A thresholds analysis of growth, convergence and structural change in the EU: insights for Portugal

Following the political turmoil and economic crisis of the 1970s, Portugal enjoyed some years of rapid (and above average) economic growth, accompanying the preparation and accession to the European Union and the participation as a founding member in the Euro Zone. This process, however, stopped since the beginning of the 21st century and this change in the growth rhythm was exacerbated by the Great Recession. From about 1999-2000 onwards, economic growth in Portugal slowed significantly, the non-tradables sector reinforced its role as the anchor of the economy, and productivity growth stagnated or even declined, depending on the productivity measured considered. This paper applies a thresholds regression approach to examine the growth and convergence process of fourteen EU member states over the period 1980-2011. Given the changes in the pattern of production towards a higher weight of the non-tradables sector that Portugal recorded throughout the period under analysis, we use the share of non-tradables as the threshold variable and derive some potential implications from our results for a better understanding of the Portuguese growth and convergence process in preparation for and after accession to the European Union. Threshold analysis allows us to identify those growth determinants that do not have the expected effect on growth and hence determine the specific policy implications for different non-tradables sector weight regimes.