The political revolution
Major historical events and social transformations occurred in Portugal and the Lusophone world in the second half of the 1970s and first half of the 1980s.
The period was marked by the bloodless Carnation Revolution in April 1974, which brought the fall of the almost 50-year old authoritarian regime (since the 28 May 1926 coup and the following establishment of the Salazar’s New State in 1933), and the beginning of a process of democratisation as well as the simultaneous end of the Colonial War and consequent independence of Portuguese African territories in 1975.
This new era was initially characterised by failed right-wing and left-wing coups, polarisation and political instability, following a Cold War-style division typical of the time, opposing two large groups, those willing to install a socialist political and economic regime and those favouring a Western-style capitalist liberal-democracy. The initial governments became progressively dominated by the socialist forces, leading to major social and economic changes: civil and labour rights were strengthened, crucial economic sectors were brought under the direct control of the Government, many banks and other firms were nationalised, factories were occupied, while large amounts of land were expropriated and put under workers’ control.
However, on November 1975, the liberal-democratic revolutionaries gained the upper hand. Elections were then announced and a New Constitution was approved in 1976, mixing liberal-democratic with socialist principles. Under the new Constitution the creation of a Welfare State became compulsory, and socio-economic policies became increasingly more moderate.
The economic shocks
This era was also marked by a combination of major external and internal economic shocks. The external shocks were the end of the so-called “Bretton Woods system” in 1971 (the fixed-exchange rate mechanism created in 1945), after the Nixon Administration’s decision to terminate the convertibility of the US dollar into gold; and the decision of the Arab countries of Organisation of Petroleum Exporting Countries (OPEC) to embargo oil exports to various Western countries in 1973.
The internal shock was the April 1974 revolution and its consequences. Besides the policy changes mentioned above, the revolution led to a decolonisation process with an enormous economic impact: panicked settlers fleeing from the colonies, mostly Mozambique and Angola, flocked to Portugal, in what amounted to the largest short-term population movement into the country in all of Portugal’s history. Population growth, and consequent growth of the labour supply, combined with rising wages and capital flight, led to a very serious economic crisis.
The governments from 1976 needed, on the one hand, to deal with the crisis and, on the other, to fund social services to develop the Welfare State, something that other European countries had done much earlier in the post-war era. Compared to Salazar’s regime, public spending on health, education and social security increased significantly in the mid-1970s.
However, growing budget deficits and inflation, with prices of imported goods going up in the context of the oil crisis, led to problems of imbalance in international payments. The interruption of trade with the former overseas provinces, due to the latter’s independence, and the reduction of tourism and migration remittances, because of political turbulence in Portugal, aggravated further the economy’s situation, determining a long external payment crisis. Three stand-by arrangements (SBA) with the International Monetary Fund (IMF) were signed in 1977, 1978, and 1983, to deal with it.
The IMF interventions
The government responded to the negative balance of payments account in two ways: by using the Bank of Portugal’s reserves in foreign currency and by getting loans from Western countries and international institutions. Two austerity programs were adopted in 1977, interest rates increased, ceilings to bank credit were introduced, taxes were raised and public investments reduced. A programmed system of exchange rate depreciation named crawling peg was introduced in September 1977.
A large loan was then provided to Portugal by a series of countries led by the US, under the condition that IMF assistance would follow. As a consequence, Portugal signed a second SBA with the IMF in 1978, now imposing various conditionality measures: a ceiling was put on credit to be granted by the banking system to public companies; interest rates were again raised; a ceiling was put on wage increase; the government engaged into a restrictive fiscal policy; and the prices set by the government were increased. Depreciation under the crawling peg regime was reinforced. These measures were very effective in terms of international balance, with the current account reaching balance in 1979.
Another oil shock in 1979, combined with certain expansionary internal political measures, reverted the positive steps. In 1983 a SBA between Portugal and the IMF was signed. This time the measures were stricter, although of basically the same nature than under the previous two SBAs. The programme was again successful in terms of external balance, but now at a higher cost in terms of growth and unemployment. Rebalance allowed Portugal to be ready to enter the European Union (EU), then called European Economic Community (EEC), something that happened in 1986, after long negotiations.
Throughout this era (1974-1985), growth was modest and volatile, bringing an interruption to the process of convergence of GDP per capita with EU countries that had been very rapid between the 1950s and 1973.
Major historical events and social transformations occurred in Portugal and the Lusophone world in the second half of the 1970s and first half of the 1980s.
The period was marked by the bloodless Carnation Revolution in April 1974, which brought the fall of the almost 50-year old authoritarian regime (since the 28 May 1926 coup and the following establishment of the Salazar’s New State in 1933), and the beginning of a process of democratisation as well as the simultaneous end of the Colonial War and consequent independence of Portuguese African territories in 1975.
This new era was initially characterised by failed right-wing and left-wing coups, polarisation and political instability, following a Cold War-style division typical of the time, opposing two large groups, those willing to install a socialist political and economic regime and those favouring a Western-style capitalist liberal-democracy. The initial governments became progressively dominated by the socialist forces, leading to major social and economic changes: civil and labour rights were strengthened, crucial economic sectors were brought under the direct control of the Government, many banks and other firms were nationalised, factories were occupied, while large amounts of land were expropriated and put under workers’ control.
However, on November 1975, the liberal-democratic revolutionaries gained the upper hand. Elections were then announced and a New Constitution was approved in 1976, mixing liberal-democratic with socialist principles. Under the new Constitution the creation of a Welfare State became compulsory, and socio-economic policies became increasingly more moderate.
The economic shocks
This era was also marked by a combination of major external and internal economic shocks. The external shocks were the end of the so-called “Bretton Woods system” in 1971 (the fixed-exchange rate mechanism created in 1945), after the Nixon Administration’s decision to terminate the convertibility of the US dollar into gold; and the decision of the Arab countries of Organisation of Petroleum Exporting Countries (OPEC) to embargo oil exports to various Western countries in 1973.
The internal shock was the April 1974 revolution and its consequences. Besides the policy changes mentioned above, the revolution led to a decolonisation process with an enormous economic impact: panicked settlers fleeing from the colonies, mostly Mozambique and Angola, flocked to Portugal, in what amounted to the largest short-term population movement into the country in all of Portugal’s history. Population growth, and consequent growth of the labour supply, combined with rising wages and capital flight, led to a very serious economic crisis.
The governments from 1976 needed, on the one hand, to deal with the crisis and, on the other, to fund social services to develop the Welfare State, something that other European countries had done much earlier in the post-war era. Compared to Salazar’s regime, public spending on health, education and social security increased significantly in the mid-1970s.
However, growing budget deficits and inflation, with prices of imported goods going up in the context of the oil crisis, led to problems of imbalance in international payments. The interruption of trade with the former overseas provinces, due to the latter’s independence, and the reduction of tourism and migration remittances, because of political turbulence in Portugal, aggravated further the economy’s situation, determining a long external payment crisis. Three stand-by arrangements (SBA) with the International Monetary Fund (IMF) were signed in 1977, 1978, and 1983, to deal with it.
The IMF interventions
The government responded to the negative balance of payments account in two ways: by using the Bank of Portugal’s reserves in foreign currency and by getting loans from Western countries and international institutions. Two austerity programs were adopted in 1977, interest rates increased, ceilings to bank credit were introduced, taxes were raised and public investments reduced. A programmed system of exchange rate depreciation named crawling peg was introduced in September 1977.
A large loan was then provided to Portugal by a series of countries led by the US, under the condition that IMF assistance would follow. As a consequence, Portugal signed a second SBA with the IMF in 1978, now imposing various conditionality measures: a ceiling was put on credit to be granted by the banking system to public companies; interest rates were again raised; a ceiling was put on wage increase; the government engaged into a restrictive fiscal policy; and the prices set by the government were increased. Depreciation under the crawling peg regime was reinforced. These measures were very effective in terms of international balance, with the current account reaching balance in 1979.
Another oil shock in 1979, combined with certain expansionary internal political measures, reverted the positive steps. In 1983 a SBA between Portugal and the IMF was signed. This time the measures were stricter, although of basically the same nature than under the previous two SBAs. The programme was again successful in terms of external balance, but now at a higher cost in terms of growth and unemployment. Rebalance allowed Portugal to be ready to enter the European Union (EU), then called European Economic Community (EEC), something that happened in 1986, after long negotiations.
Throughout this era (1974-1985), growth was modest and volatile, bringing an interruption to the process of convergence of GDP per capita with EU countries that had been very rapid between the 1950s and 1973.