Inequality and Growth relevant Links for the Portuguese Economy

During the 1980’s, Portugal experienced a decrease in income inequality but this decrease was not uniform across the income distribution and, in recent years, income inequality seems to be following the opposite path. From around the year 2000, the Portuguese economy has become almost stagnant, with real GDP per capita still only around 60% of the EU-27 average in 2007. Portugal has also become one of the most unequal EU member states in terms of income distribution in the meantime. If inequality is negatively associated with economic growth and positively associated with poverty, this implies a reduction in the well-being of the Portuguese citizens. The aim of this paper is to review the theoretical and empirical literature on the relationship between inequality and economic growth from the perspective of the Portuguese economy. The correct identification of the (predicted) sign of the relationship for this particular country and of the underlying mechanisms that explain it is crucial to derive more accurate redistributive policy recommendations that enhance growth. The same exercise can be replicated for future EU member states in order to avoid unnecessary losses in terms of its growth potential and poverty alleviation.