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From Revolution to Divergence: Structural Reforms and the Persistence of Portugal’s Post-1974 Growth Gap

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  • João Tovar Jalles

Abstract

This paper investigates the persistence of Portugal’s post-1974 growth gap relative to a synthetic counterfactual, focusing on the role of structural reforms. Building on evidence of a structural break following the Carnation Revolution, the analysis shifts attention from the initial divergence to the mechanisms sustaining it over subsequent decades. A novel dataset of annual institutional reforms covering labour market regulation, unemployment benefits, collective bargaining, minimum wages, and product market regulation is constructed for the period 1970–2025. Using local projection methods, the paper estimates the dynamic effects of these reforms on the evolution of the gap and its underlying channels. The results reveal a clear asymmetry across institutional domains. Product-market liberalization is associated with a gradual narrowing of the gap, while labour-market rigidities are linked to its persistence, particularly at medium to longer horizons. These effects operate primarily through the investment channel, with limited contributions from employment and productivity dynamics. Moreover, the impact of reforms is state-dependent: external constraints significantly amplify both the adverse effects of rigidities and the benefits of liberalization. Robustness checks and placebobased inference using OECD countries confirm the stability of the findings. Overall, the results highlight the importance of institutional design and macroeconomic context in shaping long-run growth and adjustment dynamics in small open economies.

Suggested Citation

  • João Tovar Jalles, 2026. "From Revolution to Divergence: Structural Reforms and the Persistence of Portugal’s Post-1974 Growth Gap," Working Papers REM 2026/0414, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp04142026
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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