Printing Money: The wrong band-aid all along?

Reading time: 6 minutes

Have you ever wondered why governments do not just print money every time they have a large debt? After all, if there is a need for funds, and if the governments have the means to create more money, then why do not they do it?

In fact, in the United States, the president Joe Biden has been actively printing money to overcome the pandemic crisis. Such measure has been concerning most of the American population, as the inflation rates are increasing by the minute and a hyperinflation crisis is in the mind of many.

A question imposes, should we be concerned? What can history tell us about using these mechanisms to overcome major depressions? The answer to this lies in the balance between rising inflation and the reduction of debt. In this article, we will analyse this equilibrium, and explain the consequences of rising inflation throughout history.

The Mechanics used in overcoming a Crisis

First and foremost, we must observe the mechanisms used to overcome an economy which is deleveraging. During economic hardships, the amount of debt increases to a point where the debt repayment grows at a much faster pace than levels of income, thus decreasing spending. As one’s spending is another’s income, we have an ongoing stream of less borrowing (since people become less creditworthy), while the debt repayment still prevails.

In such extreme situations, lowering interest is not enough to overcome these crises (as the Central Banks would do when faced with a short-term recession). Thus, to decrease debt burdens, there are usually four ways to do so: Cut Spending, Reduce Debt, Redistribute Wealth and Print Money.

While the first three are deflationary forces, still resulting in income decreasing at a higher rate than debt, printing money is an inflationary and stimulative force controlled by the Central Bank and used to buy financial assets and government bonds, increasing their value. As the Central Bank is only capable of buying financial assets and the Central Government (not able to print money) of spending on goods and services, giving the money directly to households, these two institutions must combine forces to stimulate the economy. This reinforces the importance of policy makers, who need to balance the mix between deflationary and inflationary forces to maintain stability, ensuring a debt decline relative to income, positive economic growth and a controlled inflation.

However, there have been many times when this did not happen. The Central Bank needs to print money in such a way that the rate of income growth is higher than the rate of interest on accumulated debt. Since this method is quite preferable to the other alternatives and easy to undertake, it is no surprise that it has been abused a lot throughout history, leading to disastrous outcomes as hyperinflation.

Examples of Hyperinflation throughout time

Most of us recall hearing that post World War I Weimar Germany was one of the worst cases of hyperinflation. In fact, during the war, Germany financed most of its army and resources through money printing, portraying it as an investment since they believed they would win the conflict. Consequently, the German government not only used propaganda to appeal to patriotism, as to disguise the immanent inflation that was on the horizon, but also censored a lot of information regarding the stock exchange market and foreign exchange rates.

After the war came to an end, the major debt in Germany’s economy culminated with the well-known Versailles Treaty. The Germans were left to pay an astronomical and unrealistic debt after a miserable conflict. By September 1920, prices were 12 times higher than the ones before the war, and France was starting to put pressure on Germany to reimburse its repairment payments, going as far as, in March 1921, surrounding and occupying German ports.

While instability spread across the country, Germany tried to start implementing the mentioned above mechanism, mainly through deflationary forces, such as wealth redistribution. However, due to the abnormal high taxation, it is said that the rich started to spend all their money in whatever they could, to avoid giving it to the government. Simultaneously, Germany kept printing money, trying to stay afloat, perpetuating the vicious cycle of inflation and uncertainty which would lead to the rise of the extremist and far-right party.

This is a very good example of how dangerous it can get when the two main forces mentioned are not managed correctly.

The depreciation in value of money made paper notes so worthless that children used them as building blocks

Furthermore, another known and current example is Venezuela. Throughout the last decades, Venezuela’s currency, the Bolívar, and its overall economy had been highly dependent on oil exports. However, due to the global price drop, the foreign demand for the Venezuelan currency to buy oil crashed, and with it the Venezuelan economy. In 2013, after the presidency of Hugo Chavez, his new successor, Nicolas Maduro, decided to start printing money as a solution, because of its intrinsic inflationary force.

However, as the price of oil kept falling and Venezuelan oil output decreased, even more investors decided to look elsewhere, which deepened even further the devaluation of the bolívar. As prices began to rise, the government kept printing more money to pay its bills and debt, entering into a hyperinflation cycle.

Faced with the tremendous devaluation of the currency and to deter the population of adopting the US Dollar, the government decided to issue currency controls, namely a fixed exchange rate that would stop currency transactions. The government also made many attempts at valuing the currencies by creating new ones tied to the oil price but never succeeded. Moreover, this led to many cases of unofficial currency trading, fomented by the uncertainty and distrust of the Venezuelan population towards the country’s political and economic instability, which only worsened the situation.

Regarding this case, we may note that, faced with a crisis, the Venezuelan government emphasized inflationary mechanisms, failing to establish a sustainable balance.

Venezuelan population started trading bolívars with dollars

A look in the present

One of the most discussed policies nowadays is Biden’s. After Fed’s injection of 2.3 trillion dollars in the economy, with a total amount of stimulus checks to households of 391 billion dollars, we have seen rising inflation in the US, with the consumer price index reaching 5,4% in September 2021 (Graph 1).

Graph 1: Annual percentage change in consumer prices

In order to explain this value, there are several matters to consider. Firstly, some external shocks to monetary policies have an impact, such as the energy shock, as the prices of energy and fuel have been rising (consequence of lack of resources). Besides that, some supply chains that were disrupted have not returned to normal, leading to price increase in imported goods. On the demand side, with the economy returning to ordinary again, the demand escalates in some sectors, such as services, and this disturbance can lead to the rise of prices, as families attempt to return to their previous consumption habits and companies seek to compensate the losses. Another important aspect is related to long-term expectations. The inflationary forecast can lead to an even higher inflation rate in the long run.

Will the United States repeat the past?

All in all, USA’s inflation is dependent on many consequences that came out of the pandemic crises other than Biden’s stimulus policies, unlike the mentioned examples. However, all of them share a similar imminent problem regarding the excess amount of debt they are supporting, despite the United States currently being able to attenuate it.

We are living uncertain times and as long as policy makers are aware of the need to find an equilibrium between inflationary and deflationary waves, this current deleveraging may occur in a stable way.

Sources: Business Insider, Caixa Bank Research, CNBC, Financial Times, Forbes, The Conversation, The Economist, The Guardian, The New York Times, The Washington Post, The White House, Trading Economics, VOX.

Benedita Elias

Mariana Gomes

The Asian Tigers: Successful Economic Development in the XXth Century

Reading time: 7 minutes


After the Second World War, East Asia was facing multiple political and economic problems. Few would predict that four countries in the region would be the best example of successful development: Hong Kong, Singapore, Taiwan, and South Korea embarked on an unprecedented economic transition. In the beginning of the 1960s they were all low-income countries. Rapid and sustained economic growth and equal income distribution provided for by intelligent industrial policy, with some state intervention turned them into some of the world’s richest countries by the end of the century. 

In this article we will present the decisive economic and political factors in each of four tigers’ trajectory, and what they teach us about economic development.  

Evolution of Real GDP per capita in
all four Asian Tigers

Hong Kong’s Positive Non-interventionism 

         The city of Honk Kong was a British protectorate until 1997. Thus, its economic development in the 20th century was made under colonial rule. The economy was devastated after the Japanese occupation in WWII and the embargo from China during the Korean War. Nevertheless, it was able to produce an industrial take-off in the 1950s. The reasons for this take-off are twofold: first, the city benefited from capital and know-how brought from refugees from communist China; secondly, the colonial authorities opted for a liberal approach to policymaking. 

Sir John Cowperthwaite (1915-2006), Financial Secretary of Hong Kong (1961-1971)

The authorities, headed by Sir John Cowperthwaite (financial minister from 1951 to 1971), chose a laissez-faire policy, with openness to trade and to capital flows, low taxes, balanced budgets and the creation of the necessary institutional conditions for agents to operate in free, competitive markets. At the same time, the government intervened in the supply of public goods, strong and efficient regulation, and some welfare measures such as supply of housing. 

         These institutional conditions provided a framework for a rapid economic growth in the 1950s through the 1970s that was heavily based on industry. Structural changes were brought by China’s relative openness after Deng Xiaoping’s reforms. From the 1970s onwards Hong Kong’s economy moved from an industrial economy to an economy based on trade and value-added services, with a particular emphasis on financial services. 

         Today Hong Kong is one of the technological, financial, and trading centers in the world. Its economic results are sound and believed to continue to be so in the future. After the 1997 handover, it has become more economic integrated with China. However, the economic freedom and progress coexisted with lack of democracy and basic freedoms both during Britain’s rule and today. 

Singapore: Growth without Freedom 

         The city of Singapore gained its independence from Britain in 1963 and it seceded from Malaysia in 1965. At the time it was an underdeveloped city, with most of its inhabitants living in poverty while unemployment soared. Furthermore, it was a small state lacking natural resources, and basic economic and well-being infrastructure. 

         Inspired by the example of Israel, the government of Singapore tried to reap gains from trade and globalization to develop its economy. The government embarked on a set of policies designed to attract foreign direct investment and develop and liberalize trade in the region. Taxes were low, incentives given to investors and the rule of law was strictly enforced. In a couple of years most production units were owned by foreign investors, particularly American and Japanese ones. In the 1960s and 1970s, the country’s GDP grew at an annual double-digit rate. To industrial economic dynamism Singapore created was further enhanced with investment in education, particularly on technical skills. 


 Lee Kuan Yew (1923-2015), Prime Minister of Singapore (1959-1990)

   Singapore produced real structural reforms that created a resilient economy that dealt with relatively ease with the Asian Financial Crisis of 1997-98, the Dot-Com bubble and the 2008 Crisis. Today the city-state is one of the world’s trading and financial services centers, with many exporting high-tech industries. Furthermore, it shows many good results in quality-of-life indicators. 

         However, development came at a cost. The reforms were made by a strong government, under the leadership of the People’s Action Party since the late-1950s. Particularly, the reforms are associated with the person of Lee Kuan Yew, prime minister from 1959 to 1990. The business-friendly measures were coupled with a strong authoritarian government that constantly curtailed individual freedoms. Prosperity came at the cost of democracy, which is not the most desirable model to emulate. 

Taiwan: an active government 

Taiwan became an independent country after the Chinese Civil War, which opposed nationalists and communists. As the communist regime of Mao Tse-tung was implemented, the Chinese business elite was forced to flee to Taiwan, bringing capital and economic power to the island.  

The miracle of Taiwan’s economic growth was only possible due to an active posture of the government, which encouraged enterprising and development of the economy, providing several incentives.  

The plan for this growth consisted of transforming an economy based on agriculture to manufacturers, namely in the textile industry, modernizing the stages of production and trying to make it self-sufficient. The support of the government was fundamental since it supported the investment and capital acquired. This plan proved to be a huge success, as it drove Taiwan’s economy, shifting from the primary sector to the services sector, increasing exports and attracting investors.  

Another factor to consider in this process was that the labour force was extensive and very cheap, as the degree of education was not very high in most of the population, lowering the costs of production and allowing an establishment in the world’s market with competitive prices. Besides that, Taiwan also invested in the consumption and production of electronics, namely in integrated circuits. As the know-how and quality of the products increased, it boosted Taiwan’s economy, receiving plenty of foreign capital and exporting most of the production.  

South Korea: an exemplary case of diverging paths 

South Korea’s case is interesting, because, unlike the other three nations, it is noticeably larger and borders one of the worst cases of regime failure – North Korea. 

General Park Chung-hee (1917-1979), ruler of South Korea (1963-1979)

The Korean peninsula was home to a mostly agrarian society prior to World War II, making it one of the poorest in Asia. With the end of the world war, Cold War followed, and the Korean war broke out in full force, pitting the communist forces of the North (backed by China and the Soviet Union) against the US-led troops in the South. This was a defining moment in the Korean economy, leading to a coup by South Korea general Park Chung-hee in 1961. Chung-hee was a de facto dictator; however, the country flourished with him spearheading efforts to transition from an agrarian to industrial economy. His iron-fisted rule ensured controlled growth in the early 1960s. A lot of South Korea’s early prosperity stems from foreign aid provided by the United States – the chaebols, family-ran corporations, the backbone of the Korean economy, benefited greatly from these donations, in addition to tax breaks and easy financing. This period, between the 1960s to the 1970s, led to the consolidation of household names, such as Samsung, LG, and Hyundai. 

During the Asian Tigers growth period, South Korea’s GDP grew at an exceptional average of 8% per year – one of the fastest in Asia. Contrary to its neighbor to the north, South Korea adopted an export-heavy economy, which contributed to this growth as the West turned to Asia for its industrial and electronic goods. South Korea also had a booming steel industry, with some of the largest shipbuilding yards in the world. 


The ascension of the Asian Tigers would shape our world, changing the dynamics of the worlds’ economy and the balance of power in South-East Asia. 

There were differences, for instance Hong-Kong adopted a policy of laissez-faire, with a very reduced intervention from the government, unlike Taiwan, Singapore, and South Korea where that entity played a major role, controlling the reshape the economy. Despite the variety of measures and different approaches, the ultimate result was an astonishing economic growth. 

This series of economic growth is an example to follow, as they show how, with the right measures, adapted to each situation, economies can flourish in a sustainable way.  


American Economic Association; BBC; Berkeley Economic Review; Borgen Magazine; Corporate Finance Institute; CNN; Economic History Association; E-International Relations; Food Research Institute Studies; Geographical Association; Ichiro Sugimoto; Investopedia; International Development Society – King’s College London; Journal of Comparative Economics; Kellogg Institue; MacroTrends; Montreal Economic Institue; St. Louis FED; Taiwan Today; The China Quarterly; The Economist; ThoughtCo; VoxEU; Wikipedia; WorldAtlas; World Bank; ZBW. 


Rui Ramalhão

Guilherme Barroca

Mariana Gomes

The collapse of the Soviet Union

Reading time: 6 minutes


For many decades, the USSR was regarded as an economic powerhouse. It achieved rapid industrialisation through central planning, despite an enormous human cost. In the 1950s and 1960s, it grew rapidly, and many observers in the West considered it possible that the USSR would surpass the US as the biggest economy in the world. Furthermore, it also achieved full employment, stable low prices for basic items, and free social services to its population. It seemed that the system worked, attaining both growth and material well-being for the population. 

However, by the 1970s and 1980s, there were many signs of economic problems. Growth rates were declining, as well as consumption, with many people having to recur to black markets. In technological terms, the USSR was lagging behind the capitalist world, with lower quality and quantities of industrial production. This implied that the country was not able to compete in international markets for manufactured goods. From industrial power, the USSR turned into a mere exporter of raw materials. Moreover, some indicators of life quality like infant mortality or life expectancy were declining. 

The very nature of the Soviet regime prevented it from dealing successfully with the economic and social challenges it faced in the 1970s and 1980s. Reforming a socialist regime, whit state ownership of the economy and firm control of the Communist Party was not an easy endeavour. However, the regime was not doomed to collapse like it did in 1991. Many frail and inefficient regimes subsist despite serious troubles. The story and the impact of the collapse can only be understood when looking at the attempts at reform, and the events and decisions of the agents at the time. 

Gorbachev’s reforms 

The most important actor was Mikhail Gorbachev, who served as the General Secretary of the Communist Party of the Soviet Union from March 1985 to August 1991, which was the most influential position in the Soviet State.  Contrary to what some might believe, he did not act as a sole visionary, but rather he represented a faction inside the Communist Party that defended the need for reforms deviating from orthodox Marxist thought to overcome the problems of the USSR. 

A political overhaul of the Soviet Union began during this period. The period is named for Perestroika policies. The term means restructuring, which encompassed economic, social, and political reforms. Regarding the economic activity of the USSR, two important laws deeply changed the functioning of the Union: 

  • The 1987 law on State Enterprises, which decentralized economic controls: removed restrictions concerning workers’ wages and companies’ chosen output production, allowing them to keep a share of their profits and reinvest them. Besides, factory and farm managers were to be elected directly by the company workers, rather than through the Party. 
  • The 1988 law on Cooperatives, that permitted the creation of privately owned businesses in the services, manufacturing, and foreign-trade sectors. The size of these cooperatives was not limited by law and they could participate in any legal economic activity, being able to form joint ventures with foreign companies as well. Effectively, they were indistinguishable from capitalist enterprises. 

Furthermore, another concept deeply related to the Perestroika, was the Glasnost, meaning transparency. Gorbachev wished to increase the openness of state affairs to the public, which was pursued by increasing media freedom. This provided ideological opponents of Marxism-Leninism, from Nationalists to Liberals, new platforms to express their dissatisfaction. However, this was also a period of tension and unrest. 

Returning to the cooperatives, numerous administrators and managers, especially in the foreign trade sector, were able to enrich themselves through lucrative deals with foreign investors. This culminated in Artem Tarasov, a founder of one of these cooperatives, proclaiming to the media that he was the first soviet millionaire in history. To the soviet population, who were taught from early the importance of economic equality and economic democracy, this was outrageous, at best. Riots ensued. 

The fact is the whole Perestroika proved to be a failure: in 1989-90 the USSR experienced significant inflation, allowing speculators to purchase goods at state-owned stores, which had fixed prices, and resell them at exorbitant rates. This led to state-wide shortages which further fueled the wrath of the population, increasing public unrest. The moderate 2.3% real economic growth in 1985 had turned into a -11% recession in 1991. 

Pressured by nationalist and pro-independence movements across the different republics, the Soviet regime organized a referendum in March 1991, where it was asked to the Soviet citizens if they wished to remain in a renewed Soviet Union. With a turnout of 80% of its population, over 76% voted that they wished to preserve the USSR, despite the hardships. 

However, this was not enough to prevent the dissolution of the USSR. Boris Yeltsin, who had been elected the president of the Russian section of the USSR in June of 1991, albeit initially claiming to be a pro-USSR reformer, would deal the decisive blow. His signature of the Belavezha Accords with the leaders of the Ukrainian and Belarussian republics in December 1991 marked the effective end of the USSR. 

The aftermath 

After the dissolution of the USSR, Russia was turned upside down, with enormous changes in the economy, society, and politics.  

Firstly, there was an opening of the Russian economy to the world, promoting the relations with foreign countries, especially with the U.S, as the dissolution of the Soviet Union also marks the end of the Cold War, followed by liberalization of the economy with Boris Yeltsin’s radical reforms.  

This shock therapy included the sale of the Russian state assets, privatization of some industries, and the liberalization of the economy. Although, these reforms did not happen the way Yeltsin predicted. During this process, the state assets were sold at a lower price than what they valued, and there was hyperinflation reaching 2 000% during 1992. The government, in an attempt to control it, implemented tight monetary and fiscal measures (such as taxes and interest rate increases and subsidy cuts). Nevertheless, this led to a shortage of goods because the producers began slowing down their production.   

In these circumstances, Russia lost most of its power and could no longer achieve global supremacy. It moved from a country that fought for global supremacy to a broken and corrupt country with an uncompetitive economy. Its economy suffered from the loss of some of its states. Another factor to take into consideration is that its Cold War economy was targeted to the military sector and it faced some difficulties in being competitive when they enter the global market. Consequently, there was a major decrease in real GDP per capita. 

A comparison of the real GDP per capita of the USSR with the USA and the world GDP per capita shows the dramatic crises around the time of the collapse that lasted for many years. 

This breakdown of the economy had an extensive effect on the living conditions of the population. Life expectancy decreased from 70 years to 64, only between 1988 and 1994, and by 1992 about a third of the population lived in poverty. There was also an extensive gap between rich and poor, worsened by the high corruption within the regime, revealed by the Gini Index that reached 48,4 in 1993. Besides that, the liberalisation of prices made an entire class of people with fixed income (such as pensioners) suffering a drop in living standards. Furthermore, there was an increase in criminality (in 1990 were registered 1. 84 million crimes, and in 1995, 2.76) since the regime lessened its force in an effort of democratisation, allowing the growth of the Russian mafia. 

Cartoon from 1992, regarding Yeltsin’s reforms. 

As the market barriers disappeared, western companies entered Russia. But other barriers disappeared as well. Western products, trends, and tastes became widely accepted and disseminated. These contacts with the West were not only an economic shock, but a cultural one as well. 

The collapse of the USSR created economic, geopolitical and cultural shocks and problems that are somewhat present today and may help to understand 2021 Russia. 

Sources: American Enterprise Institute for Pulbic Policy Research; BBC; Brookings Papers on Economic Activity; Financial Times; Gapminder;; International Labour Office; Investopedia; Irénées; Journal of Eurasian Studies; Macrotrends; National Bureau of Economic Research; Norwich University; Pew Research Center; Russia Beyond; Statista; The Atlantic; The Conversation; The Guardian; US News; VOXEU; Wilson Center; World Bank. Robert W. Strayer, Why Did the Soviet Union Collapse?: Understanding Historical Change. 

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Rui Ramalhão

André Rodrigues

Mariana Gomes

The Po(o)rtuguese Problem: Portuguese Economic Growth Backwardness

Reading time: 6 minutes


The Industrial Revolution in 18th century Britain was a turning point in History. With industrialization countries were able to have sustained economic growth for long periods. Successive waves of industrialization, occurred in Europe during the 19th century, bringing a period of great economic expansion. However, some countries, like Portugal, grew but not as much as the European leaders. This trend continued for most of the 20th century, with some exceptions. Today Portugal still lags in many indicators from its European counterparts.

            Our goal with this article is to understand a part of the historical dynamics that prevented Portugal from reaching sustained economic growth. We will use the “four golden rules to achieve lasting economic growth” as explained by a group of our colleagues ( and explain how they evolved during Portugal’s contemporary history.

Economic Diversification

One of the main drivers for real economic growth is economic diversification. Succinctly, if an economy is well-diversified, then its performance will not be as crippled if one of its sectors faces adversities, thus being easier to deal with shocks and facilitating long-term economic growth.  

Concerning Portugal, it would be valuable to analyze the impact of its different economic sectors on its GDP to discover whether the country ever was dependent on a specific area of its economy.  

Table 1 – Percentual impact of each sector on Portugal’s GDP; Source: Bank of Portugal (1954-95) and INE (1995-2010)

From the table presented above, we see that Portugal’s Agricultural and Industrial sectors have lost significant influence over this period, going from a combined 55% of Portugal’s GDP in 1954 to a mere 14,5% in 2011. Consequently, a gradual increase in the services industry has been observed, overtaking the previous two as the main sector in Portugal’s economy.

One must ask then if this evolution is different than the one experienced in most Western countries. The answer is negative. This information is reflective of the contemporary deindustrialization phenomena that have led to a gradual shifting of industries that were once established in the Global North to the Global South, particularly to South East Asia. Likewise, the development of the services industry, mainly propelled by developments in technology, has been observed throughout most developed economies.

Besides, Portugal has never even been a country with the possibility of being dependent on a certain commodity which could have swayed Portugal’s past leaders to fully focus on the development of a certain facet of its economy.

Therefore, we do not believe that a lack of economic diversification could explain Portugal’s economic shortcomings.


Another factor that is usually employed to explain long-term economic growth is the level of productivity of an economy. Productivity measures the efficiency of production, meaning that a productivity improvement would be an increase in the output produced by each worker or each machine in an economy. It is expected that higher levels of productivity would lead to greater profits for businesses and income for individuals.

Regarding Portugal, throughout its history, there have been many periods where productivity growth was observed. From the late 19th century to the First World War, when the fires of industrialization were first ignited in Portugal, to the periods of 1951-1973 and 1985-2000 there have been plenty of years where productivity in Portugal grew.

However, these levels of productivity have always been worse than the ones experienced in most of western Europe. When in the mid-19th century countries in central Europe started to benefit from the industrial revolution, Portugal’s main economic activities were still related to the primary sector, with the exportation of cork and wine, for example. It seems as if, throughout its most recent history, Portugal has always been trailing behind the rest of Europe in this field.

Figure 2 – Labour productivity per hour worked in Portugal; Source: Pordata

This trend has not stopped for the past two centuries, resulting in Portugal today being the 7th least productive country in the European Union, having only 65,9% of the EU average levels of productivity in 2017.

Could lower levels of productivity explain the economic flaws of Portugal? Perhaps. The problem with productivity is that many other variables can influence it, such as geography or the a country’s institutions. For example, it would be nonsensical to claim that the main reason why the Bedouin tribes of Mauritania are not as wealthy as the Portuguese is a reduced level of productivity when the hardships of the Sahara Desert and the historical phenomena of the region are vastly different from the Portuguese’s.

Openess to trade

It is a well-known result in economics that openness to trade is highly correlated with long-term economic growth. As the economic historian Jaime Reis pointed in his investigation of the phenomenon of Portuguese economic backwardness, peripherical economies in Europe seemed to benefit from integration in international trade in the 19th century. However, for the Portuguese case, the data indicates that there were not many developed exporting sectors in the country that could have lead to an industrial take-off. Even more, Portugal was not fully open to international trade, nor able to exploit all opportunities trade gave to development.

Analysis for other periods gives even more evidence of the important correlation between a higher degree of openness to trade and economic growth. A study by Óscar Afonso and Álvaro Aguiar concludes that the acceleration of trading relations relates to the improvement of the economy’s productivity from the 1950s and 1960s onwards and the convergence with the most developed European countries. The integration in the European Economic Community in the 1980s was also an important driver of economic growth and convergence.

In conclusion, it does seem that openness to trade is correlated with the historical growth of the Portuguese economy, but there is not much evidence to support the idea that this is the most important factor to explain the country’s problems.


Lack of “inclusive institutions” might be the factor. This term first appeared in Why Nations Fail and reinforces the importance of respecting property rights and having an effective justice to achieve continuous prosperity. The concept is defined in opposition to the concept of “extractive institutions”, ones that extract resources from the economy to the benefit of a small group, thus preventing sustained growth.

Portugal’s contemporary history is a pendulum that swings between more inclusive to more extractive institutions, and back to more inclusive institutions. The 19th century starts with the end of absolutism and the instauration of the liberal monarchy. However, the monarchy was not always a fully liberal regime, with periods of instability and authoritarian rule. In 1910 came the Republic, another period of instability that ended in the corporativist dictatorship of the Estado Novo, an obvious example of “extractive institutions”. Only in the 1970s did Portugal come to be a modern democracy.

We see that overall, the period is marked by instability, lack of liberal and democratic institutions, and by regimes and elites that prevented the development of growth-friendly institutions and reforms.

The weight of history can be seen in the institutional problems Portugal faces today. The 2020 Corruption Perceptions Index places Portugal in 33rd place, behind several developing countries. This value suggests Portugal is not among the most efficient economies, as corruption is expected to result in lower levels of capital productivity.

In the 2020 Economic Freedom Index, Portugal has an overall score of 67, making it the 52nd freest economy in the world and 29th in Europe. The index identifies the government’s longstanding record of overspending and the continuing need for labor market reforms to reduce the number of workers who are forced to take temporary or part-time positions as the two major impediments to a greater economic freedom. While the business and monetary freedom are considered attractive from a regulatory point of view, labor reform packages in recent years have not been able to succeed in raising labor productivity.

The institutional factor may be the reason why Portugal is not achieving strong prosperity and still lags behind the most developed countries.

Sources: Análise Social; Banco de Portugal; Conselho para a Produtividade; ECO; Francisco Manuel dos Santos; Jornal de Negócios; Jornal I; Instituto de Ciências Sociais; Instituto Nacional de Estatística; Pordata; Público; Sábado; Transparency International; The Heritage Foundation

André Rodrigues

Madalena Andrade

Rui Ramalhão

The Spanish Flu and Covid-19: Parallel Crisis?

Reading time: 6 minutes

The world in 1918 was completely different from what it was a few years before. Four years of the most devastating war ever seen up until then destroyed not only millions of lives, but also countries, cities, economies, and even beliefs and faiths. Decades of liberal optimism, faith in progress, and economic development came to a sudden stop.

There was hardly a worse time for a pandemic to devastate the world. The Spanish flu was provoked by an influenza A virus known as H1N1. Its origin is from an animal virus, with which human immune systems were not capable of fighting. The first reported cases were in the United States in February 1918, among soldiers training for deployment in Europe. The name “Spanish” comes from the fact that the Spanish press was able to cover the disease since the country was neutral in WWI.

The data about the pandemic is elusive and the estimates may be somewhat vague. Nonetheless, there are some established facts. No region of the world was left untouched by the pandemic. The estimates of total deaths vary from less than 20 to 100 million. The lowest estimation points to the death of around 1% of the world’s population at the time, and some say a third of the world population may have been infected. It affected particularly young and healthy adults, from 20 to 40 years of age. This pandemic was the last time there was a decline in population worldwide. The reasons for such mortality are easy to point: global movements of troops and standing armies in the first waves, the medical science was not ready to face the virus, healthcare was precarious even in rich countries, populations were generally poor, and governments were not able to impose lockdowns or treat adequately most people.

This brief enumeration shows how much the world changed for the better in only 100 years. Our article will build from it and show how the Spanish flu impacted the world of 1918 both in economic and socio-cultural terms. At the same time, we will compare those changes to what our world in 2021 is experiencing due to the covid-19 pandemic. Can History tell us something about what we will live as soon as the pandemic ends?

Economic impacts

Gauging the economic effects of the Spanish flu is not an easy endeavor. On one hand, the proximity of WWI makes it complicated to separate the economic effects of the pandemic from those caused by the war. In addition, economic information was not as thoroughly recorded in those times as it is nowadays, making analysis even harder.

The available macroeconomic data was sufficient to create a statistical model that separates the pandemic-related impacts from the war-related ones. One study concluded, through a regression analysis, that, on average, the Spanish Flu was estimated to have reduced real GDP per capita by 6.2 percent. Although this number was not as high as the expected 8.4 percent decline resulting from World War I, it still represents a considerable decline.

Many workers in the secondary sector remained unaffected by the flu

Likewise, concerning asset prices, the same study concludes that, on average, for a death rate of 2.1 percent due to the virus, the real stock returns would be lower by 28 percentage points, these stocks being based on broad market indexes. Similarly, short-term government bills (analogous to today’s US Treasury Bills) on average, for a death rate of 2.1 percent due to the virus decreased by 14 percentage points. This decrease can be seen partly as a decline in the “safe” expected real interest rate, as people’s expectations on economic performance were surely affected by the climate of uncertainty surrounding the pandemic.

It might be tempting to establish a connection between the current Covid-19 pandemic and the Spanish Flu, as both pandemics have severely disrupted society.  However, the way western economies are structured today is vastly different from those of the past: in 1918, less than half of the population worked in the services industry, whereas today more than three-quarters work in this sector. As such, western economies 100 years ago were not as dependent on customer traffic, meaning that they could absorb better a decrease in the confidence of the general populace.

Another significant difference, for western countries at least, is that global supply chains were nowhere near as prevalent as they are today, resulting in countries in the past being able to deal with supply shortages more easily, as they would become a regional issue, rather than a global one. Lastly, businesses are more highly leveraged today than they were 100 years ago. This higher debt combined with the economic shock of covid-19 will likely cause a higher blow to the current economy in comparison to 1918.

The fact is that despite the pandemic having negative implications for the economies, the following decade was one of unprecedented economic growth, particularly in the United States. For the Weimar Republic and the other defeated countries, not so much. Although it is early to affirm this with certainty, when comparing the Spanish Flu with our current pandemic, likely the economic impacts of the latter will be more significant than the former. We are not sure about the future growth of our economy. However, we have to control the restart of the economy and society in order to contain any possible risks that may lead to another “Great Depression” as in the 1920s.

Newspaper carriers wearing surgical masks to protect themselves from the Spanish Flu.

Social Impacts

There is no doubt that a pandemic has a tremendous effect in social dynamics as well as in the economy. A study made by Bocconi University Research states that the Spanish Flu caused a permanent impact on individual behaviour relative to social trust. Social trust is the confidence and reliability that we perceive in others as honest individuals. Immigrants in the USA who lived through Influenza show much less levels of trust, and this was passed on to the next generation. Such attitudes may have come from the lack of efficiency of healthcare institutions. Weakening the social trust of individuals also has important consequences on economic activity.

A man disinfects the top of a bus. London, 1920.

With respect to the ongoing Coronavirus pandemic, thanks to advancements in public healthcare, this reaction is attenuated. Furthermore, although still early to draw any definite conclusions, a panel study developed in Sweden shows a considerable increase in social trust with the implementation of lockdown measures. There is also a big emphasis on the importance of political trust, since it may relate to the actual compliance with the law and with the policies made by the government. As this pandemic continues to unfold, it will be crucial to analyze if this specific crisis will add to or alter the conclusions of most scientific work.

Another curious aspect to explore is the post-pandemic behaviour that happened in the 1920s and may occur also after the covid-19 pandemic. After WWI and the pandemic, the world (and particularly the United States) entered the Roaring 20’s. People celebrated their newfound freedom from violence and disease and were willing to spend more than what they were used to, to compensate for the time lost. Many social conventions, particularly regarding women were shaken. Art and Entertainment also blossomed during this period, with many new developments.

Soldiers from the US Expeditionary Force who contracted the flu in an Army Hospital. France, 1918.

Nowadays many hope for the same thing to happen after the current pandemic ends. Many believe a new Roaring 20ss awaits us. According to Yale Professor and social epidemiologist Nicholas Christakis, in his book Appolo’s Arrow: The Profound and Enduring Impact of Corona Virus on the Way We Live, once an health crisis comes to an end there is often a period where people look extensively for new social interactions.

We cannot predict what will happen after covid-19 ends, but the study of the spanish flu gives us some clues about what can happen to our economy, society and personal lives.

Sources: Bloomberg; Bocconi University Research; Centers for Disease Control and Prevention; CNBC; Diário de Notícias; HISTORY; Jornal de Negócios; National Bureau of Economic Research; National Geographic; NPR; Our World in Data; Political Studies Review; Público; Sociedade Portuguesa de Medicina Interna; Times of India; VOX

André Rodrigues

Rui Ramalhão

Benedita Elias