The economy of Palau was originally based on farming and pasturing. Animal breeding was always practiced by the inhabitants of the valley of Liscia, the Liscians. In the winter season they began their annual migration and followed the course of the river south to the warm coastal areas. In the summer they made their way upstream to the interior of the island. The river played a double role: on one hand the lime from the floods made the soil more fertile, on the other, the stagnant waters facilitated the proliferation of mosquitoes which spread malaria, a disease that afflicted the coastal regions of most of Sardinia. The only defense was to move away from the coast in the summer when the danger of malaria was greater. During the long winter months the Liscians tilled, sowed and cultivated grains, vegetables, fruit trees and vineyards. The crops of the land, the breeding of goats, cows, sheep and pigs and the production of bread, cheese, honey and wool, allowed the shepherds, who in time became settled, to become self-sufficient and to sell the meager excess of their production.
From the 1800’s on, given a significant presence of the military and the consequent consolidation of its fortresses as a system of defense, the economic development of Palau is tightly connected to the development of La Maddalena. During the “Great War” Palau was an important clearing center for men and equipment: the barracks of Montiggia hosted soldiers awaiting departure for the Front. When the conflict ended the war infrastructure became unnecessary and the town experienced the most dramatic consequence of the difficult economic crisis: emigration. At the end of the 1950s recovery commenced with the creation of the first tourist villages which soon became well equipped vacation centers. In the early 1960s, when the Aga Khan began to organize the Costa Smeralda (Emerald Coast), entrepreneurs enchanted by the beauty of Palau quickly understood the great tourism potential of the region. But the person who turned Palau into an internationally celebrated tourist haven was the creative and forward-looking Spanish Count, Rafael de Neville, who, literally captured by the beauty of the landscape, founded the most renowned coastal real estate development of Palau, which he named Porto Rafael. Perfectly enclosed between the rocky coast, the Mediterranean land and the sea, with homes built in typical Mediterranean style and camouflaged among the rocks and juniper, Porto Rafael has become a pearl of the Mediterranean and the envy of many.
Palau today is a modern city with a highly developed turistic port. It is also a stop along the routes of major ship lines which guarantee connections with the Italian continent. Palau owes its economic wealth to tourism. In the summer its population rises from 4,200 to 35,000.