Few cases better illustrate the ‘reversal of fortune’ phenomenon in economic history than that of Portugal. Throughout the early modern period, Portugal was a leading European colonial power, establishing imperial concessions first in Africa and South Asia and later – more importantly – in Brazil. Thomas and McCloskey (1981) called the Iberian countries the “giants” of the 16th century, contrasting them favourably with Britain, an “inconsiderable little island … a mere dwarf”. In 1750, Portuguese output per capita exceeded French and Spanish levels; Lisbon was Europe’s fourth most populous city. Only a century later, however, Portugal was the poorest nation in Western Europe, doomed to a period of economic stagnation that lasted into the early decades of the 20th century.
Historians have long sought to explain this puzzle. One influential strand of scholarship, in the tradition of North and Weingast (1989) and Acemoglu et al. (2005), argues that longstanding institutional differences explain Portugal’s backwardness. Portugal, like Spain and France, is said to have had “political institutions at the turn of the 16th century … more absolutist than those in Britain and the Netherlands” (Acemoglu et al. 2005: 568). This would have consigned Portugal to slow growth in subsequent centuries. Recent research, however, casts doubt on this narrative. Henriques and Palma (2023), for example, show that meaningful institutional differences between England and Iberia did not emerge until at least the second half of the 17th century, while Palma and Reis (2019) demonstrate that Portugal experienced substantial economic growth in output per head from the mid-17th to the mid-18th century.
We propose that the resource curse – specifically, the Brazilian gold rush of the 18th century – as an alternative explanation for the Portuguese decline (Kedrosky and Palma 2023). During the first four decades of the 18th century, Brazilian gold production rose by over seven times, from less than 20,000 kg to more than 140,000 kg (TePaske 2010). Over 80% of this total was exported to Portugal (Costa et al. 2016: 204). The classic work of Corden and Neary (1982) suggests that a boom in a natural resource sector can trigger de-industrialisation by raising the prices of non-traded goods relative to traded goods (the real exchange rate), draining the latter of factors of production. We show that a similar process took place in 18th-century Portugal: the influx of Brazilian gold shifted production towards land-intensive, non-tradable goods and promoted the import of English manufactured goods, at the expense of domestic industry.
To assess this theoretical prediction, we use prices and wages collected from primary sources. We compute baskets of traded and non-traded goods to generate a measure of the real exchange rate in four Portuguese cities and combine them with population weights to create a national average. The results show that a substantial appreciation of the real exchange rate – in the order of 30% – took place during the 18th century, coincident with an upsurge in the importation of gold from Portuguese Brazil (Figure 1). This appreciation – an increase in the price of non-traded relative to traded goods – likely reduced employment in Portugal’s nascent manufacturing and cereal agricultural sectors, blocking Portugal’s path towards structural transformation and industrialisation.
Figure 1 Ratio of non-traded to traded price indices for Portugal, 1650–1820
Note: The vertical line in 1694 marks the approximate beginning of gold imports to Portugal.
Sources: Price data from PWR. Gold production in Portuguese Brazil from TePaske (2010).
Qualitative evidence on Portuguese history during the 18th century reinforces the narrative suggested by the real exchange. Land-intensive, non-traded primary products like meat became increasingly expensive relative to textiles and cereal grains, which could be imported from abroad (holding prices down). Wages rose during the initial boom in the first half of the century, before weakening thereafter. Amid surging inflation, Portugal ran rapidly increasing current account deficits with major trading partners, which troughed at 4 billion reis during the 1750s. The deficit with England, which ballooned to over a million pounds per annum in 1756–60, was of particular concern: most English exports were manufactured woollens, exchanged for increasing quantities of Brazilian gold (Fisher 1971: 197). Indeed, it was Portugal’s trade with England – receiving textiles in exchange for gold and wine – that inspired Ricardo’s concept of the division of labour.
Belated efforts to protect and promote manufacturing towards the end of the 18th century proved unsuccessful: establishments were of insufficiently large scale and slow to adopt new technologies. Grain imports, especially in coastal cities like Lisbon, also rose during the late 18th century, exacerbating low productivity in cereal agriculture. Both trends slowed Portugal’s transition out of the primary sector and inhibited long-run growth. Indeed, as Figure 2 below shows, the share of the Portuguese workforce outside manufacturing declined after 1750.
Figure 2 Shares of population outside agriculture for several European countries
Sources: Kedrosky and Palma (2023).
To assess the aggregate impact of the resource curse on Portuguese economic growth, we perform a synthetic control exercise, fitting Portugal’s pre-1694 growth trajectory to a sample of European countries to create a counterfactual trajectory for the 18th century. Our results indicate that by 1800, after a temporary mid-century boom, Portuguese GDP per capita may have been as much as 40% lower than the pre-gold counterfactual trend (Figure 3). While this outcome must be interpreted with caution, given the small sample size, it suggests that the resource curse imposed a significant growth penalty on Portugal at a critical stage of its development. Our results are similar in direction and magnitude to those found by Charotti et al. (2022), who analyse the effects of Dutch disease on Spain amid the post-1500 influx of New World silver.
Figure 3 Synthetic control results for Portuguese GDP per capita, 1640–1800
Note: The vertical line in 1694 marks the approximate beginning of gold imports to Portugal. As a robustness check, in the online appendix to Kedrosky and Palma (2024), we show the same figure using an unweighted mean, rather than the synthetic counterfactual, and demonstrate that the result is largely unaffected.
Sources: Kedrosky and Palma (2023).
Our paper sheds light on the causes of the ‘Little Divergence’ between Northwest Europe and the rest of the continent. The contingent nature of Portugal’s economic collapse suggests that inherent initial differences in institutions and geography did not predetermine intra-European divergence, but that this process was mediated by historical shocks with differential effects on the countries involved. For example, England – a ‘second-stage’ receiver of Brazilian gold via textile exports to Portugal – benefited significantly from the same process that hampered Portuguese development (Chen et al. 2022). Without the gold influx, it is possible to conceive of a counterfactual Portugal that took advantage of its imperial domains as a captive export market for a nascent manufacturing industry, one of the engines of growth effectively harnessed by Great Britain over the same period. With it, Portugal was reduced to a poor, quasi-dependent primary product exporter in Britain’s orbit.
Understanding how industrial and political development could be diverted is crucial to locating the sources of economic progress, both in the early modern world and in the present. Resources and institutions often play contradictory roles in this process; unravelling how the two interacted in different historical contexts is a step towards solving the eternal mystery of development.
References
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Henriques, A, and N Palma (2023), “Comparative European institutions and the Little Divergence, 1385–1800”, Journal of Economic Growth 28: 259–94.
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Thomas, R, and D McCloskey (1981), “Overseas trade and empire 1700–1800”, in R Floud and D McCloskey (eds.), The Economic History of Britain since 1700, vol. 1, 87–102, Cambridge: Cambridge University Press.
