Spain and Portugal Reenter European Fold

IN several towns that Paula Mota Alvez crosses every day, the young entrepreneur observes a telltale sign of change in the way Portugal does business.

"What you see are the cafes occupying the best locations in town closing up and being renovated into banks," she says. "And they aren't just Portuguese banks, but from Spain and elsewhere in the [European] Community," adds Ms. Mota, a mechanical engineer by training. "That tells me something."

The native of Portugal's northern Porto region is herself an example of how Portugal, and indeed the whole of the Iberian Peninsula, is evolving in its quest to economically and socially integrate and "catch up" with the prosperous EC.

A few years ago, if a young Portuguese woman chose a career in engineering at all, she would very likely have worked in the country's dominant nationalized industrial sector. Or, before the wave of nationalizations in the mid-'70s, she might have worked for a company owned by one of the hundred or so families that held Portugal's economic strings in their hands.

But Mota had a different dream. Today she employs 12 people in the cut-flower and ornamental plant business she runs from 35 acres of land just south of Porto.

As a young business owner, she is taking part in Portugal's shift to a modern European economy where small and medium-size companies have more weight. These firms now account for half of the country's exports. Meanwhile, traditional industries such as textiles and shoes must either make great strides in quality and productivity or close as markets are increasingly opened to participation and competition from the EC and elsewhere abroad.

A similar transition is taking place in neighboring Spain, although a different history and a larger, less centralized economy make its experience different. Historically a collection of kingdoms that evolved into today's assertive regions, Spain never experienced the concentration of its productive power in a few private hands to the extent Portugal did.

Moreover, Spain was more thoroughly removed from the outside world economy than Portugal. Spain lost most of its colonial empire centuries ago. Then it was subjected to nearly a half-century of General Francisco Franco's highly protectionist nationalism until 1975.

For centuries, and even well before Christopher Colombus set his foot down in the sands of America in 1492, Portugal has been an outward-looking country - though with its back to the continent on which it sits. As recently as the 1960s, much of Portugal's economic activity related to colonies in Africa.

"Business people didn't bother to look outside the world of Portugal and its overseas interests," says Joaquim Caeiro, an analyst in Portugal's now very active real estate market. "Mozambique was rich, Angola was rich." Even though Portugal was a founding member of the European Free Trade Association, "the colonies and the kind of protected internal economy they allowed retained people's focus," Mr. Caeiro says.

The colonies were lost in the early 1970s, however. After an economically disastrous decade, Portugal entered the EC in 1986. And from that point, when Portugal redirected its gaze to Europe, the country's economy has seen strong, steady growth - recently the highest annual rates in the Community.

"The single greatest factor in Portugal's economic evolution has been EC membership and an opening to Europe in general," says Rui Madaleno, economic director of the Association of Portuguese Industries. To make his point, Mr. Madaleno cites striking statistics on Portuguese foreign trade: In 1970, the EC accounted for 44 percent of Portugal's exports, while the country's colonies received 25 percent. In 1989 the EC's share of Portuguese exports had jumped to 72 percent, while the former colonies had dro pped to barely 3 percent.

Another important result of EC membership, says Madaleno, is that Portugal is developing "a very natural economic partnership" with Spain. After centuries of wars and a more recent history of carefully maintained walls between them, the neighbors are discovering the mutual benefits of greater openness.

"We were two countries back-to-back, with very weak exchange despite our long common border," Madaleno says. "Six years later [after Spain and Portugal joined the EC], Spain is our number one supplier, and our third best customer." Among foreign investors in Portugal, the Spanish are second only to the British.

Both the Iberian countries still have a long way to go to catch up with the rest of the Community: Spain's economic output per inhabitant is 77 percent of the EC average, while Portugal's is 55 percent.

The EC's hefty funding of infrastructure and other economic development in both countries has played an important role in raising incomes in recent years. In 1989, Community transfers accounted for nearly 2 percent of Portugal's national output, and 0.4 percent in Spain's much larger economy, the Organization for Economic Cooperation and Development reports.

Now, despite the EC's commitment in December to increase funding for the Community's poorer members in the next five-year budget cycle, many observers believe both Portugal and Spain have received the bulk of EC "gifts" in their initial transition.

Yet to Madaleno, the most important benefit of EC membership is not money.

"After a decade of incessant change, it gave people a confidence that the rules of business would now be fixed, that they knew where Portugal was going," he says.

That "confidence," he says, led people both inside and outside Portugal to look at the economic future in a new light. Portuguese company start-ups jumped from 8,000 annually in the first half of the 1980s to 19,000 in 1990. Foreign investment bolted from $163 million in 1985 to $6 billion in 1990.

In Spain, where EC membership has similarly solidified a democratic political system and aided the transition to a free-market economy, foreign investment jumped from a total of $1.3 billion for the first five years of the 1980s to $10.5 billion in 1989 alone.

"The mentality of business has changed immensely in the past few years," says Paulo Nunes Almeida, a textiles firm manager, founder of a small computer-services company, and vice president of Portugal's National Association of Young Entrepreneurs. "There are many more young people starting their own businesses, something that was impossible in the past."

With more banks and investment companies in Portugal, investors are willing to consider more than just the projects backed up by old money and a few prominent names, as in the past, Mr. Nunes says.

Still, he says Portugal is held back by high inflation and accompanying high interest rates.

And despite her own success in getting a loan to start her business, Mota says her country's business mentality hasn't changed enough yet to really compete with Europe. "Banks talk about their partnership with the new Portugal, but when it comes down to the loan, the question is still how much money is behind you and what are the names of the people backing you up."

Spain too, despite being the EC's fifth-largest economy, risks a difficult transition into Europe's single market. Bureaucracy and state interventionism must be cut and organizational skills improved, analysts say. As with Portugal, such changes imply further shifts in mentality, which are often slow.

Yet if changing mentality is one of the keys to Portugal's progress, Mota admits she has witnessed it in her own family. "My parents were a little bit against their daughter going into business for herself," she says. "But now that I'm up and running, my father is talking about a business project of his own."