The First Republic was ended by a military coup in May 1926, but the newly installed government failed to solve the nation's precarious financial situation. Instead, President Óscar Fragoso Carmona invited António de Oliveira Salazar to head the Ministry of Finance, and the latter agreeÍÍÍÍd to accept the position provided he would have veto power over all fiscal expenditures. At the time of his appointment as minister of finance in 1928, Salazar held the Chair of Economics at the University of Coimbra and was considered by his peers to be Portugal's most distinguished authority on inflation. For forty years, first as minister of finance (1928-32) and then as prime minister (1932-68), Salazar's political and economic doctrines were to shape the Portuguese destiny (see The New State , ch. 1).

From the perspective of the financial chaos of the republican period, it was not surprising that Salazar considered the principles of a balanced budget and monetary stability as categorical imperatives. By restoring equilibrium both in the fiscal budget and in the balance of international payments, Salazar succeeded in restoring Portugal's credit worthiness at home and abroad. Because Portugal's fiscal accounts from the 1930s until the early 1960s almost always had a surplus in the current account, the state had the wherewithal to finance public infrastructure projects without resorting either to inflationary financing or to borrowing abroad.

At the bottom of the Great Depression, Premier Salazar laid the foundations for his Estado Novo, the "New State." Neither capitalist nor communist, Portugal's economy was cast into a quasi-traditional mold. The corporative framework within which the Portuguese economy evolved combined two salient characteristics: extensive state regulation and predominantly private ownership of the means of production. Leading financiers and industrialists accepted extensive bureaucratic controls in return for assurances of minimal public ownership of economic enterprises and certain monopolistic (or restricted-competition) privileges.

Within this framework, the state exercised extensive de facto authority regarding private investment decisions and the level of wages. A system of industrial licensing (condicionamento industrial), introduced by law in 1931, required prior authorization from the state for setting up or relocating an industrial plant. Investment in machinery and equipment designed to increase the capacity of an existing firm also required government approval. Although the political system was ostensibly corporatist, as political scientist Howard J. Wiarda makes clear, "In reality both labor and capital--and indeed the entire corporate institutional network--were subordinate to the central state apparatus."

Under the old regime, Portugal's private sector was dominated by some forty great families. These industrial dynasties were allied by marriage with the large, traditional landowning families of the nobility, who held most of the arable land in the southern part o 100f the ce country in great estates. Many of these dynastiÍÍÍÍes had business interests in Portuguese Africa. Within this elite group, the top ten families owned all the important commercial banks, which in turn controlled a disproportionate share of the national economy. Because bank officials were often members of the boards of directors of borrowing firms in whose stock the banks participated, the influence of the large banks extended to a host of commercial, industrial, and service enterprises.

Portugal's shift toward a moderately outward-looking trade and financial strategy, initiated in the late 1950s, gained momentum during the early 1960s. A growing number of industrialists, as well as government technocrats, favored greater Portuguese integration with the industrial countries to the north as a badly needed stimulus to Portugal's economy. The rising influence of the Europe-oriented technocrats within Salazar's cabinet was confirmed by the substantial increase in the foreign investment component in projected capital formation between the first (1953-58) and second (1959-64) economic development plans. The first plan called for a foreign investment component of less than 6 percent, but the plan for the 1959-64 period envisioned a 25-percent contribution. The newly influential Europe-oriented industrial and technical groups persuaded Salazar that Portugal should become a charter member of the European Free Trade Association (EFTA) when it was organized in 1959. In the following year, Portugal also added its membership in the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF--see Glossary), and the World Bank.

In 1958 when the Portuguese government announced the 1959-64 Six-Year Plan for National Development, a decision had been reached to accelerate the country's rate of economic growth--a decision whose urgency grew with the outbreak of guerrilla warfare in Angola in 1961 and in Portugal's other African territories thereafter. Salazar and his policy advisers recognized that additional claims by the state on national output for military expenditures, as well as for increased transfers of official investment to the "overseas provinces," could only be met by a sharp rise in the country's productive capacity. Salazar's commitment to preserving Portugal's "multiracial, pluricontinental" state led him reluctantly to seek external credits beginning in 1962, an action from which the Portuguese treasury had abstained for several decades.

Beyond military measures, the official Portuguese response to the "winds of change" in the African colonies was to integrate them administratively and economically more closely with Portugal through population and capital transfers, trade liberalization, and the creation of a common currency--the so-called Escudo Area. The integration program established in 1961 provided for the removal of Portugal's duties on imports from its overseas territories by January 1964. The latter, on the other hand, were permitted to continue to levy duties on goods imported from Portugal but at a preferential rate, in most cases 50 percent of the normal duties levied by the territories on goods originating outside the Escudo Area. The effect of this two-tier tariff system was to give Portugal's exports preferential access to its colonial markets.

Despite the opposition of protectionist interests, the Portuguese government succeeded in bringing about some liberalization of the industrial licensing system, as well as in reducing trade barriers to conform with EFTA and GATT agreements. The last years of the Salazar era witnessed the creation of important privately organized ventures, including an integrated iron and steel mill, a modern ship repair and shipbuilding complex, vehicle assembly plants, oil refineries, petrochemical plants, pulp and paper mills, and electronic plants. As economist Valentina Xavier Pintado observed, "Behind the facade of an aged Salazar, Portugal knew deep and lasting changes during the 1960s 857 ."

The liberalization of the Portuguese economy continued under Salazar's successor, Prime Minister Marcello José das Neves Caetano (1968-74), whose administration abolished industrial licensing requirements for firms in most sectors and in 1972 signed a free trade agreement with the newly enlarged EC. Under the agreement, which took effect at the beginning of 1973, Portugal was given until 1980 to abolish its restrictions on most community goods and until 1985 on certain sensitive products amounting to some 10 percent of the EC's total exports to Portugal. EFTA membership and a growing foreign investor presence contributed to Portugal's industrial modernization and export diversification between 1960 and 1973.

Notwithstanding the concentration of the means of production in the hands of a small number of family-based financial-industrial groups, Portuguese business culture permitted a surprising upward mobility of university-educated individuals with middle-class backgrounds into professional management careers. Before the revolution, the largest, most technologically advanced (and most recently organized) firms offered the greatest opportunity for management careers based on merit rather than on accident of birth.

Data as of January 1993