Jorge Braga de Macedo
 
 

From the late 1950s to the early 1970s, Portugal developed channels of structural interdependence with the European economy.(2) The continuous increase in real wages and very large gold and foreign exchange reserves resulting from this demonstrated the benefits for Portugal in directing manufacturing exports to the more advanced these countries. A Free Trade Agreement with the European Economic Community (EEC) consolidated these channels of interdependence in 1972. Unfortunately, by this time Portuguese prosperity was coming to an end. The ensuing stagflation complicated and slowed the process of European integration.

Over and above the oil embargo and the international recession, the Portuguese economic environment was decisively affected by the 1974 Revolution. Severe wage inflation, widespread nationalizations, and expansionary fiscal policies characterized a two-year period of civil strife during which the ideological pressure was largely anti-Western. In March of 1977, the newly established democratic government formally requested membership in the EEC, fulfilling a promise made during the Spring 1976 electoral campaign, but it was not until 1978-1979 that a stabilization program agreed upon with the International Monetary Fund (IMF) restores equilibrium in the balance of payments. However, the program did not succeed in controlling the deficit in the public sector accounts and, after the second oil shock and the dollar shock of 1981, the external problem returned with a vengeance.

Under present conditions, it is evident that the transitional inflow of real resources necessary to avoid the adverse effects of full membership in the EEC will have to be much larger than would have been the case if the "catching up" process of the sixties had not been interrupted. Given Portugal's small size relative to the Community, if it were joining alone the required aid would probably be forthcoming. Greece became the tenth member in 1981 and the necessity of transitional aid was acknowledged in the treaty of accession. However, Spain applied for EEC membership shortly after Portugal and it is safe to assume that the total required aid for both these countries would be well beyond the capabilities of the present EEC budget. In fact, even if Community aid were not required for the restoration of macro-economic equilibrium and an acceleration of economic growth, the southern enlargement of the European Community would still be a further stress on already strained areas such as agriculture and "sensitive" industries.

Therefore, contrary to the expectations of positive short- and medium-run effects of European economic integration that led the original Six to set up the Common Market and to enlarge it in the early 1970s, the expectation is that the current enlargement is more likely to have negative short-and medium-run effects on the Community, as well as on its prospective members. Nevertheless, the deterioration of the international political environment, without reviving the federalist dreams of the early days, generated a sense of fundamental European solidarity which made the southern enlargement imperative. Such a steep trade-off between political and economic incentives was absent in the earlier experience of the European Community which was largely based on the hope of turning the consolidation of economic gains from increased structural interdependence into policy interdependence and, ultimately, political integration.

The trade-off is perhaps most dramatic in the case of Portugal. On the one hand, sensitivity to economic developments abroad was probably greater at the time of the 1972 Agreement than it is now or is likely to become in the near future. On the other hand, despite the domestic and international macro-economic malaise, after the revolution the EEC showed a political responsiveness to Portuguese integration which was lacking before. In fact, a major political slogan of the Socialist party in the 1976 elections was "Europe is with us," while the Democratic Alliance which won the 1979 elections called European integration "the priority of priorities." European political responsiveness declined after the summer of 1980 due to French reservations about the Iberian enlargement and the postponement of membership by the Commission until 1984 at the earliest.

In the meantime, renewed macro-economic difficulties have again made it clear that Portugal cannot hope to have control over the process of integration unless the political system succeeds in maintaining a stable social environment. Aside from the well-known difficulties of the advanced European industrial societies in this respect, the young Portuguese democracy has confronted specific problems. Electoral legitimacy, itself divided between the President of the Republic and the Assembly of the Republic, had to coexist with a Revolutionary Council made up of military leaders, among whom was the President of the Republic. Before its recent demise, the Council succeeded in blocking several attempts at improving the investment climate and the discipline of public sector finance. By exacerbating political divisions, it also prevented improvements in the structure of the three major democratic parties. Socialist, Social-Democrat and Centrist, as well as limiting the stability of coalitions between them. Furthermore, even after the Amendment of 1982, the Constitution remains an attempt to guide Portugal's political democracy toward a "classless society" (article 1).

There are two domestic constraints on the success of the integration of Portugal into the EEC: the logic of the economic situation and the contradictions of the constitutional system. The logic of the economic situation implies narrow limits for politicizing resource allocation mechanisms, which are not recognized by the constitutional system. The constitution protects the legacy of the revolutionary period. These two features obviously hinder government policy-making. Specifically, a sophisticated policy, which would maximize the benefits of geographical proximity to European markets and institutions without abandoning the traditional Atlantic interdependence, becomes difficult to imagine, let alone implement.

The economic and political constraints interact in both the short and long run. On the one hand, the politicization of resource allocation, favored by what we will call the "dynamics of parallel legitimacies," decreases only when external disequilibrium reaches crisis proportions. On the other hand, the vicious cycle of short-run dilemmas prevents the economy from making structural adjustments which would allow it to take advantage of the growth of EEC trade. It also makes European integration and political democracy harder to reconcile with the long run objective of the 1976 Constitution. The dilemmas of integration stem from these two constraints which will be analyzed in turn.

THE DILEMMA OF THE POLITICIZED OPEN ECONOMY

The Logic of the Economic Situation

In a small open economy, there are narrow limits to the politicization of the resource allocation mechanism. In the short run, macroeconomic policies are restricted to maintaining a sustainable external deficit. In the long run, economic growth requires taking advantage of the opportunities offered by the world economy.

To understand the short-run logic of the economic situation, the lesson of the recent macro-economic experience must first be understood. In order to do this, I will concentrate on the main adjustment channels at work and illustrate the macro-economic dilemma by showing the pressure of real wages on the current account at a given level of output. (3) With respect to the long-run logic of the economic situation, however, it is not enough to extrapolate from revealed patterns of comparative advantage. Alternative types of international specialization must also be analyzed in terms of their contribution to national welfare to make it possible for public policy to attempt to favor the specializations most likely to make integration a success in the new international environment.

In both the short and the long run, the logic of the economic situation is a consequence of characterizing the Portuguese economy as dependent: because it cannot affect the relative price of its exports and imports, when these decline, the real wage has to decline as well. Note that an economy is often smaller in import than in export markets because import markets tend to be more concentrated. The assumption of the dependent economy is thus optimistic. It implies that international trade patterns are sufficiently diversified for the supply of exportables to be constrained only by the domestic resource endowment and by the domestic demand for exportables. Not having to face export quantity constraints is, of course, the most desirable consequence for a small country with increased structural interdependence with a large area. It is evident that, in the Portuguese case, there is a great deal more export diversification to be done, not only in terms of European markets but also in the American, African, and Middle-Eastern markets. Indeed, concentration on European markets subjects Portuguese exports to quantitative restrictions. In this case, exchange-rate devaluation – while able to reduce wages in terms of traded goods - may not be able to improve the current account deficit without a deeper depression in economic activity and a further reduction in the standard of living of the population.(4)

Revolution and macroeconomic adjustment

Consider a dependent economy where macro-economic equilibrium is defined by a combination of real output and real wage. If, from a situation of balance in the current account, the real wage increases, expenditure on goods and services rises relative to output and the current account moves into deficit. To correct the deficit without decreasing real wages, there must be unemployment and thus a decline in output. External balance implies an inverse relationship between real output and the real wage. For simplicity, internal balance is defined by the absence of unemployment, given full capacity utilization so that there is no response of labor supply and output to the increase in real wages. Internal balance is implied by the equality of an exogenous potential output and effective demand. (5) In any event, there is a unique combination of real output and real wage which keeps the dependent economy in short-run equilibrium.

If we allow for growth of potential output and world inflation, short-run equilibrium in the dependent economy can be interpreted in terms of deviation of the observed rates of change of real output and the real wage from their long-run equilibrium values. If the actual growth rate is higher than the warranted rate, inflation will accelerate (and conversely). If real wages grow at a rate higher than the rate compatible with intertemporal real current account balance, the current account deficit will worsen (and conversely).

Figure 11.1 illustrates these relationships in terms of the growth gap and the wage gap. At the origin, the growth rate of real output is equal to the growth rate of potential output so that the growth gap, denoted by x, is zero. Similarly, at the origin, the rate of change in real wages, or rate of wage inflation, is equal to the equilibrium wage inflation given by change in the terms of trade and in labor productivity, so that the wage gap, denoted by w, is also zero. Along the vertical axis (where x = 0) there is internal balance while the inverse relationship between growth and wage inflation that preserves external balance is represented by the downward-sloping locus. The two schedules divide the space into four "zones of economic unhappiness": when x is negative (Zones B and C), domestic inflation falls and unemployment rises; below the external balance locus (Zones C and D), the current account improves. The dilemma of macro-economic policy in the dependent economy is clear from the figure: Zones A and C (respectively external deficit and accelerating inflation and surplus and unemployment) are compatible with positive or negative wage gaps, while in Zone B the wage gap is positive and the growth gap is negative and in Zone D the wage gap is negative and the growth gap is positive.

Figure 11.1 also includes a schematic illustration of the phases of the macro-economic adjustment process in Portugal since 1973. At that time the economy was somewhere in Zone D, with a current account surplus, a negative wage gap, and increasing price inflation, but was probably not too far from the origin. The oil crisis and the subsequent international recession led to a fall in the terms of trade, which in turn led to a fall in the warranted real wage. The increase in population, due to the "decolonization" of the African territories, had the same effect. In the face of the fall of the warranted wage in 1973-1975, militant trade-unions, post-revolutionary price controls, and a passive fixed-exchange-rate policy led to an increase in real wages and thus to a large positive wage gap and the emergence of unemployment, which threw the economy into Zone B (phase 1). Note that expansionary fiscal policy during Provisional Governments moderated the decline in output, but the decline in imports induced by the brutal fall in private investment was strong enough to keep the current account deficits at a manageable level. The expansionary policy stance of the first constitutional government (1976-1978), accompanied by ceilings on wage inflation (both through a ceiling on nominal increases and through the relaxation of price controls), restored growth and brought the economy closer to internal balance. In so doing, however, it moved further away from the external balance locus and the unsustainable current account deficits of 1976-1977 emerged (phase 2). As a consequence, in 1978-1979 wage deflation increased and was accompanied by restrictions on domestic credit creation which slowed growth, eliminated the external deficit, and brought the economy to zone C (phase 3). In 1980, the sixth constitutional government attempted to consolidate the return to equilibrium by bringing down price inflation and increasing growth. Exchange rate policy was successfully used to fight inflation and steps were taken to bring the budgetary process under control. Monetary policy, on the other hand, was expansionary so that real growth increased and the current account deteriorated substantially. This allowed real wages to rise and brought the economy close to equilibrium. At the end of 1980 and in the beginning of 1981, however, another positive wage gap appeared while inflation accelerated, so that the economy moved to zone A. The delay in implementing restrictive measures designed to check wage inflation and to reduce growth led to an alarming deterioration of the external position in 1981, which would be somewhat similar to the second phase if it were not for a vastly more unfavorable external environment.

In sum, after circling around equilibrium for five years, the economy came close to attaining it in 1980 and began a new vicious cycle in 1981. Nevertheless, we will ignore macro-economic disequilibrium when looking at the long-run consequences of European integration on resource allocation and the welfare of the population. In other words, we will only look at shifts in the origin of Figure 11.1.

Integration and Structural Adjustment

Types of specialization

Consider a small, closed, competitive economy which decides to depend on international trade. Since it is open to an new set of prices, this economy will be able to export goods that are dearer abroad and import goods that were dearer at home, thus consuming more goods and services than it would at the old set of prices. If, on top of that, the home country has access to the same technology as the foreign economy, then it will export goods that make intensive use of the factor of production in which it is relatively more abundant than the foreign economy. As a consequence, the return to this factor increases and the return to the other factor declines, but by less than the increase to the abundant factor. This implies that the owners of the abundant factor could compensate the owners of the scarce factor and that, therefore, if compensation were guaranteed, a democracy would (unanimously) vote for free trade. This is why the orthodox theory of international trade holds that free trade is good for everybody.

In practice, the scarce factor is rarely compensated in this way. As well, due to economies of scale and product differentiation, the structure of national markets is rarely one of perfect competition. These two exceptions cut in opposite ways so that international specialization in differentiated products does not have those consequences on the income distribution by factor which are associated with traditional specialization in homogeneous products. This is consistent with the observation that the expansion of trade between the advanced economies of the North Atlantic area after the Second World War was supported by workers and firms while, according to the traditional theory, it should have been resisted by workers in relatively capital-abundant countries and resisted by firms (capitalists) in relatively labor-abundant countries. As shown by Balassa, (6) this type of trade also explains the spectacular growth rates of international trade between economies with endowments and relative prices so similar that, according to the traditional view, they could hardly have benefited from more international trade. Based on these facts, models of intra-industry trade have recently been constructed which complement the traditional theory of inter-industry trade.

Figure 11.2 illustrates the two varieties of trade in the symmetric world economy with two types of labor used by Krugman. (7) The unit square is divided into two zones, I where inter-industry specialization obtains and II where intra-industry is observed. The horizontal sides of the box represent decreasing economies of scale (c) and the vertical sides represent the decreasing difference in factor endowments (z), which is also the index of intra-industry trade. When resource endowments are identical, z is unity and all trade is of the intra-industry variety. When there is perfect competition and no economies of scale, c is unity. However, even when z is zero there will be intra-industry trade if economies of scale are sufficiently large. Interpreting z and c as referring to the national economy as a whole rather than to a particular industry, the evolution of Portugal during the European Free Trade Association (EFTA) period can be represented as going from inter-industry specialization to close to the point of intra-industry specialization.(8) It would seem that, during the same period, Spain entered Zone II while this is more unlikely in the case of Greece. The Portuguese trajectory implies the substitution of traditional exports of food products - including metallic and nonmetallic manufactured goods, electrical machinery, and transport equipment, while exports of textiles grew rapidly. Under the assumption, already mentioned, that macro-economic adjustment had no effect on the size of the box, we can illustrate alternative paths for the seventies. Because of the international recession and the running down of capital in Portuguese firms, the economy is likely to have moved away from the boundary (Case A), whereas the success of European integration would require that differentiated products be successfully developed and exported (Case B).
 
Trade creation and trade diversion

The key to the success of integration is complicated by the existence of a common external tariff. Insofar as the common external tariff is larger than the present Portuguese tariff, it liberalizes trade with the Ten but protects it with the rest of the world, particularly the "dollar area." Therefore, if the common external tariff is the one to be enforced on the new applicants, trade creation with the EEC will be partly offset by trade diversion with the rest of the world. More specifically, it is known that Portugal exports most of its manufactures toward the Community while it imports most of the raw materials from the dollar area. Since there is no domestic production of oil, the major trade diversion will be in agriculture. On the other hand, to the extent that the access of Portuguese manufactures to European markets is already free, trade creation in manufacturing will be confined to the import side, with negative consequences on the trade balance.

However, to the extent that quantitative restrictions on Portuguese manufactures are lifted, there will be trade creation on the export side. Then the increased return to labor in the Portuguese industrial export sector will attract more workers and accelerate the exodus from agriculture, while scarce capital moves into imports substituting agriculture. If factors were perfectly mobile domestically, the final result would be an increase in the real return to labor and a decline in the real return to capital. If, instead, factors are imperfectly mobile (or if agriculture has land as a specific factor), the return to capital in agriculture (or the rent to land) rises and the wage in terms of agricultural goods falls, the return to capital in manufacturing falls, and the wage in terms of manufacturing rises. If agricultural goods have a sufficiently large weight in the basket of consumers, the real wage will fall.
 

International Factor Mobility

Trade theory assumes that factors do no move across national borders. To the extent that membership in the EEC increases partner countries' investments in Portugal, as well as employment of Portuguese workers in the Community, then factor returns in Portugal and in the EEC are more likely to be equalized than would be possible through the expansion of trade alone. For factor mobility to bring about the equalization of factor returns, the domestic capital stock would have to be owned mostly by foreigners, while a large part of the population would have to seek employment abroad. In that situation the notion of national prosperity is divorced from its territorial foundation.

Even without believing that perfect international capital and labor mobility is a likely outcome of membership, one cannot neglect the possibility that the type of specialization observed in Portugal would have negative consequences for the coherence of a smaller and poorer nation-state integrated with a large and richer region. Neglect of this possibility could only be justified by accepting that the disappearance of the identity of the country is a necessary cost of increasing economic welfare.(9) Taking such identity as given, however, implies preserving policy instruments - such as the exchange rate and nontariff barriers – that, if optimally used, might allow the benefits of Europe's geographical proximity to be reaped without incurring the costs of foregoing acquired – or expected – positions in the markets of North America, Brazil, or the former African colonies. The question then becomes whether foreign policy is likely to devise and implement optimal bilateral agreements. Otherwise European institutions might be needed to exert pressure upon the contradictory Portuguese constitutional system, to which we now turn.

THE DILEMMA OF THE BIPOLAR EXECUTIVE

The Contradictions of the Constitutional System

For an acceleration of growth relative to Europe to be possible, policies likely to preserve macro-economic balance and to induce intra-industry specialization are not sufficient. It will also be necessary for the political system to generate stable dynamics in society. Therefore constraints deriving from the political regime and the type of government are the natural counterpart of the economic dilemma.

The foundations of the Portuguese political system are written in the 1976 Constitution thus some political constraints on the Portuguese social dynamics might be inferred from it. The Constitution is, however, a long and ambiguous document: there are many unenforceable recommendations which have hindered its interpretation and which explain the consensus among the major democratic parties for the recent Amendment. True, the political regime is clearly based on majority rule applied to all citizens: aside from numerous references to political democracy and the will of the people, there is an explicit command that political positions have to be periodically renewed by direct and secret vote (article 116, no. 1 and article 121). But, unlike Constitutions of the Western type, once this rule is satisfied the State still has to find a way to establish a "classless society" (article 1), given "peace and justice among peoples" in the international system (article 7, no. 2). Thus the contractions in the constitutional system stem both from the political regime, which tends to promote political instability, and from the economic program, which attempts to chart the transformation of Portugal into an abstract "classless society". This transformation assumes away the existing world economy but also prevents the reform of the chaotic public sector of early 1976 (article 85, no. 1).

The Dynamics of Parallel Legitimacies

Given these initial conditions, the most apparent feature of the political regime has been the competition between the parallel electoral legitimacies of the Assembly of the Republic and the President of the Republic. The President also shares the revolutionary legitimacy of the Revolutionary Council, which (until the Amendment) was supposed to be the guardian of the Constitution.

The system of government where both the Head of State and the Prime Minister have electoral legitimacy is frequently called semi-presidentalist, but, following Kaltefleiter (10) and Linz (11), we will refer to it as a bipolar executive. (12) The dynamics of the bipolar executive system are illustrated in Figure 11.3 by a changing combination of the structure of the party system (13) (decreasing on the horizontal axis) and the influence of the President of the Republic on the parties, so that these are able to produce a parliamentary majority for the Cabinet (decreasing on the vertical axis). The origin represents a stable combination of a structured party system and a Pesident of the Republic who is also the head of the party in power, as has been the experience of the Fifth Republic in France. (14) The extreme case of instability is the combination of a paralyzed party system without presidential influence, as happened in the final days of the Weimar Republic (1930-1932). Intermediate cases are the nonstructured party system where the President of the Republic is the head of the majority party as happened in the Weimar Republic from 1919 to 1922 and has existed in Finland since 1956, the structured system where the President of the Republic has no influence on the majority party, as happened in Austria from 1950s to the mid-1960s, and the structured system where the President of the Republic has influence on the majority party, as happened in Austria subsequently.

The evolution of the Portuguese system, also plotted in  Figure 11.3 , presumes that it is a nonstructured party system where the President of the Republic has little influence over the majority party. In case A, where the Democratic Alliance is taken to represent a stable majority, the relevant analogy would be the Austria of Scharf in the second half of the 1960s. Due largely to the progressive weakening of the Democratic Alliance after the death of Sá Carneiro, however, the revolutionary legitimacy of the President of the Republic has been increasing the weight on one pole of the executive, and may also have increased the power of the President at the expense of the party structure so that the unstable dynamics of Case B characterize the 1980-1982 period. Finally, if the breakdown of the Democratic Alliance in early 1983 is followed by another unstable coalition, let alone a minority government, then the tempting analogy for the period until the presidential elections of 1985 would be the second presidency of Hindenburg in the early 1930s (case C).

The "Economic Constitution"

The problem of existence
 
The problem of existence arises because the 1976 Constitution contains principles which seek to bring about the transformation of the present Portuguese society by reference to the abstract "classless society" of article 1. An effort of conceptualization is again necessary in order to ascertain the legal effects of this transcendental objective, givent he constraints implied by the political regime and by the logic of the economic situation. One constraint, efficiency, is identified, and one composite objective, which might be called democratic, equitable, and closed socialism (attributes in decreasing order of applicability).

The logical itinerary is as follows. Among all the efficient organizations of the Portuguese society, majority rule is to chose the one that is closest to the equity desired in the Constitution, given the initial conditions. The usual democratic trade-off between efficiency and equity must, according to the same majority rule, evolve toward a closed socialist system; this was called the "peaceful development of the revolutionary process" in the original Constitution (article 10 no. 1, now suppressed). In any event, this assumes that individual preferences can be aggregated into a nondictatorial social welfare function. If a solution to the constrained maximization of this function requires a substantial discounting of the objective of "closed and equitable socialism", as has been happening - the Constitution, interpreted within this legal and economic framework, has, nevertheless, been respected. (15)

Allowance for this discounting of the transcendental objectives is implicit in the constitutional requirement that a direct manifestation of majority rule, the law of the Assembly of the Republic, is necessary to define essential aspects of the economic organization, such as planning (article 94, no. 1) and the financial and tax system (article 106, no. 3). Similarly, law proposals containing the sectors banned from competition (article 85, no. 2) have been vetoed by the Revolutionary Council and provide a good illustration of the dynamics of parallel legitimacies. Indeed, a major legacy the Revolution, the nationalization of "basic sectors of the economy," is made irreversible by article 85, no. 1. There has been discounting of the future but no depreciation of the past.

The objective

The idea of socialism seeks to direct a process explicit in the original version of the constitution where social and economic organization was based on the development of socialist relations (article 80). The instruments of this development were "the collective appropriation of the means of production" and the "exercise of democratic power by the working classes" (article 80). On the other hand, article 50 identified as "guarantees and conditions for the effectiveness of economic, social and cultural rights and duties" not only collective appropriation and the "democratization of institutions," but also "development planning". While these articles have been amended, in order to link appropriation and planning, given the majority rule, it is necessary to know what variant of socialism is implicit in the Constitution.

The frequent use of Marxist terminology, as well as the historical context in which the Constitution was designed, might suggest extending the modern theory of the mode of production, due to Althusser and Ba1ibar (16), to include socialism and thus do away with the historical determinism of the "transition". We then would see the Plan as a political solution to the trade-off between efficiency, equity, and socialist relations of production, as implying what Martinet (17) called "mutual exploitation" among workers. Concern over excessive centralization by the State in parts II and IV of Title II of the Constitution (covering respectively the Plan and agrarian reform), together with the proposition that planning is ineffective in a world of uncertainty, might then lead to the design of a competitive system which would economize on costly information. (18)

The reference to national independence seems to imply more than the legal definition of the domain of applicability of the Constitution because it has a political and ideological dimension which is linked to the theory of the peripheral capitalist mode of production. According to Amin (19), the independence (autonomy) of central capitalism is opposed to the dependence of peripheral capitalism, where dependence here is a holistic notion that has little to do with the technical concept used above. Not surprisingly, in the 1976 Constitution independence has a nonaligned connotation: for example, the "abolition of all forms of imperialism, colonialism and aggression" is seen as a condition for the new international order (article 7, no. 2). But the Constitution does not accept the view that socialism and independence imply each other. Indeed, an open trading system is encouraged in article 81, line g and article 109, no. 2, provided that national independence is preserved. (20) As to the recommendation that the State should "regulate" ("control" in the old article 110) foreign trade operations, this is of course subject to the dependence (in a technical sense) of the Portuguese economy.

The first of fourteen "priority tasks of the State" in article 81 (and a "fundamental task of the State in article 9, line c) is "to promote the economic and social welfare ... of the people, particularly the least favored classes." This social welfare criterion seems to correspond to justice as equity, as implied by the maximin criterion of Raw1s.(21) While the eulogy of the proletariat in classic socialist thought may have something to do with the maximin criterion, it is important to note that such a criterion eliminates the need for the class struggle in the domestic arena, as used to be required by the suppressed article 10, no. 1 cited above. It is, of course, more difficult to make it compatible with the "just and peaceful" international order recommended in article 7, no. 2.

The constraint

The notion of efficiency which – together with the majority rule - constrains the constitutional program is a weak notion based on a situation where nobody can be made better off without somebody else being made worse off. This notion of Pareto efficiency, implicit in the logic of the economic analyzed above, is accepted in the Constitution in article 81, lines f (on the defense of competition) and m (consumer protection), and can also be used to interpret State intervention on price formation (article 109, no. 1). A principle of short-run efficiency can also be established because the State has to secure the full utilization of the productive forces (article 81, line c).

Short- and long-run efficiency are linked by the task of promoting balanced growth across sectors and regions (article 81, line d) which implies some control over the public and external sectors as well as an efficient allocation of scarce resources to investment. Indeed, article 81, line c now explicitly mentions the "efficiency of the public sector." At the same time, statements to the effect that public sector property "will tend to dominate," (old article 90) and that private activity was allowed "as an instrument of collective progress" (old article 85, no. 2) have been eliminated.

Finally, since private saving is encouraged in article 105, no. 1 and would not be forthcoming at interest rates too much below international rates, it can be argued that efficiency also requires the revitalization of capital markets. This requirement is not likely to be met, however, as long as the legacy of the 1976 nationalizations prevents entry of new (private) firms into "basic" sectors of the economy.

CONCLUSION

The ongoing Southern enlargement of the European Community raises an economic and political dilemma for Portugal. Since integration requires increasing structural interdependence, the economic dilemma refers first to the tight constraints on short-run macro-economic policy. Once macro-economic balance is established, the economic dilemma becomes the problem of choosing a type of specialization which might benefit the economy without relying on the potential compensation of losing sectors or factors. The current international economic environment suggests that Portugal may continue to face quantitative restrictions in European markets for some of its undifferentiated products. If Portugal succeeds in developing two-way trade in differentiated products, then trade will be beneficial for workers and firms so that prosperity in the national territory will be more likely not to require large international factor mobility. But in order for differentiated products to be marketable internationally, foreign policy should compensate for the negative effects of sensitive industries and protected agriculture in Europe by means of bilateral agreements with traditionally important non-European markets.

The recent macro-economic experience shows that Portugal took five years to re-establish external balance after the shocks of the first oil crisis and the April revolution. If macro-economic equilibrium had been preserved, this speed of adjustment would compare favorably with that of major trading partners and neighboring competitors. The second oil shock, the dollar shock, and renewed policy errors have, however, led to further restrictive macro-economic adjustment measures which are likely to slow down the process of structural adjustment. Furthermore, the combination of a bipolar executive with revolutionary legitimacy and a Constitutional commitment to socialism has generated a system which is particularly crisis-prone, making the political dilemma at least as dramatic as the economic one.

NOTES

1. Portions of this chapter have been presented at CEDEP, Fontainebleau (France); CSIS, Georgetown Univeristy, II Congresso das Actividades Económicas, Cascais (Portugal); IPEA, Rio de Janeiro (Brazil); the Catholic University of Portugal; the Lisbon Law School and FSI, US State Department. Comments from the participants are gratefully acknowledged. Errors are my own.

2. J. Macedo, "Portugal and Europe: the Channels of Structural Interdependence." In Revolution: Economic and Political Perspective— (Boulder: Westview Press, 1981)

3. P. Krugman and J. Macedo, "The Economic Consequence of the April 25th Revolution," Economia, 3, nº. 3 (October 1979).

4. The role of exchange-rate policy in the recent macro-economic experience of Portugal is documented in J. Macedo, "A Portfolio Model of an Inconvertible Currency: The Recent Experience of Economic Adjustment (Oxford: Basic Blackwell, 1983) and references therein. On the political economy of stabilization see "The political economy of Stabilization" in Macedo and Serfaty, Portugal.

5. I am also ignoring the effects of inertial inflation on potential output. The distortions caused by inflation at the macro-economic level may worsen macro-economic problems because agents’ reactions are based on signals distorted by price controls. A. Borges, "Concorrencia e Política de Preços in II Congresso das Actividades Económicas (Lisbon, Confederação da indústria Portuguesa,— August 1981) has an appraisal of price controls in Portugal.

6. B. Balassa, ed., European Economic Integration (Amsterdam: North Holland, 1975).

7. P. Krugman, "Intraindustry Specialization and the Gains from Trade" Journal of Political Economy, 89, no. 5 (October 1981).

8. Data on the index of intra-industry trade are from J. Donges and K.W. Schatz, "Competitiveness and Growth Prospects in the Enlarged European Community," The World Economy, 2, nº.2 (May 1979); data on economies of scale from A. Sousa, "Funções de produção com elasticidade de substituição constante na indústria transformadora prortuguesa" Economia, I, no. 1 (January 1977). Note that zone I, defined by c = 1/2 in Krugman, "Intraindustry Specialization" shrinks with the increase in the size of the foreign country.

9. The argument is developed in J. Borges de Macedo, "Uma perspectiva portuguesa para a integração Europeia," Boletim Democracia e Liberdade, 9 (February 1979)

10.W. Kaltefleiter, Die Funktionen des Staatsoberhauptes in des Parlamentarischen Demokratie (Koln, Westdeutscher Verlag, 1970).

11. J. Linz, "Some Comparative Thoughts on the Transition to Democracy in Portugal and Spain," in Macedo and Serfaty, Portugal

12. The analysis of semi-presidentialism by M. Duverger, Echec au Roi (Paris, Albin Michel 1978) - where Kaltefleiter's work is not explicitly acknowledged - has been quite influential in Portugal.

13. The "structure of the party system" can be inferred from the number of parties, their organization, and the stability of coalitions. In the end, however, it is the stability of voting patterns that determines whether a party system is structured or not.

14. After the 1981 parliamentary elections, which created a majority that is more radical than the President, there may be a change in the traditional practice of ignoring articles 20 and 21 of the French Constitution (which define the powers of the Prime Minister) and of interpreting article 8 (about the inability of the President of the republic to withdraw confidence from the Prime Minister) as implying that in a situation of conflict between the two poles of the executive, the Prime Minister should resign. This would, of course, raise the position of France in the vertical axis.

15. While influential interpretations of the Constitution, such as J. Miranda, " A Constituição Portuguesa e o Ingresso nas Comunidades Europeias" in Portugal eo Alargamento das Comunidades Europeias (Lisbon, Intereuropa, 1981) have been sensitive to this framework, the more widespread method of interpretation draws instead on the German literature on the Weimar constitution. See further evidence in J. Macedo, "Princípios Gerais da Organizacao Economica," in J. Miranda, ed., Estudos sobre a Constituição (Lisbon: Petrony, 1977)

16. See their contribution in L. Althusser, Lire "Le Capital" (Paris: Maspero, 1965).

17. G. Martinet, Les Cinq Communismes (Paris: Seuil, 1971).

18. This more agnostic view should be contrasted with the belief that competitive markets necessarily economize information. See, for example, S. Grossman and J. Stiglitz, Information and Competitive Price Systems, American Economic Review, 66, no. 2 (May 1976). A fascinating view of the Soviet system is in A. Besancon, Anatomie d'un spectre l' economie politique du socialisme réel (Paris: Calmann-Levy, 1981)

19. S. Amin, L' accumulation à 1 'echelle mondia1e (Paris: Anthropos, 1970).

20. Article 86, on foreign activity and investments, is more restrictive since it adds the "workers’ interests" to "national independence." The reference to the Plan was, however, dropped.

21. J. Rawls, A Theory of Justice (Cambridge: Harvard, 1971).