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.