Courtesy of Spanish
Tourism Office
City of Arts
and Sciences, Valencia |
Gonzalo Garland
Professor of Economics at Instituto de Empresa (IE)
Business School
If the last time you visited Spain had been in
1975, when the death of General Franco brought an
end to more than 30 years of dictatorship, a return
visit today would present a dramatically different
picture of the nation. Per capita incomes measured
at purchasing power parity averaged out then at
$4,400, comparable in real terms to those of Egypt
or Guatemala today. Democracy was an ideal, and
the country was clearly locked into another time
in comparison with the rest of Europe, with perhaps
the exception of Greece and Portugal. Today Spain
is the eighth largest economy in the world, with
per capita incomes of almost $26,000, positioned
not far behind Italy and Germany. Moreover, Spain
boasts a vibrant culture evidenced by stunning architecture,
an innovative film sector, and impressive cuisine.
Meanwhile strong Spanish multinationals investing
worldwide and sound macroeconomic policies enable
the country to grow faster than most countries in
Europe.
Just how did this transformation come about? Several
factors can explain the dynamism of the Spanish
economy over the last three decades. Perhaps one
of the most important was the political change that
occurred as Spain moved away from a closed authoritarian
model and embraced the principles of modern democracy.
This uncommonly smooth transition process has come
to be described by many analysts as exemplary. These
changes, in turn, closed the gap with Western Europe,
paving the way toward Spain’s negotiations
with the European Union, which eventually led to
Spain joining the EU in 1986. This particular event
had a powerful impact on the country’s economy
in terms of trade and investment. Since then Spain
has continued to close the gap with the original
members of the European Union, to the point that
it is expected that the country’s per capita
income will be higher than the EU average within
the next two years.
It must also be said, however, that domestic economic
policies also played a pivotal role in Spain’s
successful transition process. Some of these policies
originated from Spain’s membership in the EU,
such as anti-trust legislation, investment facilities,
or exchange rate coordination. But monetary policies,
at least until the creation of the European Central
Bank, and fiscal policies have been in the hands
of the individual member countries. Spain made enormous
improvements to its fiscal policies, far more than
most analysts predicted in the early 90’s after
the signing of the Maastricht Treaty in preparation
for the launch of the Euro a few years later.
In fact, of the five conditions established by
the Treaty for joining the Euro zone, two had a
direct bearing on fiscal policies. The first one
set a maximum for the public deficit, which could
not exceed 3% of GDP, and the second, closely related
condition, was that debt/GDP ratio should not rise
above 60%, or should show a clear pattern of descent
if above this threshold. In 1994, complying with
the debt to GDP ratio did not look too difficult
for Spain, given that the proportion was 62.70%,
just slightly above the 60% limit. But it was actually
far harder than it looked when a large deficit entered
the equation. With a deficit equivalent to 6.33%
of GDP, it looked as if a great deal more effort
would be required than originally thought to reduce
government spending and to increase taxes. This
was a vital prerequisite for Spain to form part
of the first group of countries that would convert
their currencies into the Euro. And most analysts,
both in Spain and the rest of Europe, thought that
it was almost impossible for Spain to comply with
these criteria.
Nevertheless, as on so many occasions, reality
outperformed the analysts. Spain not only complied
with the requirement to join this group of pioneer
countries, but did so with far greater ease than
other European countries. Furthermore the country
has continued to present healthy fiscal indicators.
In fact, for year 2006 it is estimated that Spain
will show a fiscal surplus of 1.1% of GDP. This
result is particularly impressive when compared
to other countries in the region, such as the UK,
Germany, Italy or France, where fiscal deficits
are estimated to vary between 2.9 and 4.2%. Some
would claim that Spain’s growth was fuelled
by the large amounts of EU funds that the country
has received over the last decades. Although there
is little doubt that these funds had highly positive
effects, particularly in terms of investment in
infrastructure and in the agricultural sector, this
aid is not a sufficient explanation alone for the
significant changes that have taken place in Spain.
The internationalization of Spanish companies is
another phenomenon that merits attention when analyzing
the country’s transformation. With very few
exceptions, in the 70’s and 80’s Spanish
firms focused on their local markets rather than
venturing beyond home turf. That changed drastically
during the 1990’s, when companies like Telefónica,
BBVA, Banco Santander, Endesa, Repsol-YPF, Zara
or Mango, to name just a few, decided to go international
with a new sense of self-assurance that simply had
not existed before. For many of these corporations,
the initial expansion took place in Latin America,
where shared language and culture eased the process,
but the trend has increasingly incorporated other
world regions, including other European countries
(in particular the UK) the US and Asia. And this
globalization of Spanish firms’ activities
is highly likely to continue, as more and more prefer
to diversify their exposure in Latin America, where
political changes tend to affect the firm’s
performance.
Although Spain has seen tremendous improvements
in so many social and economic areas, and the country
has undergone a profound transformation over these
last three decades, this does not mean that there
are no challenges lying ahead. Current problems
include high inflation, low increases in productivity,
an aging population, and an imbalance between exports
and imports that has led to a high current account
deficit. Spain needs to tackle these issues in order
to sustain the growth rates that have featured so
strongly in the country’s recent history. There
would appear to be general acknowledgment that these
issues need to be addressed, but they require the
implementation of aggressive policies. Hopefully
this will happen, and we can continue to marvel
at the strength of the Spanish bull.
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Spain 
