The Great Portuguese Hollowing Out

With every passing day Portugal has less and less economy left, while fewer and fewer people remain to try to pay down the debt.

As Portuguese President Aníbal Cavaco Silva once put it, “A country without children is a nation without a future.” He was, of course, referring to his country’s ultra-low birth rate, which is just over 1.3 (Tfr) and has been below replacement level (2.1Tfr) since the early 1980s. In 2012 only just over 90,000 children were born in the country, the lowest number in more than a century – you need to go back to the nineteenth century to find numbers like the ones we have been seeing since the crisis really took hold.

But added to this longstanding, yet unaddressed, problem there is now another, just as dangerous, one. High unemployment levels and the lack of job opportunities are leading an ever increasing number of young Portuguese to emigrate. The numbers are large, possibly a million over the last decade, victims of the country’s ridiculously low growth rate – under 1% a year. And the departures are accelerating. Jose Cesario, secretary of state for emigrant communities, estimated recently that up to 240,000 people may have left since the start of 2011.

Naturally this is one of the reasons why Portuguese unemployment numbers haven’t hit the Spanish or Greek heights. According to data from the Portuguese Institute of Employment and Professional Training, during the first nine months of last year 24,689 people cancelled their unemployment registration due to a decision to emigrate. This compares with 16,977 in the first nine months of 2011. In September alone, 2,766 people signed off for the same reason, a 49% increase on September of 2011. Yet between January and September Portugal’s EU harmonized unemployment rate rose from 14.7% to 16.3%, suggesting that without so many people packing their bags and leaving the figure would have been significantly higher, and offering some explanation as to why government officials don’t do more to try and stop the flow.

Nobel economist Paul Krugman recently suggested that among the ailments Japan was suffering from was a shortage of Japanese. Or put another way Japan’s slow growth is partly a by-product of the country’s ageing and shrinking workforce. Looking at the country’s population dynamics Portugal certainly looks a likely candidate to catch this most modern of modern diseases. Not only does Portugal have the key ingredient behind the Japanese workforce shrinkage – long term ultra-low fertility – it has some added issues to boot. Japan may be immigration averse, but its inhabitants aren’t fleeing in droves.

Of course, a shortage is always relative to something. Many hold that the planet is overpopulated, and that energy constraints mean fewer people would be better. So shouldn’t we be celebrating all these children who aren’t getting born?
Well, no, at least not if you want sustainable pension and health system, and that is what the developed world sovereign debt crisis is all about, how to meet implicit liabilities for an ever older population. One thing Portugal won’t have a shortage of is old people, since the over 65 age group is projected to grow and grow, even as the working population shrinks and shrinks. No wonder the young are leaving, even if the youth unemployment rate wasn’t 38.3%, just think of all the taxes and social security contributions the remaining young people are going to have to pay just to keep the welfare ship afloat. Patriotism at the end of the day has its limits.

Unfortunately population flight and steadily rising unemployment aren’t the only problems the country is facing. The economy is also tanking, and getting smaller by the day.

Far from the recession getting milder as last year progressed it actually accelerated, and there was a 3.8% output drop in the three months to December in comparison with a year earlier.
Naturally, it isn’t all bad news. Exports are doing extremely well. They were up by 5.8% during the course of 2012, and the really good news was an increase of almost 20% in shipments outside Europe – exports to countries outside the EU jumped 19.8% to13.1 billion euros. These now constitute nearly 30% of total exports, up from just over 25% in 2011. In contrast exports to other EU countries – where domestic demand is contracting rather than expanding – were up a mere 1%.
In contrast retail sales were down nearly 10% on the year, construction output 15%, and industrial output 5%.

This is a familiar picture across Europe’s southern periphery, where positive export performance does not compensate for shrinking domestic demand due to the smallish size of the export sector, generating a negative environment which ongoing reductions in government spending do nothing to assuage.

And next year it looks set to get worse. The Bank of Portugal is now forecasting a GDP drop of 1.9% in 2013, compared with earlier expectations for a much softer fall. As recently as last October the IMF was expecting only a 1% drop. In any event it will be the third consecutive year of decline, making for five out of the last six years where the Portuguese economy has gone backwards following the best part of a decade where it scarcely moved forwards.

But if there is a shortage of both growth and young people, there is no shortage of debt. Gross government debt as a percentage of GDP hit the 120% of GDP level last year. And it isn’t only public sector debt, the Portuguese private sector owed some 250% of GDP at the end of last year, according to Eurostat records, one of the highest levels in the EU.

Worse still the country’s net international investment position had a negative balance of nearly 110% of GDP, the worst in the EU.

This last detail is important, since according to conventional economic theory it is by drawing down on overseas assets (which have been acquired by pensions and other saving) that elderly societies can help meet their pension and health liabilities (the Japan case). But in Portugal far from reaping returns on this account, paying down these debts, or interest on them, will be a drain on public resources for many years to come.

So with less people working and paying into the welfare system, less GDP, and huge debts the numbers simply don’t add up. This year we will see GDP levels last seen in 2000. Yet in their latest Article IV consultation report the IMF Executive Directors actually “welcomed the [Portuguese] authorities’ impressive policy effort to gradually reverse the accumulated imbalances and prevent future crises”. How they can say this and keep a straight face when talking about a country which is actually travelling backwards in time is hard to understand. It looks increasingly like the Fund is suffering from “integrity flight” and relegating itself to the role of a public relations body for a group of fumbling European politicians.

The depth of ignorance which exists on the challenges the country faces was revealed last year when Prime Minister Pedro Passos Coelho actually said that the best solution to youth unemployment problem was for young people to emigrate. We are increasingly handling the new and complex problems presented by the 21st century with the aid of simplistic formulas derived from 20thcentury textbook economics. It’s time for someone somewhere to wake up to the fact that the old models don’t work, because there are growing number of key factors they simply don’t capture. The poor performance of economists using these models is increasingly getting the profession a bad name among the public at large. Mr Draghi’s outright monetary transactions programme may well be doing a marvelous job of addressing the issue of financial capital flight but it offers few solutions to the human capital one. In the absence of policies which acknowledge these issues exist and then address them none of the sustainability analyses – debt, financial sector, whatever – are worth the paper they have been written on.


I have established a dedicated Facebook page to campaign for the EU to take this issue more seriously, in particular by insisting member states measure the problem more adequately and having Eurostat incorporate population migrations as an indicator in the Macroeconomic Imbalance Procedure Scoreboard in just the same way current account balances are. If you agree with me that this is a significant problem that needs to be given more importance then please take the time to click “like” on the page. I realize it is a tiny initiative in the face of what could become a huge problem, but sometime great things from little seeds to grow.

This is a revised version of an article which originally appeared on the Iberosphere website.

This entry was posted in A Fistful Of Euros, Economics, Economics and demography, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

40 thoughts on “The Great Portuguese Hollowing Out

  1. I know you are using random WordPress images.
    But, for me, today, the image is of the Electrico in Lisbon.

  2. Where are those emigrants going? What role does Brazil play in this story, particularly going forward?

  3. Isn’t exercising their right to free movement just what (young) people should do to create a better future for themselves?

    Isn’t moving to a country with better outcomes for inhabitants one of the few ways to hold bad government accountable?

  4. “Isn’t exercising their right to free movement just what (young) people should do to create a better future for themselves?”

    Absolutely Ralf, I completely agree, and would never criticise anyone for going. In fact it’s been some time now that I have answered the question I often get from people here in Spain “I have a son/daughter who has just left university and can’t fin a job”, my answer is immediate “leave, this is a country now only fit for old men”.

    But, have you ever heard of the tragedy of the village pond (or commons). If too many people exercise their right then the right eventually becomes worthless. It isn’t the young people leaving who worry mean, but the older ones who stay in societies that become unsustainable. It may be the politicians fault, but it’s the ordinary citizens who get to carry the can, and then a Europe with such sharp divisions eventually falls apart. Is this really in our collective interests. Oh, I know, why should I care, I’m alright Jack.

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  6. Great article! I agree with your verdict, but what about the solutions? How do you improve this demographic situation? Some form of child benefits? Can Portugal or Spain afford new welfare state programs? Do you have examples of countries where these kind of policies worked? The way i see it, probably the only available solution for this countries is to attract more migrants, but this is a political hot potato now in Europe. And, of course, with unemployment at more than 25% is hard to attract any migrant worker at all. So if it´s true that in order to resolve Spain´s unemployment problem there needs to be a 20% reduction of real wages, then in order to create new jobs fore some desperately needed 1 or 2 million immigrants you´ll probably need to have some 30% reduction in wages(ceteris paribus). Well, good luck selling this idea to the Spaniards.
    PS – I am also a foreigner living in Barcelona, so it´s easier for me to talk about Spain rather than Portugal, but I believe the situation is basically the same in both countries.

  7. I don’t really believe the 1 million in the last decade number, but I’ll believe half that. Interestingly, if the population is shrinking, it does make the economics data over the short term not look as bad on a per capita basis.

    Over the long term, it’s absolutely catastrophic. That age pyramid is not even a pyramid.

  8. Hi Luis, I agree that in the short term people leaving not only makes per capita GDP look better, it slows down the rise in unemployment. Your Prime Minister isn’t the only political leader on the Southern Periphery who thinks this, but typically, like many politicians they are putting expediency before the long term interest of the country.

    On people coming back after 6 months, well look, I can’t speak about Portugal but here in Spain that has been the historic pattern. It even went back to the migration to Germany and Switzerland in the 60s and 70s, many in the end came back. But they came back to a job market that was improving, and to a country with a bright future (in the 1990s at least). But, as the saying goes, this time seems different. Unemployment in Portugal still looks far from its peak. In Spain and Greece at around 27% it is probably peaking. But it is highly unlikely that we will see growth this decade which will really bring the unemployment down to reasonable levels. So what would they be coming back to when there is work, and better paid work, elsewhere?

    Indeed, just how many of the Portuguese who left for France in the 1990s actually came back?

    These economies need a major “jump start” to turn investment and the labour markets around, but Europe’s leaders seem too complacent to take such a bold step. And anyway, Germany is a net beneficiary of all this, while restarting Portugal, Spain and Greece would mean higher unemployment in Germany. Where’s the incentive for the politicians?

  9. Eduard

    I don’t have an instant solution to this problem. Indeed in the long run I don’t think there is a “solution” as we currently envision solutions.

    You are quite right that raising child benefits (which I think we should do anyway) will now be very hard since there is such demographic pressure on health and pensions. Policymakers were warned this was all coming several decades ago, but as in so many matters they took no notice. Children are an investment in the future of a country, so I would have thought the implications of not having enough children to support a growing elderly population should have been obvious, but obviously it wasn’t.

    But all these measures, including immigration (where will China get the immigrants from, the “Chinese problem” is only a decade away) only buy time, they don’t give a solution in the classic sense. One day or another every society will have a “topsy turvy” pyramid.

    Some seem to think having robots instead of children is the solution, but I’m not sure they have thought through all the social implications of this. On the other hand, maybe robots would do a better job than the current politicians.

    The conclusion I think we can draw though, is that most of the policy measures being advocated by mainstream economists won’t work, whether they be advocating austerity or stimulus, since neither of these address the underlying fertility issue (it is beyond the bounds of monetary policy). If I am right and it is these epochal swings (demographic dividend and then demographic penalty) which lie at the heart of our current difficulties, purveyors of both these classes of policies are misleading many, many people, because they are suggesting they can create a sustainable, self sustaining economic recovery when they can’t.

    So the solution lies in part in adaptation and acceptance. But voters are a long way from this point at present, so we are seeing increasing volatility in the political system as people are expecting something they can’t have.

    Maybe it is better to think about the demographic issue in a similar way to the climatic one. It is something that is happening, that will happen more quickly or more slowly but it will happen. We are the agents of at least part of this change, but there isn’t much policy can do about it. We come from an age where it was thought policy could solve everything, now we discover it can’t.

    But that doesn’t mean we can do nothing. There are specific measures we can take that will help. Naturally some countries can benefit to the disadvantage of others. Those who wake up first to what is happening will be the main beneficiaries.

    On the other hand, does it make sense at the moment that so many people in the UK are getting worked up about Bulgarians and Romanians coming to the country to work.

    There is a long long road to travel on this front. Maybe seeing what gets to happen in Japan and then subsequently in China will help concentrate peoples minds.

  10. Erratum:

    All of which has lead him to ask himself

    …has led him…

    or …which leads him…

  11. Very interesting article as it puts together the major stress factors of the Portuguese society/ economy. I was curious about the close look by an English author until I learned you live in Barcelona- so close! The numbers for foreign investment are awful, and it seems that it’s one of the big issues, not only in this country. The financial turn to the capitalism in the last two decades turned normal, moderate rates of retrun on capital not acceptable by the greedy owners of capital assets; even before the crisis, portuguese capital was flowing to other geopraphies where returns were bigger. This problem is never addressed properly and it’s pf huge importance in the long run for the other indicators you point out: no investment, no new jobs, no new jobs for young people, less mariages, less children, emigration in despair, unsustainable accounts, degradation of demographic balances, unsustainable social security, and so on… Good work! I’ll be back .

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  15. With respect to people coming back:

    From the migrations of the 1960s, I think a significant fraction went back to Portugal, often at a later period in their lives (retirements or semi-retirement).

    As to recent years, I have no hard data.

    I have anecdotal evidence from my circle of friends/family/acquaintances that several people have left and come back six months or a year (or 2 years) later. Some people seem to spend a few months in Angola semi-regularly without wishing to permanently move there. Switzerland is another favorite for these trips (might be visa-related).

    I do not know how representative my circle is, however.

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  17. Edward Hugh, you have a good text here and you’re clearly point problems that need to be solved, but the data you’re working with…

    If 1 million people left the country in the last decade why did the population increased (from 10.356.117 in 2001 census to 10.562.178 in 2011)?

    Obviously this numbers don’t reflect what’s happening since around 2010, so things are worse now. But just like Luis Pedro Coelho said people that leave wont necessarily stay abroad. It’s obvious for example when you look at people that go to Angola to work in a 6 month project and then come back. In the statistics they show as people that left the country just like any others.

    In conclusion, i agree with the problem, but the numbers aren’t exactly the ones you have here.

  18. @quote:

    “But added to this longstanding, yet unaddressed, problem there is now another, just as dangerous, one. High unemployment levels and the lack of job opportunities are leading an ever increasing number of young Portuguese to emigrate.”

    “Problem” “Dangerous” Where exactly is the problem? Isn’t everything within these two sentences assumptions based on faulty reasoning?

    If Portugal has N population how does having 2N or 3N make it ‘better’? Is better or worse numbers on a chart of a computer screen? Do we live as slaves to our economic indicators or are we free men, or is that simply another finance fraud?

    The assumption is made that younger workers are needed to pay retirements of older workers when such payments are universally borrowed. The assumption is made that nations repay their debts when such payments are always rolled over into greater debts or defaulted upon when nobody is paying attention. The cultural assumption is that more is always better but more commercialized waste ultimately ends with capital exhaustion, there can be no other possible outcome.

    If there are no jobs in Portugal, there is no need for more Portuguese. This is common sense. As it is the entire planet is grossly over-populated with humans, it is but for the grace of the petroleum industry that said population levels exists in the first place … and as petroleum availability declines there will be a vicious contest between ourselves and our precious toys for sustenance …

    Seeing so far the sentiment of the public and the favors granted to the toys at every fork in the road, it is likely the diminution of the numbers of humans will be swift and shocking indeed.

  19. Hi Edward,

    Nice text, but you missed two things: 1) in the first half of the first decade of the 21st century Portugal (and for the first time in its recent history at this dimensions) was an immigration country with estimates from immigration supporters reaching about 500k people coming from mainly Brazil and Eastern Europe; 2) the seriousness of the immigration – I work in IT and having people moving out is something normal in my professional circles, normally in the first 5 years after college. But, in the last two years I saw more than 20% of my contact list get an international phone number, and in the last year it went from single people to married couples with children that are under 7 years. The difference in these moves is that they include a commitment to move for at least a decade while their kids are in school. They’re not coming back easily.


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  22. Dear Mr. Hugh

    There´s a bright side to all these people migrating to other countries if they send remittances back home. Take for example Latvia. If there are a lot of unemployed and if there´s no chance (or political will) to create employment for them in the short term, isn´t it better if they migrate to other countries, and send part of the wage they earn to their family members who stayed behind?1
    Clearly I would prefer them to stay in Latvia and work there but if that is not possible…
    From your other posts on this issue I understand that you are not a big fan of fiscal stimulus to raise demand and production, right? However, to continue cutting the budget only depresses the economy further and so more and more people will leave, unless you believe in what Krugman calls ´the confidence fairy´. I understand that you are worried about the longer term sustainability of debt, but trying to cut it now only worsens the outflow of people (apart from shrinking the denominator in Debt/GDP, so also worsen debt sustainability in the short term).


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  24. Never assume that social convention is immutable or inviolate.

    The particular distribution of goods in a real economy is *always* the result, however indirect, of social convention. The distribution of wealth, and of the income that generates it, is *always* the result of social convention. Even supposedly natural rights such as to own personal, real or intellectual property are social conventions.

    Present social conventions favor strong exclusive ownership of property and a debt-based economy because that works for the most influential who have in turn convinced most people that it works for everyone. If average citizens were to become less influenced by those who gain the most, perhaps by purging themselves of juvenile Horatio Alger fantasies, conventions would undoubtedly shift toward more equitable schemes oriented more toward providing the desired results and less toward playing a rigged game out to the end.

    To suggest that one can’t take care of the elderly and disabled without economic and population growth is tantamount to suggesting that one can’t bake a cake without any ounces. It’s facially silly in the latter case, but strangely accepted in the former. If it isn’t happening but clearly could happen, it’s because we have chosen not to make it happen in favor of something else.

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  29. Dear Edward,

    I have been following your blog for sometime as I share the same interest in Economics and Demography. Once you take into account population in economic analysis it explains so much about what’s going on in the world, and in the present there’s a lot going on. The situation in Portugal is particularly serious because it is ageing before getting rich. I’m not an economist but I’ve tried to graph the “shortage of Japanese” moment for Portugal and I think I was able to do it. Could you take a look at my blog? I’ve posted in Portuguese for the moment but there’s a translation tool in the blog in case need.
    If it’s not asking to much would you mind to leave a comment there.Thanks

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  33. I think this will happen,

    Portugal population decreases, work decreases, income of country and there for unable to pay debt off. Leaving Corps to buy off Portugal independency in every way. The population will migrate to other countries and mix with those people eventually causing the culture to disintegrate and become obsolete. Spain will take over Portugal and enforce the remaining land to be Castilian in culture. As for the language, it will survive but just not as ‘Portuguese’ as Brazilian.

  34. Such a Shame though I do enjoy the Portuguese culture ever since the days of Neolithic paganism they believed in god of security & medicine.They are leaders in healing of the environment such as recyclable energy & resources as far back as the medieval age. Also leading in peace keeping all around the world and helping former colonies that don’t even belong to them establish themselves.
    And Many more great Modern era accomplishments.

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  36. Great article but I’d like to had some points. I believe the biggest problem in Portugal is government corruption, the scandals appear on almost a weekly basis and huge sums of money involved that are deviated from their purpose of investing in the country. A lot of the country is also wasted, beautiful landscapes with great biodiversity are torched every year because of wildfires and as such the potential for tourism is lost. Portugal has one of the biggest exclusive economic zone in its sea and it is neglected for its potential and not patrolled so other countries can explore it. Geographically Portugal could be used as a strategic port of entrance to Europe from the Atlantic. A fantastic climate.. i could go on… I’m Portuguese and i’ll have to leave my country to search for a job and i find it a shame i love it and i find it has a lot of wasted potential and at fault are the very Portuguese people who don’t turn on their governors and their governors who live corrupted lives and don’t care about the future of this country

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