Economy, Overview

While the Portuguese economy has undergone remarkable changes since the 1970s, Portugal remains among the least developed nations in western Europe. Two events in the late 20th century have profoundly affected Portugal’s economic development—the 1974 revolution and Portugal’s entry into the European Community (EC), a predecessor of the European Union (EU), in 1986.

Prior to the revolution, industrial, agricultural, and financial resources remained concentrated among a few wealthy families. Portuguese industry and agriculture were inefficient and labor-intensive, and the nation’s financial investments were directed mainly toward the profitable African colonies. The revolutionary government first undercut the old elite’s economic power by granting independence to the African colonies. It also expropriated landed estates in central and southern Portugal and established communal farms. Banks and insurance companies, followed by most of the country’s heavy and medium-sized industries were nationalized, with the exception of foreign-owned enterprises. Most of the new state-owned firms, however, proved highly inefficient and contributed to large deficits and growing public debt. By the early 1980s many Portuguese favored the privatization of state-owned enterprises, a reduction in communal agriculture, and Portugal’s rapid entry into the EC.

Portugal joined the EC in 1986 and, following a transition period lasting until 1992, adopted the organization’s key policies. These included dropping protectionist tariffs and eliminating all barriers to the movement of goods and capital between Portugal and other member states. The EC also required Portugal to phase out subsidies to public enterprises and to adopt agricultural reforms. Membership in the EC, which formally became the EU in 1993, reshaped Portugal’s economy. Portugal revised its tax structure, expanded its social welfare system, and privatized many nationalized industries. Portugal’s economy has benefited from increased trade ties to Europe and from EU grants aimed at improving the country’s infrastructure. In addition, as a participant in Economic and Monetary Union (EMU) and the EU’s single currency, the euro, Portugal was required to reduce its budget deficits and to adopt other economic reforms.

Portugal has made great strides in raising its living standards since the mid-1980s, and the country’s per capita income is gradually approaching that of its EU partners. However, Portugal’s economic development is highly uneven. Manufacturing and services, along with much of the country’s population, is concentrated in coastal areas in the west and south. The northern and eastern interior regions continue to experience economic stagnation and decline, as well as population losses due to steady out-migration. Portugal’s gross domestic product (GDP) in 2000 was $105 billion.