The economic program implemented by the Spanish authorities over the period 1982–86 may well be an example of the effectiveness of stabilization policies combined with gradual structural reforms in helping a country adjust to domestic and external imbalances. Following a 15-year period of high and sustained economic growth during which real gross domestic product (GDP) increased at an average annual rate of nearly 7½ percent—the highest rate of economic expansion in Europe—Spain found itself in the mid-1970s in the midst of a severe crisis. The rise in international oil prices dealt a serious blow to Spain’s industrial sector, the principal engine of growth throughout the 1960s and early 1970s. Heavy investment in energy-intensive sectors, such as steel, chemicals, and shipbuilding, and a concomitant substitution of energy sources away from domestic coal toward imported oil had left industry particularly vulnerable to such external shocks and ill-prepared to compete effectively with its counterparts abroad. The oil price rise also coincided with the end of the Franco era and Spain’s return to democracy. The emergence, inter alia, of a free trade union movement and the desire on the part of the Government to avert serious social confrontations that might endanger Spain’s fledgling political institutions led to a rapid acceleration of wages, which exacerbated the already adverse consequences of the terms of trade loss.¹ The combined effect of these two factors precipitated a steady deterioration of the economic climate and a pronounced drop in the rate of economic growth. Between 1975 and 1979 GDP grew by less than 2 percent a year, well below the rates registered in Spain’s main trade partners. By the early 1980s it had become clear that the Spanish economy was facing major economic imbalances and that a comprehensive adjustment program was necessary.

The Government that came to power in the fall of 1982 was aware that the resumption of sustained noninflationary growth could not be achieved through expansionary demand policies. Rather, a medium-term economic strategy was necessary aimed at restoring macroeconomic balance on a sustained basis through improved efficiency in resource allocation and use. In the next four years the Spanish authorities embarked upon a program of adjustment, which, through a combination of demand management policies and structural reforms, led to marked improvements in a number of areas. (See Appendix III.)

Economic growth, which had fallen below 1 percent a year in the early 1980s, resumed and proceeded at rates in excess of those prevailing among its industrial partners. The rate of inflation, which at over 14 percent in 1982 was more than twice the average for the member countries of the Organization for Economic Cooperation and Development (OECD), had fallen below 5 percent by mid-1987. The current account of the balance of payments, which had been in deficit throughout the early 1980s, registered sizable surpluses over 1984–86, equivalent to nearly 2 percent of GDP annually. While Spain’s fiscal adjustment efforts were initially less successful, with the deficit remaining above 5 percent of GDP, a number of measures were implemented in the latter part of the adjustment period (1985–86) with term implications. The successful substitution of a number of inefficient taxes by a value-added tax (VAT), the reform of the pension system, and the marked improvement in the balance sheets of the public enterprises have laid the groundwork for a sustained improvement of the public finances over the medium term. Although the official rate of unemployment rose rapidly over the adjustment period, it had leveled off by late 1985 and began to fall during 1986, as employment recovered sharply, partly as a result of measures taken to foster greater labor market flexibility and a substantial deceleration in the rate of growth of wages with respect to the late 1970s and early 1980s.

The measures implemented to ease rigidities in the labor market were part of an effort to support the financial stabilization program by much-needed structural reforms. Significant steps were taken to restructure those sectors of Spanish industry affected by worldwide excess capacity—steel, shipbuilding, and textiles, among others—through an Industrial Reconversion Program, which provided budgetary support to a process of retrenchment involving substantial employment reductions, compensation and retraining for those affected, and an ambitious investment program intended to accelerate the modernization of key industrial sectors. Energy policy continued to emphasize the need to increase the share of domestic sources in total energy consumption and, in conjunction with demand- and supply-oriented policies implemented as part of the National Energy Plan, the self-sufficiency ratio rose from 34 percent in 1982 to over 42 percent in 1986. Further liberalization of the financial markets, the privatization of an important number of nonfinancial public enterprises, and Spain’s entry into the European Communities (EC), which has already led to an opening up of the economy and has the potential to bring about enduring transformations, are other recent noteworthy developments in structural reform.

This paper discusses the main features of Spain’s recent adjustment effort and assesses its impact on the overall economic situation. Section II provides a brief historical background on Spain’s economic development from 1960 to the early 1980s. The following section discusses the authorities’ stance on monetary and fiscal policy and examines the role of exchange rate policy in the recovery of the external accounts. Section IV assesses progress made in structural reforms, with particular emphasis on industrial restructuring, energy policy, privatization, financial sector reforms, social security, and the labor market. Section V analyzes the impact of the above policies on the recent evolution of output and employment, prices, and the external accounts. A brief overview and assessment of the adjustment program and of the policy challenges ahead are presented in Section VI. A number of questions are explored further in the Appendices: Appendix I examines the issue of concealed employment in the Spanish economy; Appendix II presents some empirical estimates on the determinants of export performance; and Appendix III summarizes the Government’s broad objectives for the evolution of the Spanish economy.