Unexpected lessons from Spain’s economic boom
Much of the debate over the Spanish economy in recent decades has focused on issues such as persistent unemployment. Building on a new book, Oscar Calvo-Gonzalez argues that putting these failures aside and taking a fresh look at the country’s economic successes can provide surprising information.
“What is Spain’s main export? The question was intended as a small conversation, addressed to Spanish Prime Minister José María Aznar by one of President George W. Bush’s closest advisers as the two waited for the US president to join the meeting. Aznar responded in his trademark laconic manner, “Cars”. Supposing he had been misunderstood, the American continued: “No, I’m asking about the number one product Spain sells abroad.” What Aznar insisted on, “Cars”. Baffled, the American tried again: “No, no, what I want to know is which Spanish product sells the best abroad”, and Aznar simply repeated: “Yes, cars, cars.
Spain is not only a major exporter of cars, but one of the few economies that has successfully made the transition from middle income to high income in recent decades. Of more than a hundred middle-income economies in 1960, only a dozen had become high-income economies by the end of the 20th century. The discovery that transitions to high income status were relatively rare led economists Indermit Gill and Homi Kharas to coined the term “middle income trap”.
It was a way of drawing attention not only to this stylized fact but, more importantly, to the lack of a satisfactory framework to assist decision-makers in their efforts to move from middle to high incomes. An abundance of literature has followed, often questioning whether this can be considered a “trap” or not. Regardless, the number of countries that have transitioned to high income countries remains low. And the attention of development practitioners tends to focus on even fewer success stories – like South Korea. Some of Spain’s economic failures are so well-known, particularly the stubbornly high unemployment rate, that observers rarely implicitly associate Spain with economic success.
Worse yet, the experience of Spain’s accession to high-income country status is often misunderstood. The economic development of Spain over the past decades is considered by many to be inevitable. Above all, the standard count goes, Spain’s European neighbors were wealthy and eager to help. While the country may have bottomed out after its civil war in the 1930s, the standard account continues, it was doomed to bounce back. I will return to the role of Europe below, but first let me briefly present the conundrum.
In 1950, Spain’s GDP per capita had diverged from major economies for a century and a half. External and internal commentators despaired of desperate politics, repeated cycles of violence, corrupt practices or the incompetence of the authorities. However, in the next thirty years, Spain would catch up with around 30 percentage points of GDP per capita compared to the United States, which itself is experiencing a golden age of growth. Admittedly, the external context was favorable at the time, but the country had hitherto not been able to capitalize on other occasions of good external conditions.
Even more damning for the view that Spain’s catching-up is largely the result of a rebound is the fact that the sources of growth have changed, with a significant increase in the contribution of productivity growth. In addition, the frequency with which the economy was contracting, as opposed to growing, was also sharply reduced. These two factors suggest a qualitatively different basis for growth in the decades after 1950. And the success extended to social aspects. Indeed, on many human development indicators, Spain’s catching up with the leading countries was more complete than in terms of production. Progress on social measures has not rebounded either. Spain may have been a military power at the start of the modern period, but its literacy rate was lower than that of Britain by about two centuries until the 19th century.
Spain’s economic boom as a high-income country has been largely overlooked and often misunderstood. Having a fresh outlook on Spain’s economic development is very profitable.
Little is known about this story because much of the existing literature on Spain’s economic development has been interested in documenting shortcomings in economic policies or institutions that have prevented more comprehensive catch-up. And, in hindsight, the list of sub-optimal policies was not short, including high tariff protection, excessive regulations, insufficient public revenue collection, limited support for innovation, and inefficient public spending, among others. others. But by focusing on the half-empty glass, we risk overlooking how, despite all these flaws, the glass got half-full.
Changing this perspective changes questions and ideas about Spain’s economic trajectory. Some courses are known. Without first controlling political violence and ensuring political stability – a byproduct of the Cold War – take-off would have been unlikely and unsustainable. Spain has benefited from good macroeconomic policy, or more precisely from the correction of bad macroeconomic policies. It has also benefited greatly from increased openness – especially to foreign direct investment – which was one of the many avenues to greater market discipline.
But other ideas are not what you might expect. The initial set of economic reforms, often seen as measures of last resort in times of crisis, are better explained in Spain by political stability than by economic instability. Subsequent reforms, often ridiculed as lacking in ambition, can be seen as “political tinkering” which, on the whole, has led to greater contestability. Often in an intriguing way.
Cars, to go back to the story with which we started this blog, are a good illustration of this. In the 1950s, the national auto industry consisted of a state-owned company and a subsidiary of Renault which was to have a local partner – who happened to be the dictator’s brother. Car imports were subject to high tariffs and, unsurprisingly, a lot of corruption. Not the most auspicious beginnings. And yet, the automotive industry that was to develop in Spain did not do so despite protection and regulations, but because of them.
Local content rules have been put in place and applied; above all, local suppliers were put into competition. Foreign companies have set up factories and brought in technology, in part attracted by the highly protected domestic market. But protection was associated with competition in certain ways. For example, a new Ford plant was authorized on condition that it exports at least two-thirds of its production. This created the right incentives for both a competitive operation and one that created linkages at the national level. In a relatively short period of time, a competitive market of auto parts suppliers has developed.
And what about Europe? Access to European markets was important for openness to yield the desired results, but the path to prosperity depended on many institutional developments that took place long before EU membership. Especially the idea of the Europeanization of Spain has helped to create a political and social consensus which has proved to be essential.
Spain’s economic boom as a high-income country has been largely overlooked and often misunderstood. Having a fresh outlook on Spain’s economic development is very profitable. While each country’s path is unique, this updated view of the country’s trajectory is a useful case study of how development actually happens without perfect institutions and despite unpromising initial conditions.
For more information, see the author’s new book, Unexpected prosperity: how Spain escaped the middle-income trap, to be published by Oxford University Press on October 23
Note: This article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured Image Credit: Jorge Fernandez Salas to Unsplash