Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis—1993 The government's economic goal is to modernize Portuguese markets, industry, infrastructure, and workforce in order to match the productivity and income levels of its more advanced European Union (EU) partners. Portuguese per capita GDP (on a purchasing power parity basis) reached 64.5 percent of the EU average by the end of 1993. The government's medium-term objective is to be in the first tier of EU countries eligible to join the Economic and Monetary Union (EMU) as early as 1997. To be eligible, Portugal must reduce inflation, budget deficits, public debt, and interest rates in line with convergence criteria set by the European Commission. The current policy mix to meet these criteria includes modestly stricter fiscal policy; continued tight monetary policy in defense of a broadly stable exchange rate; conservative incomes policies to support the disinflation process; and privatization and trade policies to increase the efficiency and productivity of the economy. An unexpectedly severe recession, significant fiscal slippage, and turmoil in the EU exchange rate mechanism undermined Portugal's EU convergence strategy in 1993. Faced with higher unemployment, a markedly weaker government fiscal position, and dimmer growth prospects than originally anticipated, financial markets repeatedly tested the government's commitment to disinflation in 1994. In response, the government consistently reaffirmed its commitment to exchange rate stability. As a result, inflation is much reduced, interest rates have come down, and the economy appears headed for recovery of 1.1 percent in 1994 and 3 percent in 1995. Prime Minister Cavaco Silva and the Social Democratic Party (PSD) face parliamentary elections in 1995. Some observers believe the Prime Minister remains committed to the discipline of EU convergence despite domestic political pressures to boost the economy in an election year. They point out that the government has thus far resisted union demands for a 5 percent minimum wage increase as part of a one-year social pact and is letting financial markets set a cautious pace for interest rate reductions even at the cost of slower growth and higher unemployment in the short-term. In addition, they say the government is aware that the European Commission is linking disbursement of politically-important EU cohesion funds to demonstrated progress on meeting EU convergence criteria. Other observers believe electoral considerations are already evident. They point out that government is not planning to cut the FY-1995 budget deficit as much as might be expected and is conceding to pressure groups such as local bankers and small merchants. Furthermore, they say accelerated declines in interest rates and a generous off-cycle salary boost cannot be counted out as electoral concerns build. 2. Exchange Rate Policy Portugal participates with Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, and Spain in the exchange rate and intervention mechanism (ERM) of the European Monetary system (EMS). In accordance with this agreement, Portugal maintains the spot exchange rates between the Portuguese escudo and the currencies of the other participants within margins of 15 percent above or below the cross rates based on the central rates expressed in European Currency Units (ECUs). The wider 15 percent band replaced a 6 percent band in August 1993. Portuguese authorities continue to maintain a stable exchange rate to anchor wage and price expectations. The authorities have thus far not used the wider 15 percent margins to ease policy, but rather have reacted to bouts of exchange rate pressure by raising interest rates and intervening in the market. In particular, since August 1993, the authorities have kept the escudo well within the old 6 percent band against the deutsche mark, at approximately PTE 102/DM. The government believes the general upward trend in Portugal's export market shares in recent years indicates the exchange rate continues to be consistent with maintaining international competitiveness. 3. Structural Policies The Portuguese Government continues to liberalize the economy to stimulate growth and convergence with EU standards. EU assistance programs designed to facilitate structural adjustment in Portuguese agriculture, industry, commerce, and regional development will approach 4 percent of GDP in 1994. EU transfers are expected to increase by 8 percent per year during 1994 to 1999. Since the Portuguese government must provide significant counterpart funding of EU transfers, the structure of government spending is expected to shift markedly away from current spending to make room for rising public investment. In the labor market, the sharp slowdown in nominal wage settlements has supported the disinflation effort. More broadly, the government is investing in worker training programs to enhance the quality and mobility of the workforce and improve its productivity. The government's privatization program slowed in 1993 after advancing rapidly in 1992. The government took in revenues of only 400 million dollars in nine privatizations in 1993. The pace picked up in 1994, however, with six privatizations yielding over 700 million dollars in revenues through August. By year-end 1994, "denationalization" of the banking and insurance sector will be virtually complete, and major non-financial state-owned enterprises (including energy and telecommunications) will be partially or wholly privatized. The government normally sets maximum foreign ownership percentages on a case-by-case basis and may retain a substantial voice in management of selected firms. 4. Debt Management Policies Total external debt stood at $19.7 billion at the end of 1993, or equal to about 23 percent of GDP. As recently as 1989, external debt represented almost 40 percent of GDP. Portugal's debt is well structured and can be comfortably serviced. Large international reserves, and the ability to tap international financial markets on favorable terms, will enable Portugal to manage balance of payments pressures and maintain financial stability as the economy recovers and imports for investment revive. Portugal is an aid donor nation and closely follows development issues in its former African colonies. Portugal's aid as a proportion of GDP exceeds the average for the OECD Development Assistance Committee. 5. Significant Barriers to U.S. Exports As of January 1, 1993, all barriers to trade, capital flows and labor mobility between Portugal and its EU partners were eliminated. Most barriers to U.S. exports, therefore, are common to all EU member states. Policymakers see foreign investment as a crucial pillar in building a more competitive economy. The government offers a very generous package of incentives to investors, including 100 percent foreign-owned subsidiaries. The package of incentives can range from 25 to 35 percent of the total investment. However, the government restricts or excludes private and foreign participation in some sectors, including sewage treatment, postal, transportation and water. Portugal follows EU directives for standards, testing, labeling, and certification. The Portuguese Quality Institute establishes national standards and implements EU directives. Portugal has already adopted most EU directives into Portuguese law. The Portuguese Telecommunications Institute sets standards for telecommunication products, and the National Laboratory Civil Engineering sets Construction Standards. Low voltage electrical and electronic equipment must meet the requirements of EC directive 73/23/EEC. Imported textiles, apparel, and leather goods must carry a label indicating country of origin and composition by percentage of the fabric. Government procurement legislation makes no distinction as to country of origin. In July 1993, the GATT accepted Portugal's list of entities covered by the Government Procurement Code. Quantitative import restrictions remain for the following products: automobiles, fabrics and nets, fuses, parts of footwear, iron and steel tubes and pipes, and weaving machines for certain countries. Textiles are covered by the Multi-Fiber Arrangement (MFA) and protected by EU-wide quotas that will be phased out under the Uruguay Round over 10 years. 6. Export Subsidies Program Portugal has no programs designed to directly subsidize its exports. However, EU grants to modernize Portuguese industry and agriculture may indirectly subsidize Portuguese exports. Also, government support to public firms, primarily designed to make them more attractive for eventual privatizations, may be considered an indirect subsidy. 7. Protection of U.S. Intellectual Property On October 20, 1994, Decree Law 252/94, which transposes the EU software law, entered into effect in Portugal. This law explicitly offers copyright protection for computer programs and stipulates stiff fines for software piracy. The government has undertaken great efforts to improve enforcement, but small-scale copying occurs. Business and software organizations have taken a proactive role in the fight against piracy. Portugal is a member of the World Intellectual Property Organization and is party to the Berne and Universal Copyright Conventions and the Paris Industrial Property Convention. Trademarks are granted for 10 years and are renewable. Duration of copyright is life of the author plus 50 years. Computer programs are not explicitly protected under copyright. Enforcement action against unauthorized copying of software and audio and video cassettes has become more common. Patents are granted for 15 years and are not renewable. Enforcement is sometimes weak, but enforcement agencies are being strengthened. In 1991, Portugal enacted patent protection for chemical products, pharmaceuticals, and food products. Portugal's patent law also contains compulsory license provisions for insufficient use. 8. Worker Rights a. The Right of Association.-Workers in both the private and public sectors have the right to associate freely and to establish committees in the workplace to defend their interests. Unions may be established by profession or industry. Strikes are permitted for any reason, including political causes. They are common and are generally resolved through direct negotiations between management and the unions involved. There are two principal labor confederations. The General Confederation of Portuguese Workers Intersindical (CGTP-IN) is linked to the Communist party. The CGTP is in the process of joining the European Trade Union Congress (ETUC); ratification of its membership is now expected to occur in 1995. The General Union of Workers (UGT) is a pluralist, democratic federation affiliated with the International Confederation of Free Trade Unions and the ETUC. b. The Right to Organize and Bargain Collectively.-Unions are free to organize without government or employer interference. Collective bargaining is guaranteed by the constitution and practiced extensively in the public and private sectors. When collective bargaining disputes lead to prolonged strike action in key sectors, the gov ernment is empowered to order the workers back to work for a specific period. Under a modification of the strike law, a “minimal level of service" must be provided during certain strikes, including in the public health, energy, and transportation sectors. c. Prohibition of Forced or Compulsory Labor.-Forced labor does not exist. This prohibition is enforced by the General Labor Inspectorate. d. Minimum Age for Employment of Children.-The minimum employment age is 15 years. It will be raised to 16 when the period for 9 years of compulsory schooling takes effect on January 1, 1997. The UGT and CGTP-IN have charged that a number of "clandestine" companies in the textile, shoe, and construction industries in northern Portugal exploit child labor. Despite improvements in the number of inspections carried out by the General Labor Inspectorate, however, the government does not allocate resources sufficient to fully address the problem, which remains unresolved. e. Acceptable Conditions of Work.—The national monthly minimum wage was last adjusted on January 1, 1993, and is generally enforced but legally does not apply to workers below the age of 18. Current legislation limits regular hours of work to 8 hours per day and 44 per week, but the workweek will be reduced to 40 hours by 1995. Overtime is limited to two hours per day, up to 200 hours annually. Workers are guaranteed 30 days of paid annual leave. Employers are legally responsible for accidents at work and are required to carry accident insurance. Accidents average between 70,000 and 75,000 per quarter. These figures have focused government attention on improving worker safety in the construction sector. There is also considerable concern about the poor environmental controls in the textile industry. f. Application of Worker Rights in Various Sectors.-Legally, worker rights apply equally to all sectors of the economy. As noted above, child labor and worker safety are problems in the textile and construction sectors. Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993 |