Throughout the eighteenth century, the Western world experienced remarkable changes. The usually labeled “Malthusian regime,” defining technological constraints to per capita production growth and tracing a flat long-term trend for most of the European economies, came to a halt for the first time in England. The new economic era brought about gains in total factor productivity, together with population growth. Living standards increased and implied a dynamic change in aggregate demand. These features of the modern economic growth that began in the final decades of the 1700s made headway through the modest and restricted spread of technology. They reached northwestern countries after the first steps had been given in England, while Mediterranean and Scandinavian regions fell behind. Different potentials to follow the English path in the nineteenth century led scholars to look back to previous centuries, particularly to the eighteenth century, to find both the roots of structural changes and causes of its pace of diffusion (Van Zanden 2009).

The present chapter focuses on this period that raised conditions for a greater divergence among European countries’ economic growth. It covers the time span that starts with the Peace of Utrecht (1715) and ends with the first Napoleonic invasion, when the Portuguese royal court fled to Brazil (1808). Portugal's economy is here described taking into account the fact that this was one case among other Mediterranean countries that fell behind. A set of constraints were still impending over macroeconomic variables, which show a downward trend clearly from 1780 on, like urbanization rates and real wages. Nevertheless, a higher integration of the primary sector in international markets occurred and the empire increasingly played in favor of the kingdom's economic performance. The former contributed to the rise of agricultural output and led to some productivity improvements and the latter contributed to the rise of gold money stock and justified protectionist policies that made Brazil the outlet of Portuguese manufactures.

In spite of the fact that these positive trends derived from the greater openness of the economy, the country suffered two exogenous shocks. The earthquake of 1755 caused a dramatic destruction of fixed capital in many regions. Recovery was a lengthy affair but also an opportunity for the institutional innovation carried out by the marquis of Pombal (Pereira 2009).