by Ricardo Ferraz
In my paper, I calculate and present the budgetary costs of Portugal with the First World War 
and estimate their effects on public finances and on economic growth using two dynamic models. I also establish comparisons between Portuguese budgetary costs with those of other belligerent nations.
It is important to start by mention that the First World War (1914-1918) required Portugal to reinforce its military presence in the Portuguese colonies of Angola and Mozambique, and also to send forces to fight in Flanders alongside the Allies against the so-called central powers. The war there led to a deterioration of Portugal’s public accounts, which only recorded budget deficits. Strong budgetary imbalances were also a reality in other belligerent countries.
The Portuguese government’s strategy to finance these deficits resulted in a significant increase in the money supply, which, together with a crisis of scarcity of essential goods, led to high inflation rates. War also meant a significantly reduction in emigrant’s remittances and in exports of African products, whose income largely reverted to Portugal. According to the literature, no other belligerent was so dependent at the same time on this type of external financing sources as Portugal was. When compared with other countries such as Austria, Bulgaria, Germany, Greece, Great Britain, and the United States, the sharp fall in the Portuguese economy can seemingly be explained, not only by the war financing policy, but also by strong structural dependencies that were heavily disturbed during the conflict.
The results presented in this paper shows that the Portuguese budgetary costs with the First World War represented, on average, practically 50% of state expenditure, and 7% of GDP for the period of 1914-1918. Altogether, it amounted to approximately 1.2m contos, the equivalent, at today’s prices to a value close to 5bn euros. Furthermore, by estimating two dynamic models, it was possible to find empirical evidence that these war costs caused different negative effects on public finances and were also negatively correlated with economic growth. Nevertheless, these estimated results need to be interpreted with a certain degree of caution, owing to the small size of the sample used and also to the fact that the models only have one lag.
Considering the country’s evident limitations and the virtual impossibility to access international financial markets, and also taking into account the structural dependencies of its economy, Portugal’s role in the First World War should have been managed more cautiously by policy decision makers, as was to occur later on, for example, during the Second World War.
Nevertheless, the Portuguese war costs seem to have been lower than those recorded by the other belligerents for which data are available, as Austria-Hungary, Bulgaria, France, Greece, Great Britain, Italy, and the United States.
The findings presented in this paper are an interesting contribution to contemporary economic history, since they represent not only a concrete quantification of the budgetary war costs for a belligerent nation in one of the most important wars in the history of humankind, but also an estimation of their effect on Portugal’s public finances, as well as the provision of important international comparisons. A more in-depth analysis of the other nations’ war costs would certainly provide even more robust conclusions that would improve our understanding of the Great War.
You can read the paper (open access) here
And read more about the author’s research here