carlos da silva costa : the portuguese economy – structural saving gap and policy options address by mr carlos da silva costa, governor of the bank of portugal, at the inauguration of the academic year of the university of porto school of economics and business, porto, 31 october 2012. * i. * * introduction good afternoon ladies and gentlemen. i would like to begin by thanking you for the great honour of addressing you at this inauguration of the academic year of the university of porto school of economics and business, which this year happens to coincide with world savings day. there could not be a better occasion for an address on the structural saving gap of the portuguese economy and the policy options which best ensure the success of the on - going adjustment. ii. structural saving gap and policy options for the portuguese economy 1. public and private structural saving gap saving insufficiency is a structural trait of the portuguese economy. this is shown clearly in the external accounts : over the last 60 years, the current and capital accounts, which measure the economy ’ s financing capacity, posted a surplus only twice in 16 occasions ; meanwhile over the same period, the balance of goods and services was always negative. the chronic external imbalance led to the two adjustment programmes negotiated with the international monetary fund in 1978 and 1983. over the last 15 years, cheaper and more accessible financing afforded by monetary union led to a strong expansion in credit, and to a lesser extent, the contraction of private saving. the increase in indebtedness and decrease in saving were mainly used to finance consumption and low - return investments, and therefore did not result in the expansion of the economy ’ s growth potential. the strong increase in private spending translated into a deviation of resources to the non - tradable sector and persistent current account deficits. these imbalances were aggravated by unsustainable budgetary policies. between 1999 and 2010, the annual budget balance was on average – 5 % of gdp, and according to current data, the deficit was never lower than 3 % of gdp. this behaviour is not very different from that observed since 1977. in the first 10 years of monetary union, the current and capital accounts had an average annual deficit of 8. 3 % of gdp. the cumulative effect of these deficits was a sharp deterioration in the portuguese economy ’ s international investment position, which went from – 10 % to – 107 % of gdp from the mid - 1990s to 2010. the behaviour of gross external debt over the same period – growing from

of the education system or in territorial planning. www. bportugal. pt empirical evidence 2 points to social segregation in schools as a driver of skills inequality. the relatively poor performance by students from disadvantaged backgrounds is partly correlated to the fact that they are clustered together in lower quality schools. likewise, social housing policies should not bring about the creation of loser and winner communities. each community should include individuals considered winners and losers, in order for the former to be inspired by the latter and never stop believing they have equal opportunities to generate income. inclusive social housing is precisely one area of public policy that has benefited extensively from the expertise and contribution of the council of europe development bank, which has the noble mission of supporting social inclusion in europe. conclusion in conclusion, let me highlight the following key messages. • globalisation ’ s impact operates in at least two dimensions – income and employment. globalised trade impacts the level and distribution of income, but it also impacts the way employment is distributed across territories and across sectors. • redistribution will always be the reverse side of globalised trade. there will always be gains, but also losses … there will always be creation, but also destruction. low - skilled workers and sectors competing with imports are evident examples. studies show that redistribution costs rapidly surpass trade gains. and some of those costs are not reversible. when, for example, a given regional cluster disappears due to competition, it may never resurge again. • if there are no compensation mechanisms, discontent will rise. the european convergence machine has partially compensated for the impacts of globalisation through cohesion policies. public transfers are adequate as a first, more agile, response. ridao - cano, cristobal ; bodewig, christian ( 2018 ). www. bportugal. pt • however, public transfers won ’ t effectively solve the problem of loser communities, socially and geographically marginalised. this redistribution across communities has been shown to be empirically more important than redistribution across skill levels. without any other complementary policy, public transfers may generate dependency and destroy incentives. this problem can only be effectively solved o by adapting policy to the cultural preferences of those communities ; o by designing basic institutions in a way that every community is involved in the production process and becomes the owner of its own destiny ; o and by submitting globalisation to a set of basic rules ensuring everyone benefits from a fair level playing field and public intervention is dully framed. • in sum, a fine balance