Fernandez-Villaverde on Spain’s Economic Success

Last week I asked:

Why is Spain so much richer now than almost any country in Spanish America? Before you answer with great confidence, ponder this: According to Angus Maddison’s data on per-capita GDP in 1950, Spain was poorer than Argentina, Chile, Mexico, Peru, Uruguay, and Venezuela, and roughly equal to Colombia, Bolivia, Costa Rica, Cuba, Ecuador, Guatemala, and Panama. This is 11 years after the end of the Spanish Civil War, and Spain of course stayed out of World War II.

Via email, Penn's Jesus Fernandez- Villaverde replied. The following is kindly reprinted with his permission.

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By luck, the question is posted close to the 60th anniversary of the day that gives you a rather compelling answer (and one that is well accepted by most Spanish economic historians): July 21, 1959. I have an op-ed in El País, the largest Spanish newspaper. about this anniversary this Sunday (in my "other life," I do Spanish Economic History).

On July 21, 1959, Franco’s government approved an executive order that implemented the “Plan de Estabilización” (the “Stabilization Plan”). The result of a memorandum of understanding with the IMF, the World Bank, and the OECD, the “stability plan” committed Spain to a rather standard program of fiscal and monetary stability, opening to international trade and foreign investment, and growing integration with international economic organizations. Simultaneously, the government had undertaken, in 1957, an administrative reform that enhanced state capability and an extremely efficient top civil service was established. Forget about the guy giving you a driving license at the local DMV; what matters is the quality of the senior permanent secretary of the Treasury, which has been outstanding since 1957 without interruption.

The “stability plan” broke an inward-looking development model with growing barriers to trade that had been followed since 1874. By 1959 Spain was poor for much deeper reasons than the 1936-1939 Civil War. Most recent releases of Maddison’s NIPA data for Spain, helped by the work of top researchers such as Leandro Prado de la Escosura show, that by 1929, Spain had fallen dramatically behind its European peers except Portugal and Greece.

The combination of macroeconomic stability, freer flow of goods and capital, and stronger state capability triggered several decades of fast economic growth. Most people would naively mention tourism. These observers forget that Spain became a magnet for the European car industry. In 2017, Spain produced more passenger cars than France or the U.K. and nearly as many as the U.S. (although the U.S. number is biased by the importance of pickup trucks in the U.S. production mix). Even more importantly, Spain is one of leading world producers of car parts.

Why did Spain become a magnet for the car industry? Good legal environment (the “Decretos Ford” or “Ford Executive Order” are so-called because they were designed to convince Ford to open a gigantic factory in Valencia), macro stability, and access to the rest of the European market.

Spain's exports are rather diversified. Spain, for example, exports more airplanes and airplane parts than olive oil. Many of your readers probably fly in Airbus planes (American Airlines has plenty of them!): well, a big chunk of them are made in Spain.

A similar history can be told about the petrochemical industry. Today Spain exports more, as a percentage of GDP, than France or Italy.

To a considerable extent, the economic history of Spain since 1959 is a textbook example of modern economic growth: get a few institutions right and ride them into prosperity. European transfers after Spain joined the E.U. in 1985 are a rounding error. And joining the E.U. was the consequence of growth, not the cause.

Of course, there is the issue of high unemployment, but most foreigners forget that a 15% rate of unemployment in Spain is very different from a 15% rate of unemployment in the U.S. Roughly, and skipping some details, we are talking about many young people living at home with their parents that take 2-3 years after college before they find a job instead of a few weeks as in the U.S. due to our screwed labor market institutions. Not good, but not the end of the world.

Interestingly enough, Cuba had the same income per capita than Spain in 1959 and better literacy, education, and many other indicators. A few decades of ignoring markets and see what happens.

The critical question is, therefore, why did Spanish political-economic elites committed themselves to a market-oriented reform in 1959 and stick with it even during the transition to democracy in 1975, the arrival of the Socialist Party to government to 1982 (a surprisingly pro-market government), and the Euro crisis of 2008-2014 while most Latin American countries did not? Even today, a quick conversation with the political-economic elites of Madrid (the ones running the country) reveals a full conviction that this path has served Spain well (Bryan: the libertarians in Madrid are somewhat peripheral to that conversation, so their opinions are, to a very large extent irrelevant).

A full answer would require a long explanation, but the lack of a colonial inheritance (with all the racial and class divisions it creates) and the proximity to the core of Europe (France and Germany) are determinant factors.

Unfortunately, most research in Spanish economic history is not translated into English, but here's good summary of the "consensus view" (which I agree with).

The post Fernandez-Villaverde on Spain's Economic Success appeared first on Econlib.

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