Tourism can be the key to Portugal’s economic recovery

After Greece, Portugal can be the next big prey of the recent recession. What new can Portugal do at this stage? How can it push its GDP?

GDP = C + I + G + X – M, how can Portugal play around with this equation to increase the GDP?

The challenges in front of Portugal are

1. Portugal’s public debt is 77% of GDP (2009) and external debt is a whopping 223% of GDP (2009). In these circumstances there is no easy way of spurring the economy through Government spending or Government investment.

2. Gross national saving has gone below 10% of GDP which shows unavailability of domestic saving for investment.

3. Devaluing their currency to boost export is not an option.

4. With stringent labour laws it’s hard to see productivity rising in near future.

Thus it is clear that it’s hard to find more money for domestic investment either from household or from the Government. The challenges don’t end here. Even if Portuguese start saving more and Government gets a relief package from EU, the next question would be where to invest. Where should the Government be spending money? 

The usual suspects may not be the ideal options. For example, Portugal’s road density is already amongst the highest in the world (Length of motorway per capita; Portugal: 249.3, USA: 253.05; 2006 OECD data). Portugal fairs well in most of the other such development parameters. Thus, starting new infrastructure projects may not bring desired results, although they can bring inflation over time (Read point #5 here to understand why). Portuguese households are saving less and consuming more. Domestic production hasn’t been able to keep pace with consumption, which has resulted in a trade deficit which stands at € 1.6bn today. So giving more money in the hands of consumer will not solve the problem as the money can just end up increasing the value of imports, exactly the way it has happened in the USA. In the age of open economy the increasing domestic demand can very well be satiated with foreign imports, thus not doing enough to spur up the domestic industries.

Perhaps I am pointing towards the simple sounding way of doing something about the factors of production in order to ensure that the domestic industry create more goods and services. However, these factors are either too constrained (Land for obvious reason, Labour due to unfavourable but popular labour laws, Capital due to the challenges described above) or take a long time and effort to start showing results (Labour and Enterprise). Also, two or three of these factors must work together to show desired results.

So what can be done now? The question is still unanswered. While increasing domestic production will need both capital and time, where can the Government focus in the mean time to avoid slumping further down?

The answer lies in exploring the Balance of Payment Accounts, specifically the foreign savings or savings of rest of the world.

When your total domestic savings is not enough to meet your domestic investment, then the savings of the Rest of the World needs to flow in. So the first thing is clear, the current state Portugal is in, it needs to get money from Rest of the World. Now, the rest of the world can pay for 2 things

1. Portugal’s export

2. Portugal’s domestic investment

As briefly discussed above, boosting export would mean increasing productivity and reducing cost and it may take a longer time. Second way is to get the Rest of the World invest in Portuguese economy. Again a tricky option keeping the current economic situation in mind where Portuguese economy is said to be looking straight down the barrel.

Well, there is another simple and straight forward way of attracting the foreign savings. Specifically the household savings of rest of the world and that is through tourism. This can be one simple straight forward way to ensure that the savings of rest of the world’s comes to your country. Portugal surely has a rich historical heritage and numerous breathtaking natural views to attract savers (people) from all around the globe. This is one area which must be focused by the Portuguese Government at this moment. 

There are parts of developing world which are getting richer by the day with increasing disposable income. There is scope for Portugal to place itself amongst the top tourist destinations in the world and in the process firmly plant themselves in the radar of tourists looking for new destinations. Tourism not only brings foreign capital to fund domestic investments but also helps create direct employment and supports multiple other industries indirectly. Thus it can be an ideal sector for initial investment the Government can look for in order to ensure a healthy flow of fund.

I hope the Portuguese government sees the potential in this sector and provide the backing this industry deserves. This could be the first realistic step towards a sustainable recovery.