Portugal offers a compelling case study for what is often referred to among OECD countries as the paradigm shift in regional policy (in brief, a shift from subsidies targeting the reduction of regional disparities to investment supporting regional opportunities in order to enhance territorial competitiveness; from different sectoral approaches to multi-sectoral place-based approaches; from a dominant role of certain levels of government to a multi-level governance approach involving co-ordination of national, regional and local governments plus other stakeholders). The example of Portugal draws attention to why and how this new type of regional policy could contribute to national development in a relatively small yet diverse country, with weak growth and limited public spending capacity, and marked by a long tradition of centralised governance and no elected regional level (except in two island regions).

The encouraging return of growth in Portugal contrasts with the persistence of deep-rooted structural challenges. While the recent recovery of the euro area perked Portuguese exports, sustainable growth depends on the rapid modernisation of the economy vis-à-vis new EU members and other emerging players. The competitive edge lost in low-cost labour must be earned back in knowledge and innovation.1 Such assets for competitiveness are regionally localised in Portugal as in other OECD countries.2 A limited group of leading regions (mostly on the coast) have turned their assets into drivers of national growth, with further scope to gain international aura. Many other regions struck with specific disadvantages (mostly in the interior) have fallen behind, at the risk of underrating their own endogenous growth potential. This chapter provides a brief overview of Portugal’s macroeconomic conditions, and discusses to what extent regional assets and challenges can determine national growth prospects.

Portugal faces an unprecedented opportunity to invest in long-term assets for competitiveness. The cyclical upsurge and the strong political commitment to pass structural reforms are offering a unique momentum for Portugal to catch up with higher-income countries before emerging players (such as new EU member states) take over. Public funding to do so, however, remains limited in the present period of fiscal deficit reduction. Policies to upgrade human capital and nurture knowledge-based activities must therefore be based on a particularly cautious choice of projects.