Abstract

The Portuguese balance of payments, after recording substantial deficits for a number of years, swung back into surplus with the implementation of a comprehensive stabilization program in 1978. The program is noteworthy for the primary reliance it placed on exchange rate and interest rate policies to ease the balance of payments constraint on growth. The external adjustment was achieved while maintaining the growth of the economy at a rate that remained above the weighted average for the country’s trading partners. The outturn confirmed that there need be no conflict in Portugal between balance of payments adjustment and the pursuit of growth and development objectives.

The Portuguese balance of payments, after recording substantial deficits for a number of years, swung back into surplus with the implementation of a comprehensive stabilization program in 1978. The program is noteworthy for the primary reliance it placed on exchange rate and interest rate policies to ease the balance of payments constraint on growth. The external adjustment was achieved while maintaining the growth of the economy at a rate that remained above the weighted average for the country’s trading partners. The outturn confirmed that there need be no conflict in Portugal between balance of payments adjustment and the pursuit of growth and development objectives.

The external deficit that required correction could be traced to a number of major shocks to the Portuguese economy. These shocks included such irreversible factors as the increase in world petroleum prices in 1974, and the loss of privileged markets in Africa. They were initially met by sharp increases in domestic real wages rather than by the reductions that would have been called for to maintain payments equilibrium in the new external circumstances. By further tightening the balance of payments constraint on growth, initially higher wages would have in time caused lower wages than would have been necessary. Lower wages are required to make room for long-term growth, despite the greater inequality they entail.

A choice was made in the Portuguese program against controls and in favor of incentives. The efficacy of price incentives such as interest and exchange rates was widely doubted on the grounds that the external deficit was structural in character. If, in fact, the misallocation of resources that produced this deficit was due to rigidities that had to be accepted, financing might have been the only alternative to controls. If, on the other hand, distortions rather than rigidities lay at the root, then adjustment was certainly called for. The decision to correct perverse price incentives, whatever rigidities may also have been present, was amply vindicated by the results.

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