Portugal's Economic Future at Crossroads as OECD Urges Stronger Productivity Institutions

An OECD report warns that Portugal's persistent productivity gap, weak investment, skills shortages and fragmented policies threaten long-term economic growth and living standards. It recommends establishing an independent Productivity Council to strengthen reforms, improve business competitiveness, encourage innovation and deliver sustainable economic progress.

Portugal must strengthen its economic institutions, improve business productivity and introduce more effective policies to sustain growth and raise living standards, according to a 2026 report by the Organisation for Economic Co-operation and Development (OECD). The study, Strengthening Pro-Productivity Institutions and Policymaking in Portugal, was prepared by the OECD Economics Department, drawing on contributions from Portuguese authorities, the Bank of Portugal and the Centre for Planning and Evaluation of Public Policies (PLANAPP). It highlights how weak policy coordination, uneven business performance, limited technology adoption and workforce shortages are preventing Portugal from achieving its full economic potential.

The report argues that Portugal has made economic progress over recent decades but continues to face significant productivity challenges. Although reforms have improved business conditions, the country needs stronger institutions capable of turning government policies into measurable improvements in investment, innovation, employment and living standards.

Portugal's Economic Growth Hides a Persistent Productivity Problem

Portugal's economy has undergone considerable transformation, supported by expanding services, manufacturing, exports and international investment. Between 2013 and 2025, economic growth averaged approximately 2% annually, demonstrating resilience despite international economic uncertainty.

However, productivity remains substantially below the levels recorded in more advanced OECD economies. Labour productivity is approximately 50% below the average of the upper half of OECD countries, while GDP per capita remains around 40% lower.

These gaps matter because productivity determines how much value workers and businesses generate. Higher productivity can support better wages, stronger business profits, increased tax revenues and improved public services.

The OECD identifies significant differences between Portuguese businesses and regions. Lisbon attracts a large share of investment, skilled workers and innovative companies, while other regions face weaker economic opportunities, ageing populations and limited business expansion.

Productivity also varies considerably across industries. Manufacturing and certain professional services have improved their performance, but retail, transport, accommodation and food services continue to experience slower productivity growth. These sectors represent a substantial share of economic activity and employment, making their performance important for consumers and businesses.

Business Reforms and Innovation Support Face Implementation Challenges

Portugal has introduced numerous reforms to strengthen competitiveness and improve the business environment. The OECD examined 160 productivity-related policy measures introduced between 2015 and 2025, covering regulation, innovation, investment, financing and workforce development.

Initiatives such as Simplex have simplified administrative procedures, expanded digital public services and reduced bureaucratic obstacles. Reforms affecting business licensing, insolvency and corporate restructuring have also improved conditions for entrepreneurs.

However, regulatory barriers remain in several sectors, while smaller companies continue to struggle with complex procedures and limited resources.

Government programmes have encouraged research, innovation and technological investment. Tax incentives such as SIFIDE II and RFAI have supported business research and investment, while European Union funding has provided additional financial assistance.

Despite these efforts, the OECD finds that public support does not always translate into stronger productivity. Many smaller businesses struggle to adopt advanced digital technologies, improve management practices or expand their operations.

The report also warns that certain financial incentives may discourage businesses from growing if eligibility depends on remaining below specific company-size thresholds.

Skills Shortages and Weak Investment Hold Back Businesses

Access to finance remains another challenge for Portuguese companies, particularly small and medium-sized enterprises.

Government initiatives such as CAPITALIZAR and financing mechanisms involving Banco Português de Fomento have attempted to improve business funding. Nevertheless, investment levels remain relatively weak, limiting opportunities for modernisation and expansion.

Workforce development is equally important. Programmes including Qualifica and INCoDe.2030 have expanded access to education, professional training and digital skills.

However, businesses continue to face shortages of specialised workers and difficulties matching available skills with labour market requirements.

The OECD emphasises that improving productivity requires more than purchasing new equipment or introducing digital technologies. Companies also need stronger management, better-trained employees and the ability to adopt innovative business practices.

For workers, these improvements could create opportunities for higher wages and better employment conditions. For consumers, more productive businesses could deliver improved services, greater competition and potentially lower costs.

OECD Calls for an Independent Council to Drive Lasting Reforms

A central recommendation of the report is the establishment of a new independent Productivity Council to improve economic policymaking.

Portugal created its first Productivity Council in 2018, but its mandate ended in 2021. The OECD argues that a stronger institution with legal independence, stable resources and clear responsibilities would help governments identify productivity barriers and evaluate reform outcomes.

The proposed council would focus on two or three major policy priorities annually, publish independent assessments and recommend practical improvements.

Government authorities would be expected to respond formally to its recommendations, strengthening accountability and encouraging implementation.

The OECD also recommends cooperation with research institutions, businesses, workers and policymakers to ensure that productivity policies reflect economic realities.

Ultimately, the report concludes that Portugal's challenge is not simply introducing more reforms but making existing policies work better. Stronger coordination between innovation, investment, education and regulation could help businesses expand, reduce regional inequalities and improve living standards.

A credible and independent productivity institution could play a decisive role in turning Portugal's economic ambitions into sustained growth, stronger competitiveness and broader prosperity.