IMF on Portugal

What the International Monetary Fund (IMF) said about us in a 2006 unpublished paper (courtesy: anti-comuna):

"Catch-Up

The different experiences of Ireland and Portugal offer an interesting contrast on the sustainability of catch-up. Between the mid-1980s and euro adoption in 2000, both Ireland and Portugal were catching up. From 2000 on, however, Ireland continued to catch up, while Portugal started to revert. The main differences are in wage policy and the use of capital inflows.
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In Ireland, large FDI flows into the manufacturing sector contributed to a sharp increase of the tradables sector, an export boom, and a rapid rise of total factor productivity (TFP). As wages lagged TFP, the unit-labor cost-based REER declined sharply, boosting profitability of the export sector and leading to a sharp increase in corporate saving. As government saving increased as well, the investment boom did not worsen the current account— on the contrary, savings increased faster than investment, and the current account balance moved into surplus.
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In Portugal, large capital inflows—in the nontradables sector rather than manufacturing—fed a domestic demand boom and a surge in imports. In the absence of a large presence of foreign firms, TFP growth lagged. As wage growth exceeded TFP, profit margins in the export sector were squeezed, stimulating a decline of the tradables sector. With little improvement in the government balance and a decline in corporate savings, total saving declined, widening the current account deficit.
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In short, Ireland and Portugal had a different catch-up model. Ireland caught up through an expansion of supply and of the tradables sector; Portugal through expanding demand and of the nontradables sector.The problem in Portugal arose when the boom came to a halt in 2001 and GDP stagnated. Labor productivity growth stopped, leading to a further deterioration of competitiveness, which maintained the current account deficit high. Portugal was in a slump but could not get out of it. With high and increasing fiscal deficits, and no independent monetary policy, there was no room to stimulate domestic demand. But the tradables sector had become too uncompetitive to drive the economy, yet with euro membership, exchange rate adjustment was no longer an option.
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Why was Ireland so successful in attracting FDI in manufacturing? Both good policies and fortunate circumstances were important. Good policies included prudent fiscal policy, low taxes on labor and business income, and flexible labor and product markets. Fortunate circumstances included favorable demographics and participation in the EMU".