I Introduction
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

In the wake of the European single market, Spain can look back on a decade of broad improvements in inflation, output, employment, and the external accounts. Its product, labor, and financial markets are substantially reformed and its balance of payments opened up. International reserves have risen to record levels, and the peseta has been one of the strong currencies in the exchange rate mechanism (ERM) from its entry in 1989. Participation in the process of European integration has strengthened policy credibility and, together with structural reform, created an environment conducive to sustainable economic expansion over the medium term. Prospects for further progress in rising living standards to levels prevailing in the wealthier European partner countries are favorable.

In the wake of the European single market, Spain can look back on a decade of broad improvements in inflation, output, employment, and the external accounts. Its product, labor, and financial markets are substantially reformed and its balance of payments opened up. International reserves have risen to record levels, and the peseta has been one of the strong currencies in the exchange rate mechanism (ERM) from its entry in 1989. Participation in the process of European integration has strengthened policy credibility and, together with structural reform, created an environment conducive to sustainable economic expansion over the medium term. Prospects for further progress in rising living standards to levels prevailing in the wealthier European partner countries are favorable.

Economic practitioners and analysts interested in the reasons for the success of Spain usually refer to its 1986 accession to the European Community (EC). The accession is seen as having entailed a host of favorable effects, launching, almost automatically, the Spanish economy on a path of vigorous growth. There is much truth in this argument, but it is far from providing a full account. Many of the conditions for success were in place prior to accession and the economy had began to exhibit favorable trends, which were subsequently reinforced. Their origins must be traced to earlier years, to the lessons learned from the mistakes in responding to the 1973 oil crisis, which were applied from the late 1970s and through the second oil crisis. More generally, however, the roots of those trends must be sought in the shift of philosophy and practice from the political and economic autarky to integration with Europe and the international community at large. The establishment of Spain’s membership in the International Monetary Fund in 1958 and the agreement on a policy package with the Fund in 1959 marked a watershed in this regard.

The papers in this volume have been prepared by IMF staff members who participated in the process of cooperation between Spain and the Fund over the last three years. The volume does not present a complete description of the policies and developments, but rather reviews in detail some central aspects of the Spanish experience of recent years. Included are discussions on macroeconomic policies; an analysis of the evolution of structural reforms in key areas, such as the financial system, taxation, and fiscal decentralization. Sectoral aspects of the dynamics of inflation are also discussed.

Section II reviews Spain’s transition process to a more market-oriented economy over the past three decades and provides a setting for the discussions of the other sections. In explaining Spain’s recent success, it stresses the importance in achieving sustainable economic growth of financial policies, income policies, and structural reforms.

Section III reviews the process of domestic financial liberalization. These reforms, which started in the late 1960s and had a notable effect on financial performance, involved a market-oriented approach to the determination of interest rates, as well as major structural changes, including an increased participation of foreign banks in domestic financial markets and mergers of large domestic banks to face new challenges connected with the European single market. The section also provides international comparisons of bank performance.

Section IV reviews the constraints imposed on monetary management by efforts to stabilize the exchange rate and shows how imperfect capital mobility during the period 1980–89 helped the Bank of Spain achieve domestic and external objectives otherwise incompatible. Econometric tests on the influence of foreign exchange interventions on the money supply point to a large sterilization of the monetary impact, thus confirming that the domestic monetary targets were not impaired by efforts to stabilize the exchange rate.

Section V analyzes the 1991 income tax reform as a mechanism for integration of Spain in the EC. It also discusses the tax reform in the light of experience from recent reforms in other industrial countries.

Section VI deals with Spain’s fiscal decentralization process. It describes the instruments of regional authority finance and how they have developed in recent years. The section also analyzes the Spanish fiscal decentralization in terms of its implications on regional authority’s financial autonomy and accountability, on equity between regions, and on macroeconomic management.

A technical appendix analyzes aspects of the persistent divergence in inflation rates between the industrial and the nonindustrial sectors in Spain. The section concludes that these price rigidities are important elements blunting the effectiveness of restrictive financial policies and increasing the cost of nominal and real convergence toward the core EC countries.

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