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

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.