The archipelago of the Azores, located in the mid-Atlantic, is an autonomous region of Portugal and a European Union Outermost Region. With a GDP per capita of EUR 19 100 PPP in 2020 (USD 20 600), it is, together with four other regions in Portugal, one of the European Union’s 78 less developed regions (below 75% of the EU-27 average GDP per capita). The economy of the Azores is mainly specialised in services, which in 2019 accounted for more than 70% of total GDP and employment.
Once central to international trade routes, the Azores are now aspiring to regain a prominent international role by leveraging their unique geographical, natural and historical attributes. Over the centuries, improved oceanic navigation techniques and technological developments have made the archipelago less central to international sea routes, challenging local development and contributing to depopulation. Remoteness and relative isolation thus challenge economic growth. Critical infrastructure challenges include vulnerability to natural disasters and poor digital connectivity. Support from the EU and national institutions have cushioned the effect of the Azores’ increased isolation over time.
The region has, however, experienced some economic progress in recent decades. In the early 2000s it showed a significant level of convergence towards the EU average. GDP per capita moved from 68% to 75% of the EU average and the productivity gap with respect to the EU-27 average improved slightly. However, COVID-19 severely affected tourism in the region. After a sharp drop of 70% in total arrivals in 2020, tourism only partially rebounded in 2021 with total turnover still below 65% of pre-pandemic levels. The merchandise trade balance remains negative because the region largely depends on imports of both intermediate and final products such as food, machinery and equipment, and fuels. Exports, however, are growing, three-quarters of which are agricultural and food products. Portugal accounts for 80% of total trade, while international trade plays only a marginal role, at 15% of GDP. The main international trading partners are other EU countries such as Spain, Italy and Germany. Important emerging markets are gaining momentum, including North America and West Africa, which account for 11% and 9% of international merchandise trade, respectively.
Leveraging uniqueness will be central to the future internationalisation strategy. Three areas appear particularly relevant: agro-food, the ocean economy and renewable energies.
Prioritising high-end markets, strengthening the role of the circular economy, diversifying production and improving sustainability could support higher value-addition in agro-food production and exports. At the same time, ensuring the preservation of local ecosystems and leveraging the untapped potential of the diaspora could support the wider dispersal of Azorean products.
With an exclusive economic zone of 1 million km², the ocean represents a key opportunity for innovation and sustainable value creation for the Azores. From deep-sea research to seamount ecosystems and research activities related to the impact of human activities, the archipelago is a natural open laboratory for understanding the functioning of seas and the potential synergies between ocean and space activities. To do so, the region needs to strengthen and expand its global research and scientific partnerships.
The Azores generates around 40% of its electricity from renewable energy, above the EU average. Yet the region’s energy matrix still largely relies on imported fossil fuels. Major challenges to the energy transition relate to the dispersed nature of the archipelago, including the presence of nine small, separate grids, limited battery storage capacity and small market size. The electrification of the energy matrix seems to be the most promising area for development, alongside further exploitation of geothermic energy, wind, photovoltaic and marine renewables such as wave power.
In going forward, the Azores could increase their global interconnectedness to support regional development. In particular, the region should aim at:
Updating the policy approach towards internationalisation to better leverage the resources of the EU programming period 2021-27 and the additional ones from the Recovery and Resilience Facility (RRF). In addition to the necessary compensation schemes linked to remoteness, environmental vulnerabilities and biodiversity preservation, it would be important to channel support to science, research and innovation activities and to enable effective international partnerships for innovation. The Azores’ use of EU cohesion policy funds could be further modernised and made forward-looking. Traditional sectors such as commercial activities associated with tourism, like hotels and restaurants, remain a priority but have limited spillover effects on the economy. Therefore, increased priority should be given to scientific and knowledge-intensive services to maximise the long-term impact of cohesion policy funds. The design of policies and instruments will require more synergies and co-ordination across different areas and between cohesion policy funds in order to avoid duplication, redundancy and dispersion of resources.
Increasing private sector commitment to internationalisation and innovation. The proactive participation of the private sector with an innovation mind-set and stronger partnership with local institutions will be essential to make the most of the EU resources and unlock international partnerships, develop new businesses and innovate in traditional activities. The private sector contributes only 15% of total regional R&D investment in the Azores, whereas in other peer regions and countries the private sector accounts for double if not triple the amount of R&D expenditures. The region can leverage available infrastructure and resources such as the technology parks and university, which could act as innovation catalysts.
Increasing synergies with national strategies. The areas where the region has a strategic potential to increase sustainable value creation through enhanced internationalisation coincides with those at the national level. This is the case for agro-food, in which the uniqueness of Azorean products could benefit from the overarching branding of Portugal. The same applies in the area of international development co-operation where the Azores, given their deep ties with key partners in Africa and ongoing projects such as the Interreg MAC and in the Interreg Atlantic Area, could be an important partner in the national development co-operation strategy.