheltered from import competition.
Insufficient Investment
12. Although the rate of fixed capital forma-
tion has gradually increased, it is still low for
a southern European country. Fixed capital forma-
tion averaged less than 18% of GNP in 1958-68 compared
with more than 22% in Greece or Spain, countrieo at
an equivalent stage of development. Portugal's
relatively low rate of capital formation is attribu-
table to both a paucity of investment opportunities
and inadequately developed institutions for channel-
ing domestic savings to potential investors.
13. The lack of investment opportunities is due
to structural shortcomings in both agricultuze and
industry. An archaic landownership system has
limited the potential for higher agricultural profit-
ability. Two-thirds of the farm population is con-
centrated on subsistence farms in the north where
holdings are too small to permit efficient use of
land, machinery, and manpower. In the south, the
predominant system of latifundia, which are owned
by absentee landlords and operated by tenant farm-
ers, provides little incentive for soil improvement
or new methods. Investment in industry has been
affected by the low degree of competition among
firms and the attendant lack of entrepreneurial
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Table 3
Balance of Payments of the Escudo Area a/
00
bd
C)
PV
hl
oi
(
.3
1
Million US $
00
bl
C)
PO
til
1-i
Current account
Metropolitan Portugal
Trade balance
Tourism
Private remittances
Other invisibles
Overseas provinces
Capital account
Metropolitan Portugal
Overseas provinces
Net errors and omissions
Overall balance
1964
1965
1966.
1967
1968
1969
17
-37
38
114
44
55
-111
-214
68
79
-44
128
91
-128
-297
82
108
-21
91
103
109
-6
2
68
-40
-340
178
158
-36
78
102
30
-333
186
209
-32
84
84
-38
-383
135
263
-53
83
89
43
-389
92
392
-52
12
15
93
-2
-1
109
-.;
-5
95
-11
11
95
-6
13
146
-20
35
10
107
135
20.9
80
a. Because of rounding, components may not add to the
totals shown.
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Table 4
Gross Domestic Product
and Employment by Sector
GDP L. 1969
Employment
Million Percent of in 1967
US $ Total a/ (Percent)
Agriculture, forestry,
and fishing 862.9
Manufacturing and
mining 1,869.6
Construction 198.0
Services 1,950.6
Total 4,881.1
17.7 34.7
38.3
4.1
40.0
100.0
25.6
8.5
31.2
100.0
a. Because of rounding, components may not add to the totals
shown.
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initiative and also by an industrial attitude that
is still, although to a diminishing degree, exces-
sively oriented to Portugal's small domestic market.
14. Viewed from the supply side, inadequate
credit mechanisms have existed to support a much
higher level of investment. PorLugal's money and
capital markets are too underdeveloped to mobilize
large amounts of private savings. The government,
although an important source of medium- and long-
term credits, has been unwilling to fill the gap
completely. Several opportunities for converting
added income into investible funds have remained
unexploited because of this. For example, little
of the increased income generated by the expanded
markets within EFTA in the 1960s was invested and
the large increases in emigrant remittances are
largely used to increase consumption.
Scarcity of Skilled Workers
15. The low educational levels of and technical
training available to labor have hampered economic
development, particularly in industry. Only 60%
of the eligible students receive as much as six
years of schooling. About 35% of the population is
still illiterate. As a result, many employers have
been unable to fill vacancies requiring skill and
experience qualifications.
16. This shortage of skilled workers and tech-
nicians has been exacerbated by a consistently large
net emigraticn during the 1950s and 1960s. Emigra-
tion, spurred more recently by attractive wages in
other European countries and by a four-year stint
in the military service -- usually in Africa -- that
all young men are required to serve, reached a peak
of nearly 120,000 in 1966 -- a level equal to the
natural increase in the labor force (see Table 5).
The flow, initially encouraged by the government be-
cause of worker remittances and domestic unemploy-
ment, became a serious concern in the late 1960s
as skilled labor became relatively scarce. Many
of the emigrants left the industrial sector where
they had learned useful skills, and industry had
to replace them with newly arrived unskilled workers
migrating from the farms. All told, because of
emigration and increases in the armed forces, the
civilian labor force has not increased in a decade.
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Table 5
Portuguese Emigration a/
411?01=
Number of
Fmigrap.0 Civilian
Year (Net) 2/ Labor Force
1945-49 4,583 N.A.
(annual
average)
1950-54 34,887 N.A.
(annual
average)
1055-59 30,224 N.A.
(annual
average)
1960
1961
1962
196?
1964
1965
1966
1967
1968
1969
30,458
31,740
31,870
37,349
53,886
87,488
118,519
90,949
79,067
69,153
3,130,000
3,060,000
3,080,000
3,100,000
3,100,000
3,070,000
3,070,000
3,070,000
3,090,000
N.A.
a. Inc u tng on y t 086 workers an relatives w o
emigrate legally. There have been, in addition,
eubstantial numbers of illogal emigrants. These
probably average at least 5,000 per year.
b. The number of emigrants who have returned to
Portugal each year have been netted from the total
numbers of annual emigrants.
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17. The increased demand for skilled workers
and the high rate of emigration have combined to
cause an accelerated rise in wages since the early
1960- The resulting increases in labor costs,
added LI exisiting supply bottlenecks and a risi,j
demand trend, have exacerbated inflationary pres-
sures. Consnmer prices rose at an annual rate of
about 6.5% during 1966-70 following a prolonged
period of stability.
The Costs of Colonialism y
18. The economic burden to Portugal of main-
taining its African territories of Angola, Mozam-
bique, and Portugese Guinea has been considerabla
since a major reoellion erupted in Angola in 1961.
Financial and managerial resources have had to be
diverted from crticial domestic economic problems
and projects. Portugal's regular military forces
have almor-`: tripled in size since 1959 and about
two-thirds of the 210,000 men are tied down in
Africa. Although effectively providing security
for most of the heavily populated areas, the army
has made little headway in ending ten years of
fighting. Lisbon's military expenditures rose
sharply during the 1960s following the outbreak of
hostilities in Africa and, as a result, now average
about 7% of the country's GNP (see Table 6). Of
these milA.tary expenditures, 60% have been absorbed
by Portugal's military requirements in Africa.
Moreover, with the civilian labor force nearly
stable and GNP rising steadily in Portugal, labor
productivity has been growing rapidly and unemploy-
ment has been progressively absorbed. This means
that the real cost of maintaining and expanding the
armed forces has increased -- military service is
less and less a refuge for underemployed rural la-
bor and more and more of a diversion of labor from
needed civilian uses.
19. Portugal also has been contributing heav-
ily to economic development in Angola and Mozambique,
hoping both +..o encourage additional white settle-
ment through increased investment in infrastructure
and mineral resources and to demonstrate to the black
inhabitants that their economic welfare is enhanced
under Portugese rule. During the secon6 half of
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Table 6
Portugal's Military Expenditures
Year
Military
Expenditures
(Thousand
US $)
Percent
of Tctal
Expenditures
Percent
of GNP
Approximate
Number of
Military
Personnel a/
00
tli
1
1959
1960
1961
98,080
105,140
171,190
28.9
26.7
36.6
4.3
4.2
6.4
75,000
79,400
84,000
Piz
t.;
1962
199,780
38.7
6.9
116,500
bn
1
1963
199,090
36.5
6.4
134,100
1-3
1964
224,390
37.5
6.6
139,800
1965
232,350
36.5
6.2
1E0,500
1966
257,140
37.3
6.3
178,600
1967
333,050
41.0
7.2
197,500
1968
371,910
42.4
7.4
198,200
1969
374,920
39.3
6.9
210,000
a. Regular military, excluding the Nat-zonal Republican Guard
and Fiscal Guard, which together have numbered from 12,000 to
15,000 perconnel.
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the 1960s, Lisbon made more than $125 million in
official long-term loans (net) to its three African
provinces, contributed between one-fourth and one-
third of that amount in grants, and guaranteed sub-
stantial amounts of private loan uonalitments.
International Exposure and EFTA
20, Portugal's entry into EFTA in 1960 was
alszar's most notable economic accomplishment.
The consecrient growth in trade has been very im-
portant tr Portugal because its domestic economy
provides neither the market nor the technical capa-
bilities required to sustain economic expansion.
EFTA extended special privileges to Portugal bn-
cLuse of its less developed status. Thus Lisbon
ha3 been permitted to postpone tariff cuts for
many o.0 its imported industrial products until
1980, yet since 1967 Portugal has benefited fully
from the abolition of import trIriffs by other EFTA
members.
21. During the 1960s Portugal's exports grew
nearly 11% annually (see Table 7) compared with
slightly more than a 1% annual increase luring
1952-60. Moreover, the composition and direction
of Portugese exports changed. Traditional exports --
cotton textiles, cork, wine, and olive oil --
while increasing in absolute terms, declined in im-
portance compared with new manufacturing exports --
chemicals, light machinery, and a wider variety of
consumer goods such as processed foods. Fc.,: lx-
ample, as total exports expanded at a rate ot 9.3%
annually during 1966-69, exports of wood and cork
increased at an annual rate of 1.7%, cotton tex-
tiles at 5.8%, and wine at 8.4%; but exports of
metals and metal products increased 14.0%, machinery
and transportation equipment 31%, and canned toma-
toes 13.9%. Exports to the Portuguese territories
declined from 29% of total exports in 1959 to 25%
in 1969, as exports to EFTA countries increased to
35% of the total. The export expansion, in turn,
stimulated a sharp increase in the annual growth
rate of Portugal's GNP from an average of 4.5%
during the 1950s to about 6% d-ing the 1960s.
Greater and more diversified industrial production
accolnted for m'Ist of the improvement.
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Table 7
Growth of Portugal's Exports
Thousand US $
Year
Total
'llEE2E5S1
Total
Imports
Exports to
Territories
Exports Exports
to EFTA to EC
1957
288,314
501,639
75,566
123,520
1958
288,652
480,329
79,211
124,496
cdr
1959
290,485
475,859
83,988
120,508
f4
'
1960
327,239
545,576
83,688
143,947
Cr)
W
01
1..]
?-?
d.
1
1961
1962
1963
326,014
369,803
418,232
656,095
585,375
656,218
75,687
83,160
99,424
70,615 70,874
74,888 86,026
91,708 91,742
1964
515,853
776,345
128,920
129,902 106,847
1965
576,440
923,574
144,001
158,091 119,513
1966
619,637
1,022,833
145,986
179,260 120,499
1967
701,432
1,059,221
171,041
240,511 116,740
1968
762,315
1,177,664
190,454
261,561 126,804
1969
822,567
1,230,709
208,617
285,849 149,310
1970
a/
793,064
1,297,031
198,466
280,982 144,075
a. January-November.
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22. Since joining EFTA, Portugal has welcomed
foreign investment to reduce production costs and
improve its international competitive position.
Foreign investment -- equally divided between
direct and portfolio investment -- rose from $7.5
million in 1962 to about $40 million in 1968.
Accounting for only 4% of fixed capital formation
in 1960, foreign investmen.`, now contributes nearly
20% of fixed investment. Because of low wage rates,
most foreign capital has been attracted to labor-
intensive industries, particularly food processing,.
textiles, and electronic equipment assembly, directed
mainly to exports.
23. Another outgrowth of the increased contact
with the outside world has been the substantial in-
flux of tourists. The number of foreign tourists
has expanded rapidly during the past decadc, attain-
ing a peak of nearly 2.8 million in 1969, compared
with only 350,000 in 1960. Tourism ranks third to
merchandise exports and emigrant remittances as a
source of foreign exchange -- $92 million in 1969
(see Table 3).
Caetano's New Policies
A Changing of the Guard
24. When Caetano was selected as the new prime
minister in September 1968, he too had to win
approval of the same powerful group of families
with vested interests in land, industry, and the
military that had formed an alliance with Salazar.
Accordingly, he has been at least tacitly committed
to uphold some of the basic ideas that character-
ized the Salazar era.
25. It is significant that, in light of the
inherent constraints of his office, Caetano has
aiopted -- albeit cautiously -- a more progressive
brand of economic policy than his predecessor.
From the outset he placed considerable emphasis on
-.7:eater professionalism in public administration
and modern economic techniques and decision-making.
He has appointed a number of young "technocrats"
to key ministerial posts, some of whom were formerly
members of the opposition to Salazar and all of whom
are strong advocates of industrial modernization
and more progressive economic policies.
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New Government Initiatives for Economic Struc-
tural Reform
26. The Law of Means (the annual economic
policy guidelines) for 1970 and 1971, the first to
be drafted entirely by Caetano's economic advisors,
have established distinctly new policy directions.
The two most noteworthy characteristics reflected
in these annual statements have been: first, that
the government is dedicated to rapid growth and
development, in contrast to Salazar's paramount
preoccupation with stability; and second, that un-
precedented responsibilities are assumed by the
government for planning and stimulating this growth.
For example, much more extensive use has been made
of expansionary fiscal and monetary policies under
Caetano than over before.
27. As in 1970, the Law of Means for 1971
notes especially the pressing need for increased
fixed capital formation through both public and
private investment. Public investmont needs join
the requirements for the defense of the African
territories as a top-priority claim on the budget,
a position that had been exclusively reserved to
the latter throughout the previous decade. Ex-
penditures on the development of Portugal's econ-
omic and human resources as a share of the total
government expenditures increased somewhat from
37% in 1969 to about 44% planned for 1971. In
absolute terms, however, the increase is more im-
pressive: $353 million and $485 million, respec-
tively. The need for scciql and economic infra-
structure, such as expansion of the country's
educational facilities, is growing more urgent.
By extending the period of compulsory schooling
for all students from six to eight years, Caetano
expects eventually to improve the skill levels of
Portuguese workers, with an nttendant boost in
labor productivity. The regime is also demon-
strating serious concern with past neglect of
agriculture by sharply increasing annual allocations
for projects such as irrigation, land improvement,
and rural roads.
28. Nonetheless, Caetano is looking primarily
to increased private investment, with less inter-
ference by the government, to foster development.
He is especially promoting industrialization as the
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main pillar of the country's economic future. Prior-
ity is being given to developing "modern" growth in-
dustries, mainly engineering and chemicals, and to
revitalizing the badly under-capitalized textile
industry, long a mainstay of the manufacturing sector.
Fiscal incentives are being emphasized in these in-
dustries to stimulate a higher rate of investment
and to improve their competitiveness. The more
important are tax incentives to encourage mergers
and a reduction or abolition of customs dutiea on
imported capital machinery and raw materials.
Caotano, unlike his predecessor, appears willing to
draw upon the country's large and growing stock of
international reserves in order to advance indus-
trial development (see Table 8).
29. The moist signific4nt and far-reaching step
taken to foster economic initiative and growth has
been to reform the oondiaionamento industrial.
This obsolete industn,v1 licensing system that
severely restricted ti,.. establishment of new indus-
trial enterprises has now been reduced in scope.
A number of industry categories subject to govern-
ment license were eliminated in February 1971. This
first stage reform exempts about 60% of Portugal's
manufacturing industries, and eventually only
strategic industries are expected to remain subject
to the system. At that time, only 5% to 10% of the
manufacturing sector will be covered.
30. Reforms are being nought in agriculture
that will encourage more investment in modern tech-
niques and equipment. Caetano ia attompting, pri-
marily by fiscal incentives, to consolidate small
land holdings in the north into more economically
sized unics. However, the gestation period for
accomplishing this objective appears to be consid-
erable. Cooperatives that encourage more efficient
use of farm machinery are being promoted.
31. Another major concern of Lisbon is to gen-
erate more medium- and long-term capital. Companies
have too often relied on short-term bank credits to
meet their caiital needs. Under Salazar, commercial
banks were premitted to extend loans with maturities
exceeding 180 days only up to an amount equivalent
to the banks' equity and reserves. Caetano's
decision to authorize the banks to finance loans
with maturities greater than six months -- and to
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International
Table 8
Reserves Held by Portugal
Million US $
x
tt
1965
1966
1967
1968
1969
1970
Gold
576
643
699
856
876
902
n
Foreign exchange
347
415
515
487
550
544
1.7!
0.i
IMF gold tranche
position
15
19
19
19
19
19
Total
9.38
1,077
1,233
1,362
1,445
1,465
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grant special export credits and insurance -- should
partially fill the gap. Furthermore, more long-term
capital has been made available by raising the ceil-
ings on the deposit rates of the government-owned
Caixa-Geral -- Portugal's most important savings
bank -- and the National Development Bank and by
creating a third major long-term credit institution,
the semi-public Portuguese Finance Corporation.
Foreigp_Capital and Technical Know-How
32. Foreign investment for the first time has
been included in the government's development strategy,
although it had been previously considered beneficial.
Lisbon offers favorable fiscal incentives to firms
deemed helpful contributors to national needs --
that is, those that are able to transfer technical,
managerial, and marketing know-how to Portuguese
nationals or those that are made in collaboration
with Portuguese investors. Caetano perceives the
role of foreign direct investment to be vitally
important to Portugal.
33. Portugal also is seeking a substantial in-
crease in foreign official aid, especially from the
United States. An International Bank for Recon-
struction and Development (IBRD) team visited Portugal
during March and April 1971 to Wicuss possible
development aid. Lisbon, however, is not optimistic
about the outcome, because of its rc!cent failures
to obtain loans from the IBRD or its affiliated
agencies, mainly because of Afro-Asian opposition.
Lisbon is pinning its foreign aid hopes largely on
an increase in US official assistance as a quid pro
quo for continued US military use of the Azores.
In the latter half of the 1960s, such aid averaged
$10 million annually (spread rather evenly among
PL-480, Export-Import Bank credits, and military
aid). However, the two governments have not yet
been able to arrive at mutually satisfactory terms
for a new agreement. 6/
6. The last formal Axores base agreement expired in
1962, and since then the United States remains there
on an ad hoc basis. As a result of talks '.itiated
by Lisbon last fall, Portugal and the United States
agreed that this bane arrangement be contin:!ad at
leant temporarily and [footnote continued on p. 203
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Price Stabilization
34. Caetano has had to struggle against in-
flationary tendencies. 1 new administration,
however, has taken a distinctly different tact from
its predecessor in resisting higher prices. Salazar
dwelt on restrictive measures to check demand forcLs,
while Caetano is convinced that increased supply with
minimum restraints on demand is a preferable solution.
He has stressed higher productivity, more efficient
internal distribution, a,-01 increased imports. He
hopes thereby to offset price and wage increments,
with selective monetary restrictions employed to
dive:t resources from consumption into investment.
Returns for 1970 indicate moderate success in dampen-
ing inflation, as the rate of price increase declined
from almost V% in 1969 to about a in 1970.
Ties with the EC
35. A main force underlying the move toward
economic reorganization and industrial modernization
is Lisbon's acowing belief that Portugal's economic
future is inevitably bound up with the markets of
Europe. From the formation of EFTA in 1960 through
the end of the decade, Portugal increased its ex-
ports to other members more than threefold, causing
the EFTA share of Portuguese exports to rise from
22% in 1961 tc, more than 35% in 1969. But if the
United Kingdom e Norway, Ireland, and Denmark are
admitted to the European Communities (EC), EFTA
will be disbanded.
36. Because of this, Lisbon Is anxious to reach
an accord with the EC. The Portuguese position, as
stated before the EC Commiss!on on 22 November 1970
is ultimately to obtain association status, pre-
sumably of the type enjoyed by Greece and Turkey.
that the United Strtes would provide increased
economic aid to Portugal, eesentially through PL-
480 aid and other assistance to be agreed upon.
In March of this year the United States offered
05 million in PL-480 aid per year -- about twice
the recent annual average -- in addition to two
surplus oceanographic research vessels and ar
unspecified amount of Export-Import Bank creeits.
Lisbon, however, is balking at what it maintains
is an inadequate package.
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Asserting that the present state of Portugal's
economic development, as well as its const:I.tution,
does not permit full membership, Portugal has re-
quested special provisions that would prepare
Portuguese industry and agriculture for eventual
economic union. Recognizing the EC's present
sensitivity to any arrangements with Portugal that
imply closer political ties, Lisbon is asking only
for commercial concessions in the initial phase.
Nevertheless, Portugal has rejected the possibility
of a preferential trade agreement of the Spain-EC
type, which provides for tariffs redvIctions foA:
selected exports. Portugal already enjoys extremely
liberalized export advantages with the EFTA member
countries that it does not wish to relinquish under
any new arrangement.
Portu al in Africa
7. Caetano has become almost as intransigent
on the colonial issue as was Salazar. All factions
in the present power structure are convinced of the
importance of maintaining the overseas territories.
These feelings are nurtured by emotional mewories of
Portugal's imperial past and the more practical know-
ledge that the African territories -- particularly
Angola -- are beginning to yield higher economic
dividends after years of considerable investment of
Portuguese money and lives. Lisbon's determination
to retain the African territories was dramatically '
demonstrated in November 1970 by the Portuguese-
supported military forays into Guinea, in part aimed
at the destruction of terrorists camps located there.
These incursions were launched in spite of the world-
wide disapprQval it was bound to, and did, evoke.
38. The prospect that the African territories
may become more valuable to Portugal is based primarily
en the discovery of large oil and iron deposits in
Angola and, to a lesser extent, on the extensive
Cabora-Bassa development program for the Zambezi Valley
in Mozambique. The 120-million-ton iron ore reserve
at Caosange will probably place Angola among the
world's largest iron ore exporters, and the two bil-
lion barrels of low-sulfur oil reserves in Cabinda
has provided Angola with another major new export,
which should lead all its exports within a few years.
The construction of an ambitious hydroelectric in-
stallation at Cabora-Bassa -- the first phase is
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scheduled for completion in 1975 -- will give Mozambique
one of Africa's largest sources of power. Moreover
the power export potential to neighboring countries is
considerable. Lisbon hopes that the agricultural dnd
mineral development permitted by the dam will ultimately
attract an additional million Portuguese emigres to
the northwest region of Mozambique. However, it is
doubtful that Lisbon can induce anything like that
number to settle in this area. For this and other
reasons, the full potential of Cabora-Bassa will
probably not be realized. 7/
39. The other African territories -- Cape Verde
Islands, Portuguese Guinea, Sao Tome, and the
Principe Islands -- because of their small size and
lack of resources, will probably always be a chain
on the Portuguese econcmy. Lisbon, however, is
unwilling to give them up for fear that this would
strengthen the cause of the insurgents in Angola and
Mozambique.
Prospects
40. Although Caetano appears to believe that the
Portuguese people should be given a greater measure
of freedom and influence n government, there is
little likelihood that this will proceed at more
than a small and grudging step at a time. He must
move circumspectly lest he imperil his own position
by provoking the financial and military establish-
ments that still comprise much of the power struc-
ture. Caetano has taken a more liberal approach
on the economic front that could yield important
results beyond the immediate confines of economics.
He counts on a reorganization of major European
markets as a convincing justification for pushing
forward more progressive economic policies. Yet
the repeal in October 1970 of a progressive labor
law, enacted just a year earlier to give workers
more rights through collective bargaining, aroused
concern that the government's program for economic
liberalization was being stifled. This act was
prompted by the need to combat growing inflationary
pressures generally attributed to excessive wage
increases.
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41. The government's new expansionary fiscal
measures -- including increased public investment
in agriculture and tax and tariff incentives for
investment in industry -- and some structural
reforms should have a salutary effect during the
early 1970s. The reform of the condicionamento
industrial, however, an especially important reform,
may take some time to make itself felt. As a result
of these new policies, the strong upswing of gross
fixed investment in 1970 should accelerate to an
annual growth rate of about 9% over the next five
years. On this basis, Portugal may achieve an
annual real growth rate for GNP during this period
of approximately 7%. Industry will continue as the
most rapidly growing sector, although agricultural
growth will also accelerate. The highest growth
areas of the industrial sector will probably be
those manufacturing paper, chemicals, and machinery.
Expanded irrigation and a shift from low-yielding
grains to animal and horticultural products for
which there is a fast-rising demand should foster
a moderate agricultural growth.
42. Both increased concentration of resources
in large-scale industries and the greater exposure
of private firms to competition will likely result
in higher economic productivity. Still, the govern-
ment must reconcile the need to achieve greater
economies of scale, through mergers when advisable,
with its determination to resist the dead hand of
the existing oligarchy over the economy. Beyond
this, shortages of skilled labor and entrepreneurial
talent will continue to be the principal growth
constraints in industry. Strong resistance to measures
directed toward the consolidation of land holdings
in the north will prevent even greater agricultural
growth.
43. A deteriorating trade balance, reflecting
the growing imports of capital goods and raw materials
that accompany expanding investment, will weaken
Portugal's balance of payments over the short run.
Indeed, imports for the first 11 months of 1970
rose by more than 20%. The long-term effects of
intensified investment activity, however, should
help Portuguese products become more competitive
on world markets. Moreover, Lisbon is looking
toward higher earnings from the tourist trade to
bolster the balance of payments. The completion
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of the Salazar Bridge over the Tagus River has
opened up access to a yet unexploited stretch of
scenic coastal area practically on Lisbon's door-
step.
44. Caetano's anti-inflationary policies are
already showing some results, and more progress can
be expected. There is some risk that the gathering
momentum of the labor union movement in Portugal
may aggravate inflationary problems, but thus far
Caetano has not hesitated to come down hard on the
unions when he felt that their demands were excessive.
The stabilization measures under Caetano have the
imporc?ant advantages over earlier methods of permit-
ting concurrent rapid real growth. Moreover, in-
creased economic prosperity and higher wages in
Portugal should gradually dampen the heavy stream
of emigrant workers.
45. Even as it seeks associate membership in
the EC, Portugal can anticipate persistent demands
to renounce its colonial policies. When Spain
applied for associate status with the EC, because
of the non-democratic nature of the Spanish regime,
the most Madrid could exact from the EC Commission
was the preferential trade agreement now in effect.
If Lisbon remains resolute concerning its African
provinces, it too may be forced to settle for some
form of preferential trade agreement, although
possibly a more favorable one than that extended to
Spain because of Lisbon's historical ties with
EFTA. Any agreement, furthermore, would cover
metropolitan Portugal only.
46. The retention of its African provinces is
held by the Portuguese to be a non-negotiable right,
but some small movement from this rigid stance is
evident. On 2 December 1970, Caetano proposed that
the National Assembly, as one of several constitu-
tional reforms, extend greater autonomy to the
overseas territories. The new "autonomous regions"
under Portugal would be given more administrative
and fiscal authority, especially to undertake local
development programs; but the Metropole would retain
control over the regions' foreign policies, defense,
and the appointment of regional governors. In the
long run, the administration may believe that it
can gradually prepare Angola and Mozambique, both
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economically and politically, to be multiracial
states, perhaps independent, bu: with close ties
with Portugal. Together, the Metropole and its
former colonies would form a commonwealth of inde-
pendent, Portuguese-speaking states, an arrangement
that could be accommodated to Portugal's increasing
orientation to Europe.
47. Caetano's efforts to modernize Portugal are
constrained by the conservative financial and mili-
tary interests that continue to dominate the power
structure. If he should lose their support, not
only would the government's ambitions for liberali-
zation of the economy be thwarted, but much of what
has already been accomplished could be undone. In
sum, the prospects for achieving economic moderni-
zation are more favorable than for political change.
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