Economic of Spain Essay

Length: 2062 words

As a tourist, traveling to the luscious land of Spain, it is safe to say that one would not take interest in its ever fluctuating economy. One would be too taken with their surroundings, drinking in the glorious glow that is Basque country. Cushioned between mysterious Portugal and the romantic history of France, surrounded by beautiful beaches and breathtaking mountaintops, Spain gives off an air of superiority, a land of pride and privilege. But beyond its appearance lies a struggling country, a place where pesetas (the common currency in Spain) are sometimes scarce, and where the government struggles to keep financial hold. A countryman’s country due to its agrarian culture, Spain has taken great strides to help their people, using their money to create toll-free highways, deflating the public deficit, fighting for worker’s rights, including wage increases. Still, Spain’s flailing capitalist economy is far behind the leading West European countries’ economies. Although in the past decade it has made incredible strides toward progressing into the next millennium, Spain has its work cut out for them in the near future in order to contend with the other West European economies.

Although the inflation rate is low, interests rates are

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low, and the government has continued to advocate liberalization, privatization, and deregulation of the economy while introducing new tax reforms, Spain has a 20% unemployment rate that ranks highest in the EU. Spain’s mixed capitalist economy will be posed with difficult challenges in the next few years with monetary and other economic policies, and will need a stable government to become more competitive with an integrated Europe. However, Spain has made a great deal of progress, considering its wavering economic past. World War II was the beginning of the distance between Spain and the rest of the European nations. Due to the fact that Spain never entered the war, the country never received the benefits from the European recovery plans, holding it in a situation of complete solitude. After the Civil War in Spain, an inward-looking development model, also known as autarky, was adopted due to its isolation with its surrounding neighbors. This economic policy was based on the conviction that the “Spanish economy had the resources to produce enough, without depending on other countries, to satisfy all society’s needs while achieving economic development” (Autarky 1).

Due to the Spanish economy’s lack of sufficient raw materials, technology, and size for developing businesses large enough to be competitive and capable of generating an ample amount capital to import necessities for growth, the plan ultimately failed. Eventually, the Stabilization Plan of 1959 was constructed to open the doors to the entry of goods and foreign capital. The Stabilization Plan consisted of the entry of capital into Spain through tourism, remittances sent home by Spanish workers who emigrated to more developed European countries, and foreign investment. Although it was unstable, this new economic plan was much more successful than the Autarky economic policy. Also referred to as a “stop-and-go” policy, it generated a more intensive use of capital than would have been expected by the physical work capital resources of the country. The work force dramatically increased, with the loss of jobs in agriculture (the traditional way in which Spaniards made a living) and the growth of the tertiary sector, which incorporated women into the workplace.

Steel, shipbuilding, textiles, and footwear were the main industries, which utilized standard technology and based its competitiveness on its cheap labor and its capital on a cheap money monetary system. Eventually, due to Spain’s lack of adapting to the rest of the world’s technological advances, an economic crisis broke out in the mid-1970’s. A dramatic rise in the price of oil had an unfortunate affect on Spain’s economic situation, and because of its reliance on oil and the fall in world demand for steel and shipbuilding, Spain became less competitive with the new industrialized countries in South East Asia. As a result, the public deficit increased and there was a steep fall in commercial surpluses. Inflation soon followed when the authorities tried to make amends instead of adjusting domestic prices and applying an expansive financial policy. The government financed these losses by recurring to the currency reserves, putting Spain knee-deep into debt. Finally in 1977, the “Moncloa Pacts” were adopted, which included the devaluation of the peseta, a moderately restrictive monetary policy, and an income policy with a commitment to begin structural reform.

This was unsuccessful as the industry failed to adapt itself to the new parameters of prices and demand, continuing to throw Spain deeper and deeper into debt until 1982. To plainly state the economic situation for Spain from 1975 to 1982, the Gross Domestic Product grew by an average rate of 1.5%, while the gross formation of capital decreased by an average rate of 2.5%. Spain political situation was revolutionized when the first socialist government took over in 1982. These unfortunate new leaders were handed down high inflation rates (14%), low growth rates, a deficit in the balance of payments on current account of an eye-popping four billions dollars, as well as a public deficit of almost 6% of the GDP, and all the while housing a high and growing rate of unemployment. In response to this, a gradual adjustment policy was created to reduce inflation, the foreign debt, the public debt, and unemployment. In this three-year period of adjustment, authorities established the basis for sustained growth and prepared the Spanish economy for future entry into the European Economic Community (EEC).

With the eventual fall of international prices, primarily oil, money and the dollar, the international economy in general, and the economies of the industrialized countries and of Spain in particular, the country entered a favorable state of expanding growth. On January 1, 1986, Spain finally ascended to the EEC. From 1986-1990, the Spanish economy received an unprecedented financial growth after joining the EEC. This economic expansion generated a great deal of employment, due to a greater demand for labor relating to increased production and the increasingly flexible measures in the labor market. Unemployment decreased 4.2%, and this economic growth became Europe’s most rapid through these five years, and the public deficit decreased along with the rate of inflation.

The gross formation of capital increased to an annual average rate of 14.1%, which doubled the average growth of investment in the OECD countries during this period. From 1985-1989, the gross formation of capital grew from 19% to 26% of the GDP. However, Spain’s economy became so fired up that its domestic demand increased to an annual rate of almost three points above production. Their inability to keep up with the demand consequently led to another ride back to high inflation rates. This surplus in demand over national production created a rise in domestic prices and an growth in foreign purchases. Because of the supply and demand policies, (also known as overheating ) subsequently, certain measures have been taken. Such measures include the reducing of the growth of demand and increasing the possible expansion of the economy. Since then, and in all regard to need, monetary and fiscal policy has been provided. To complement these policies of restrictive demand and more flexible supply, the government has tried to stimulate an income policy on several occasions.

This has especially come into effect in the past five years, as Spain has been forced to live within its means and state spending has been slashed to control the soaring budget deficit. However, tourism remains its most important industry, accounting for about 4% of the GDP and employing approximately 10% of the workforce. Also accounting for a large part of the workforce are chemicals and petro-chemicals, heavy industry, food and beverages, as well as being Europe’s fourth largest manufacturing country. Other growth areas besides tourism include insurance, property development, electronics, and financial services. The modern labor market in Spain has been characterized by the peak in the creation of new jobs from 1986-1990, as well as the large reduction in employment in 1992 during the following economic deceleration.

Approximately two million new jobs were created during the economic expansion, which amounts to a growth rate of 3% per year. 1,100,000 people took advantage of this situation and entered the labor market during this period, 896,000 of them of whom were women. Also during this period, the average wage increase was 7.4%, compared to an average inflation rate of 6.5%. However, during the 1991-1992 economic deceleration period, production grew by 1.75% in real terms while employment decreased by an average of 0.85%. Wages increased by an average of 8.5%, which displays a decline in job creation that corresponds with the increasing expense of the work factor and its substitution by capital. A fixed production factor was labelled to the high wage claims in 1990 which failed to have an immediate impact in the reduction of employment. This continued through 1991 and 1992, where high wage demands continued among the labor force, which forced companies to reduce the size of their staff.

The development of wage increases is important to the Spanish government, and in an attempt to keep up with the European Community wages, a wage increase of 2% was set for public sector employees in 1993. The rate of unemployment remains high, as it has been for most of this century. At 21.3%, the unemployment rate is considerably higher than the average unemployment rate of the European Community, which is just above 10%. While governmental spending had dramatically increased between 1986-1990 to facilitate the slightly expansionist growth, spending slowed down in 1991 in order to balance the spending out when the growth was neutral, rather than expansionist or restrictive. In 1985, non-financial state spending was 21.6% of GDP while rising to 23.2% of GDP in 1989, and remaining at more or less the same level up to 1991 when it was 23.7% of GDP. In 1986, the Spanish public administrations’ spending was roughly 3.5% of GDP, gradually increasing to about 5% of GDP in 1989. In the past decade, the figure has remained constant.

Also, ever since 1986, public investment spending in the European Community has been maintained at around 3% of GDP. To set Spain on the right “expansionist” track as far as the budget goes compared to the rest of the EU, a fiscal policy coordination accord was constructed in the beginning of 1992. In an attempt to solve the problem of excess demand, a monetary policy which raised interest rates was produced to hinder investment demand was made to slow down the progress of Spain before it went deeper into economic recession. However, a new policy is being created that will force fiscal policy to play a more central role in the containment of demand, therefore leading to lower interest rates. The present structure of debt in Spain is quite biased towards the short term, which poses future difficulties for the Treasury financing in the long run. In modern market economies, progressive taxation and distribution of income in the form of services and benefits through welfare institutions are the two tools which are utilized to correct social inequalities.

Spain was an exception to this rule up until the eighties and made serious economic adjustments. In comparison to the European Community, the tax burden is below average as it has increased from 28.1% to 36.4% since 1986. The current tax system today consists of true taxes, dues and fees, and special levies. These serve to pay back any benefit as a result of public works or services. As far as the government’s involvement in credit and stock markets, “administrative participation is confined to regulating the conditions for access by and permanence of regular operators and to monitoring the operations of financial enterprises, in accordance with the standard practice in economically developed nations” (TFS 1).

Despite its rocky past Spain has made leaps and bounds toward an economy that is competitive with the rest of the European world. With a strong new government and more macroeconomic reforms to keep inflation and unemployment down while manipulating the interest rate Spain could be a important player in the European economy as well as the world economy.

Burton, Kevin.1994. The Business Culture in Spain. Butterworth-Heinemann ltd., Jordan Hill, Oxford OX2 8DP The ABC Country Book of Spain. 7 April 2000 http://www.immigration-usa.com/wfb/spain_economy.html http://www.odci.gov/cia/publications/factbook/sp.html Josephine Quintero. Economy of Spain. 8 April 2000 .http://www.andalucia.com/spain/economy/home.htm http://www.worldbank.org/html/schools/regions/eca/spain.htm Tradeport. 4 April 2000. http://www.tradeport.org/ts/countries/spain/trends.html http://www.travelnet.co.il/espagne/menu/TheEconomyOfSpain.htm

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