Why does Portugal fail?

  • Óscar Afonso
  • 19 May 2021

Our institutions and EU membership serve the elite and allow us to escape poverty by growing a little, but do not allow the general population to rise to average EU prosperity.

The renowned economists Daron Acemoglu and James Robinson published in 2012 the seminal book “Why nations fail: the origins of power, prosperity, and poverty”, which helps to understand the causes of an Economy’s backwardness and how it can be overcome. Acemoglu and Robinson show that it is the political and economic institutions that determine economic success or lack thereof. Current reality shows that the same people can live in extreme poverty in one country and prosper when they move to another. How can a border make a difference?

Acemoglu and Robinson show that a country’s success arises when institutions are inclusive and pluralistic, i.e., include the majority of the population in the political and economic community, creating incentives for those who invest in the future. Modern prosperity is generated by investment and innovation, so investors and innovators must be guaranteed ownership of the “fruits” of their success. The minimum conditions are a properly written constitution, democratic elections, centralized and competent political power that accommodates all interests, the right to property with equal treatment of all before the law, respect for contracts, the ease of starting a business, competitive markets, and freedom for citizens to express themselves and pursue the professions they want.

The difference between the path taken by the Portuguese and British colonies proves the theory. In the Portuguese colonies, dense populations that were easily controllable and exploitable led to the implementation of extractive institutions. In the British colonies, by contrast, dispersed indigenous populations made equal control and exploitation impossible, and economic incentives were used to attract settlers; economic and political pluralism took root, the industry flourished, and so did prosperity. England, the cradle of the 1st Industrial Revolution, also proves the theory. The differences between the English, Spanish, and Portuguese absolutisms were reflected over time. During the discoveries, maritime trade was under State control in Portugal and Spain, and in private hands in England. The riches of the New World solidified the monarchies in Portugal and Spain, and ensured the political pluralism in England that sowed the seeds for later significant economic growth.

Prosperity and development thus depend on the ability of governments to make institutions inclusive and pluralistic, where everyone has the same opportunities. This is the only way to unleash the creative potential of people and countries, to build an economy with competitive advantages, to create more wealth for firms, their workers, and the state, and to generate a virtuous circle that allows progress and the sharing of well-being by all.

What lesson does this seminal book have for the current Portugal, which, being part of the European Union (EU), presents itself as poorer and yet, against what economic theory holds, also has worse economic performance, despite having a written constitution, democratic elections, and centralized political power?

Let’s assume that the constitution serves, even if, just to give an example, it allows members of parliament to have no link of accountability to the voters and thus prevents the participation of the population in controlling the quality of the politicians and the acts they perform.

Are elections truly democratic? I don’t think so. Voters are deceived with false promises and half-truths, which only guarantee paradise in the future! Whoever is in power, the incumbent always has an advantage because, with no concern for the efficient performance of the (politically dominated) organs of Sovereignty, can use public resources in its favor to win elections. Close to elections, preferences go to what is immediately visible to the voter (highways, real estate activities, and some “handouts”/subsidies to the poorest) and not to the inclusive reform of institutions that ensures better health, education, law, order, birth rate, investment, innovation, entrepreneurship, and planning.

Has the political power been competent? The imminent bankruptcy of the country three times in the post-April 25 period says it all. Decisions about the “immediately visible” are casuistic and discretionary, do not distinguish the essential from the accessory, and ensure that wealth is distributed “upwards” (to the elite) with some “handouts” “downwards” (to the poor). Political power does not respond to the interests of all, and there is no shame in the practice of abusive acts that were criticized by previous holders of power. Not all Portuguese have the same opportunities because, if monopolies are not fought in general, they are not fought at the corporate and political level, as attested by the continuity of the same old ones. Cronyism, the creation of unproductive intermediaries and parasites created by the political parties is, in fact, the rule, despising meritocracy in favor of personal and/or political interests.

But if this is so at the central state level, the same is true, with aggravation, at the local level. Especially in the dehumanized interior, where the economy revolves around the cake that is the city council budget, elections tend to be won by the incumbent. The incumbent, making itself the owner of a decreasing cake, uses a divisive and extractive strategy, based on hatred, offense, discord, and promotion exclusively its own, to marginalize and expel from the territory those who defend inclusion, merit, truth, the most determined, and who want the territory’s development.

When institutions are extractive, citizens are forcibly removed from collective life, they do not perform the professions they want, because opportunities are denied them, and there are professions that only a few can access. The State (central and local) gets in the way of everything, limits the freedom (even of expression) of citizens, and there is no clear commitment to free initiative and regulations that avoid conditioning economic activity, discouraging investors and innovators. Without investment, innovation and human capital, competitiveness depends on the employment of cheap labor, and it is already a blessing to have jobs that generate poor people. In this context, corruption could only be, as it is, widespread, having increased with democracy and with the deficiencies of justice. This, being slow and also expensive, does not ensure that all Portuguese are treated equally before the law. There are first-, second- and third-class Portuguese.

In short, our institutions and EU membership serve the elite and allow us to escape poverty by growing a little, but do not allow the general population to rise to average EU prosperity. With each of us having contributed, through ignorance or distraction, to the current situation it is up to us to finally realize that no elite gives away power and benefits willingly, so prosperity requires a political struggle against privilege(s).

  • Óscar Afonso
  • President of OBEGEF and Professor at FEP - School of Economics and Management