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).

Portugal became an independent kingdom in the twelfth century, and just over one hundred years later had established the borders it still has today. Portugal's nationhood was determined not by geography, linguistic issues, or any preexisting political structure. The kingdom's emergence as a distinct entity in the Iberian Peninsula was pivoted on a series of political and military events seeking the reclamation of land occupied by Muslims after their invasion in Iberia in 711–716. The Reconquista of the al-Andalus, as Muslims called their conquests in Iberia, is key to understanding the emergence of Portugal as a state. It brought back into Christianity lands that were among the most prosperous in Medieval Europe. At the end of the tenth century, stretching from the river Douro to Gibraltar, al-Andalus had an abundant and diversified agricultural produce, which also enjoyed the reputation of being the most technically sophisticated of the time. Of an estimated population of 10 million, 10 percent lived in cities. It was the western-most part of the Islamic world, which was described at the time as being a series of urban centers, connected by trade routes, lubricated by precious metals, and closely linked to the sub-Saharan empires of Ghana, Mali, and Songhai (Findlay and O'Rourke 2007: 48–59). The al-Andalus “represented a kind of El Dorado or Promised Land” whose resources provided a powerful incentive to the Christian kingdoms of the northern Iberian Peninsula (Chalmeta 1994: 756). Muslim Portugal was part of “Gharb al-Andalus,” the western al-Andalus, and evidence suggests that it was notably from the lower valley of the Tagus to the south that Muslim occupation was more dense and urbanized.

The making of a political entity through conquest of land and capture of resources from the western al-Andalus determined the balance of power among the Crown, the nobility, and the Church, which were the three prominent institutions called to organize new settlements and the exploitation of endowments. The partition of wealth among these entities fostered warfare, not only within the borders, but also, and mainly, beyond frontiers. Thereby the main stages of the Reconquista that pushed the frontiers further to the south and the capture of Ceuta in 1415 that opened up the European expansion are events having common ultimate factors, namely the king's need of legitimizing his rule by redistributing resources and jurisdictional powers that were pegged to the exploitation of land.

The main feature of the Portuguese economy in the twentieth century was both a rapid transformation and a slow but consistent catching-up to the living standards of the European forerunners. The convergence of the Portuguese income per capita and productivity levels commenced soon after the end of World War I and continued throughout the Republican regime, which lasted until 1926, in spite of the high levels of political instability. During those early years, economic growth was to a large extent linked to tariff protectionism and to direct state intervention in the economy. That process was not unique to Portugal, as it occurred in most of the poorer European periphery, where rates of economic growth increased to unprecedented levels. World War II led to an inevitable halt in economic growth, but Portugal's neutrality spared the country deeper consequences and created opportunities for the expansion of a few economic sectors, namely those linked to exports. The post–World War II years were the best ever for the Portuguese economy, which saw levels of income and productivity converge faster with those recorded in Europe's most advanced countries, namely in the major industrial powers. This convergence trend was shared by most peripheral countries in Europe, regardless of their political regime, and lasted until 1973. During the golden years or growth, Portugal and the rest of Europe had economic policies which tended to foster a greater opening to the outside, and a greater presence of the state in the economies. In terms of the structure of the economy, faster growth led to a swift industrialization of the country, an increase in the weight of the services sector, a decline in the importance of agriculture, and an increase in the weight of foreign trade, and higher participation of foreign capital in national investment.

Political discontent and the colonial wars led to yet another revolution, in 1974, which immediately followed the year of the international crisis caused by the end of the Bretton Woods system and the soar in oil prices in the world markets. A period of political instability ensued, lasting until 1976 or 1977, and in this year Portugal applied to join the European Communities, which it eventually did in 1986.

The present book is a substantially revised translation of a book first published in Portugal (História Económica de Portugal 1143–2010, Lisbon: Esfera dos Livros, 2011) which was written following the suggestion of a publisher that identified a lacuna for an economic history of Portugal over the period since the foundation of the kingdom, in the twelfth century, to the present times. There are many valuable works that provide a global perspective either for shorter periods of Portuguese economic history, or for longer periods of its political and institutional history, but there certainly was room for a global economic history that covers a wide range of topics, from demographic and institutional developments to the measurement of economic growth and a more formal analysis of factors of growth and structural change. We gladly accepted the challenge because there is a large amount of research from which it is possible to draw a global perspective on the evolution of the Portuguese economy, within its European borders, and regarding its relations with Europe, the empire, and the rest of the world.

When we wrote the first version of the book, we had in mind an international audience, as we were well aware that the economic history of Portugal in the long run can be of interest for students on a wide variety of topics of international reach, such as the making of colonial empires, their consequences for domestic economies and, why economies grow or fall behind. The present English version of the book is the best demonstration of that wider interest in Portugal's economic development. Although we have not changed the manuscript in terms of its main structure, this edition is different from the first in many aspects. Not only have we benefited from recent findings that have clarified our interpretation on the evolution of the Portuguese economy in the long run but we have also stressed further the connections between national and international issues. We hope the international reader will be attracted to the study of this relatively small and peripheral country both because it was the center of an empire for many centuries and it highlights many other issues regarding international economic history.

This book is about the evolution of the Portuguese economy during the course of eight centuries, from the foundation of the kingdom, in 1143, when political boundaries began to take shape in the midst of the Christian Reconquista of the Iberian Peninsula, to the integration of the nation in the European Communities and the Economic and Monetary Union. While the economy we are interested in responded to external influences across the land and sea borders, its activity also exerted influence on events occurring elsewhere.

The study of the Portuguese economy highlights in a vivid way a number of aspects of European economic history. Indeed, the formation of Portugal as a political unit in 1143 should be seen as part of the broader movement in the Iberian Peninsula, called Reconquista, which obtained the statute of Crusade by papal encyclical in 1123. The understanding of the economic forces driving territorial expansion, which ended with the takeover of the Algarve, in 1249, presents a rare opportunity to observe how Christian rulers and settlers managed to conquer and reorganize resources that were once inserted in the Muslim al-Andalus, by then one of the more urbanized and possibly technologically more advanced areas of southern Europe. The Reconquista of the Iberian Peninsula spanned 781 years, since the fall of Granada took place in 1491, and thus contributed to expand Europe's cultural, religious, and economic borders while establishing the political and institutional framework of the new Christian kingdom.

Regarding this particular aspect of the first century of Portuguese history, the development of manorial organization in Iberia provides additional evidence for a comparison with the seigneurial regime as it evolved elsewhere in Europe. The rise of a stable and legitimized monarchy in the twelfth century went hand in hand with the distribution of land and wealth that defined the balance of power between the king, the nobility, and the Church. This equilibrium needed regular military actions to ensure its sustainability and was accompanied by a dynamic of territorial expansion in order to secure more resources to be distributed. These factors were also the main drivers of the overseas expansion, beginning with the conquest of Ceuta in the northern coast of Africa, in 1415, and the ensuing discoveries. The Reconquista and maritime expansion were thus closely linked in their institutional, military, and economic aspects.

From 1620 onwards in the Iberian Peninsula, like elsewhere around the Mediterranean, the flattening out of the demographic trend indicates that the long sixteenth century of prosperity had come to an end (Parker and Smith 1978). Somewhat differently, in Europe's northwest the slowdown of population growth occurred only after 1650 and did not prevent this region from keeping its path toward financial, industrial, and commercial leadership. The shift of the economic core from Mediterranean borders to the northwestern Atlantic shores occurred within two military benchmarks that challenged the Habsburgs’ hegemony (Braudel 1966). The first refers to the Thirty Years’ War (1618–1648), a series of conflicts that began as a religious war in the Holy Roman Empire, but gradually widened, involving several European states. This protracted hostility coincided with the struggle for independence in the northern Low Countries, and as it happened, with the outbreak of the revolution in Catalonia and the Portuguese Restoration, which revealed the multiple, internal and external, tensions the Spanish monarchy faced thereupon. The second conflict that also gained European scope was the War of the Spanish Succession (1702–1714), a dispute for the throne between the French Bourbons and the Austrian Habsburgs. Each of these wars established political alliances drawn in the treaties of Westphalia (1648) and of Utrecht (1715), framing an international order dependent on the military might of the northwestern European states.

The political motivations of various European powers fostered institutional changes inherent in the rise of military expenditure which became the main justification for raising funds, either by public borrowing or by increased taxation. Thus, military concerns exposed the financial constraints of the traditional “domain state,” which drew income from royal property rights claimed over different types of assets and paved the way to the making of the fiscal state. Besides fiscal innovations, this institutional watershed comprised import-substitution policies, and all sorts of economic policies directed to strengthen the national state usually denoted in scholarship as the era of “mercantilism.”

Portugal was an active player in this backdrop that ascribed a different economic role to the state. The kingdom's political independence was reaffirmed in 1640, though it required a twenty-eight-year war against Spain (1640–1668) as well as an increasing tax burden that underpinned noteworthy steps toward the making of a fiscal state.

This book is about the economic history of a small country at the southwestern European periphery, with borders dating back to the twelfth century, and which was for a long period of time at the center of an empire with settlements across Asia, South America, and Africa. The study is based on a large body of literature which has focused on the evolution of political, institutional, demographic, and economic settings within a long period of state formation and consolidation. In spite of the scarcity of quantitative information, most of all regarding the medieval and early modern periods, we were able to provide a coherent account that responds to the fundamental questions about when, how, and why the economy expanded, stagnated, or contracted, and about changes of the country's role in the world economy. All countries matter in a way or another, but Portugal, the country we have studied here, matters in many ways that are particularly relevant. European economic history is also about what happened in its peripheral regions.

It is our contention that the present study highlights in a relevant way the vagaries of long-term institutional and economic development in the European periphery. Our research shed light on the reasons why empires are formed and the economic consequences they may have in the metropolitan economies, as well as on the role of economic and financial transactions at international level, and movements of population and urbanization. The book is also relevant for understanding the degree to which political stability influenced the pace of economic growth.

With fixed borders for more than eight centuries, Portugal provides a case study for which we can observe several dimensions considering the steadiness of space and political order. Since late medieval times, Portugal seldom experienced warfare in its domestic front, at a time when international relations in Europe were shaped by military confrontations that are at the root of state formation. Even the Dynastic Union of 1580 was not the fruit of conquest, but an enforcement of the rights of Philip II of Spain to the throne of Portugal. The secession in 1640, however, became a milestone in the political history of the country.

By the end of 1807, a French army led by General Junot entered Portugal at the northern border with Spain, to take Lisbon, the capital of the empire and main center of the commercial activity of the country, the city that was being used by the British despite the Continental Blockade Napoleon had decreed a year earlier. Prince Regent João, who had agreed on the French embargo to avoid war, fled from the French troops and embarked to Brazil, ending up in Rio de Janeiro by the beginning of 1808. The French invaded Portugal on two other occasions, in 1808 and 1811, and were finally expelled with the help of the British on the later date. Yet these events were to put an end to the old regime and leave the door open to the implementation of a parliamentary regime, much like those that would be introduced elsewhere in Europe. In 1820, a liberal revolution took place followed by the election of a Constitutional Assembly and adoption of a new constitution in 1822. This was only the beginning. The transition from the Ancién Régime to the new liberal order, however, took the best part of the first half of the nineteenth century and was punctuated by military coups, civil wars, and uninterrupted political unrest. The extent of the long institutional transformation was closely related to Portugal's level of economic, political, and social backwardness, which clearly made more difficult the needed consensus for change. To a certain extent, the implementation of the new political framework and the liberal economy emerging from it had to wait for another military coup, in 1851, the Regeneração, which ultimately led to the pacification of Portuguese society, at least for some decades, until other sources of distress emerged with the advent of the Republican forces.

The British Industrial Revolution and the spread of industrialization that ensued throughout the nineteenth century widened the gap in levels of income per capita within Europe, clearly distinguishing a core of industrializing countries and an outer periphery, to the south and the east, where the prevalence of backward agriculture lasted for several decades up to the twentieth century. It still is a point of lively discussion in the literature to define when that “little divergence” commenced in the European continent, whether it is a heritage from the Ancién Régime or a feature of the century of industrialization.

Fernand Braudel characterized 1480–1620 as the “long sixteenth century” of economic and population growth in Europe (Braudel 1982–1984, vol. 2). In Portugal too, after roughly 1480/1490, the upturn in the population numbers is one of the positive signs of this long-term cycle of prosperity. Growing trends started out from a situation in which low population densities were consistent with a high land–labor ratio typical of a “frontier economy.” From what is known about the rest of the Iberian Peninsula, this phase of demographic growth went together with a rise in per capita output, recovering to, though not exceeding, the levels that had existed before the Black Death (Álvarez Nogal and Prados de la Escosura 2013). The Portuguese economy may have followed a different path. Recent estimates suggest that output per capita decreased (Palma and Reis 2016). However, while per capita agricultural production declined, the Portuguese intercontinental trade reached its peak years by comprising offshoots in America, Africa, and Asia. Dealings overseas are one of the most studied features of Portugal's economy. The effects of these trade flows on per capita gross domestic product (GDP) in European colonial powers remain an open and controversial issue (O'Brien and Prados de la Escosura 1998). Some scholarly insights point to colonial trade as the cause of living standard improvements in the mother country. Although there is no agreement about the significance of that contribution, it is certain that it grew throughout the early modern period and achieved its higher impact in the late eighteenth century. Therefore, during the first hundred-year period of the history of the empire, in which the route of the Cape of Good Hope earned a particular advantage over other imperial resources, the colonial trade had a negligible effect on the GDP, though it fostered sectors like shipbuilding and shipping.

This chapter examines the evolution of domestic production and estimates the contribution of resources provided by the empire. During the period under analysis, roughly from 1480 to 1620, Portugal became a kingdom integrated in the Habsburg monarchy (1580). The history of the empire points to the relative advantages Portugal reaped from the political union, since it created new opportunities for slave traffic paid with silver, controlled by Portuguese merchants. Silver was at the time the most important item in the Portuguese Cape Route.