Abstract

Spain’s remarkably high rates of economic growth over the decade and a half between the implementation of the Fund-supported Stabilization Plan of 19592 and the onset of the oil crisis in the mid-1970s were largely made possible by a change in the orientation of its economic policies, which had theretofore promoted self-sufficiency in an increasingly interdependent world. Prior to 1959, Government policy had sought the rapid development of an industrial base through a high degree of protection and official intervention in the economy. Rigidly enforced quantitative restrictions on imports and strict export licensing, widespread price controls, and a large body of legislation regulating virtually every aspect of productive activity ranging from procurement and distribution to investment3 were the main characteristics of what is now referred to as Spain’s period of autarky. Policies aimed at promoting self-sufficiency in turn introduced a number of rigidities in the Spanish economy that were to hamper severely the development process. Describing some of the strains on the economy brought about by autarky, Wright (1977) states:

Spain’s remarkably high rates of economic growth over the decade and a half between the implementation of the Fund-supported Stabilization Plan of 19592 and the onset of the oil crisis in the mid-1970s were largely made possible by a change in the orientation of its economic policies, which had theretofore promoted self-sufficiency in an increasingly interdependent world. Prior to 1959, Government policy had sought the rapid development of an industrial base through a high degree of protection and official intervention in the economy. Rigidly enforced quantitative restrictions on imports and strict export licensing, widespread price controls, and a large body of legislation regulating virtually every aspect of productive activity ranging from procurement and distribution to investment3 were the main characteristics of what is now referred to as Spain’s period of autarky. Policies aimed at promoting self-sufficiency in turn introduced a number of rigidities in the Spanish economy that were to hamper severely the development process. Describing some of the strains on the economy brought about by autarky, Wright (1977) states:

Industry had developed, but often based on small units whose high costs and inefficiency rendered them quite uncompetitive on world markets. As industrial growth had accelerated so, too, had the demand for products which could not be produced in Spain, and which could not be obtained elsewhere due to the very poor level of exports and the consequent strict implementation of import controls. This created shortages. In 1959, exports equaled less than 4 percent of GNP—lower than the percentage of any OECD country except Turkey. The system of multiple exchange rates created further distortions in prices and costs and had a dampening effect on the balance of payments.4

The Stabilization Plan, which had been brought into being as a result of a severe balance of payments crisis over 1958–59, sought to restore financial and price stability, and improve Spain’s external accounts through, inter alia, a substantial liberalization of foreign trade. The various measures adopted as part of this liberalization effort were to have a profound influence on the composition of Spanish growth and on the relative role of the tradables sector. The adjustment program was launched with a 43 percent devaluation of the peseta and the elimination of the system of multiple exchange rates, supported by a marked tightening of financial policies. Ceilings were imposed on government expenditures and on bank lending to the public sector. Prices for transport and public utilities were raised by nearly 50 percent, and taxes on gasoline and tobacco were likewise increased. Ceilings on bank credit to the private sector were also imposed.

The objectives of the program were met within a short period. The annual rate of inflation fell from 33 percent in 1958 to 1.5 percent in 1960; the trade balance recorded its first surplus since 1951 as a result of a 50 percent increase in the volume of exports, and so did the current account under the influence of a rapidly growing tourist sector. More important, growth, which had come to a standstill over the crisis years, resumed. Between 1961 and 1974, the Spanish economy grew at an average annual rate of 7.3 percent, with the highest rates (10 percent on average) being registered in the three-year period immediately following the program. This overall growth performance was second only to that of Japan among the member countries of the OECD. As part of an aggressive export promotion program begun in 1959, an export subsidy scheme was introduced to offset the effects of indirect taxes, and rebates were granted for import duties on intermediate goods used in the production of export products. At the same time, restrictions on imports were substantially relaxed, and the number of products subject to quotas sharply reduced. A concomitant liberalization of capital flows, particularly foreign direct investment, gave a special impetus to Spain’s industrialization drive by allowing domestic firms to absorb more rapidly technological changes.5 The combined effect of these measures led to a substantial acceleration in the growth of foreign trade. Both exports and imports in volume terms grew over this period at average annual rates in excess of 15 percent, and their corresponding ratios to GDP more than doubled. The transformation of the Spanish economy into an industrial state was hastened by the diversification of imports implied by the opening up to the outside world that permitted the much-needed renovation of capital equipment. Between 1959 and 1974 the contribution of industry to Spain’s GDP rose from 30 to 42 percent, while that of agriculture fell from 20 to 11 percent. The share of the labor force employed in agriculture fell, over the same period, from 42 to 24 percent.

Three factors played decisive roles in enabling Spain to finance the rapid import growth that facilitated the expansion of the industrial sector: an enormous increase in receipts from tourism, emigrants’ remittances, and foreign investment. Tourist arrivals rose from 4.2 million in 1959 to over 35 million in 1974, an eightfold increase, which by the early 1970s generated sufficient foreign exchange to finance the entire trade deficit, then averaging about 5 percent of GDP. The growth of tourism over this period had a stimulative effect on other sectors of the economy, such as construction and commerce, and encouraged the development of much-needed infrastructure.6 Although reliable figures on emigrants’ remittances over this period are not available, it is estimated that they were equivalent to between 15 to 20 percent of the trade deficit. For its part, foreign investment began to account for an increasing share of gross capital formation; 20 percent by the end of the 1960s in the industrial sector. Foreign investment in the chemical and motor vehicle industries was particularly heavy. Other factors that had an impact upon Spanish economic growth over this period were the continued prosperity of Spain’s main trading partners and the availability of inexpensive imported oil, which induced a rapid substitution away from domestically produced coal, but which was to leave the industrial sector in a vulnerable position at the outset of the oil crisis.

Although the Stabilization Plan of 1959 was a crucial turning point in Spain’s economic development, signaling the beginning of a more outwardly oriented policy stance, by the mid-1960s the pace of liberalization had slackened as the authorities embarked upon a series of development plans modeled after the French system of indicative planning. In consultation with the appropriate Government agencies—usually the Ministries of Industry or Agriculture—firms would set specified targets for production or some other indicative variable, and the State would provide the necessary support in the form of fiscal incentives or, most often, subsidized credit. The allocation of such resources tended to be arbitrary, less guided by market realities than by the desire to strengthen industries perceived to be of “strategic” importance. Thus steel and shipbuilding were accorded preferential treatment; not surprisingly these sectors were most adversely affected by the oil price rises and the ensuing international recessions. At the same time, and notwithstanding the beneficial impact associated with the initial round of trade liberalization, the process of industrialization, against a background of nearly two decades of autarky, proved unbalanced, with the bulk of industrial output directed to the domestic market. By the mid-1970s, Spain was still the most closed economy in Western Europe as measured by commodity trade flows; the ratios of exports to GDP stood at 7½ percent and that of imports to GDP at 14½ percent.

An underestimation on the part of policymakers and entrepreneurs of the relative importance of cheap oil and credit, buoyant growth abroad, and the persistence of a statist approach to economic policy has been suggested as being partly responsible for Spain’s delayed adjustment to the first oil shock. While, as a result of the rise in oil prices, various measures were implemented in a number of energy-dependent European countries to limit the consumption of energy products, in Spain investment in energy-intensive sectors continued unabated. A partial indication of this may be gleaned from an examination of data on net petroleum imports by Spain and other OECD countries after 1973 (Table 1). While countries differ in available domestic energy resources, all the countries listed are net petroleum importers, and all were thus adversely affected by the rapid growth in the price of crude oil. Nevertheless, it is clear that during 1973–80, Spain’s net petroleum imports rose in dollar terms by over 1,200 percent, well above the corresponding increases for the other countries in Table 1 (with the exception of Portugal) and substantially in excess of the cumulative percent increase for the totality of the smaller European countries,7 the EC, and the OECD (less the United States). A new national steel plan unveiled in 1974, for instance, projected a real average annual growth of steel consumption of 5 percent, with a target of 20 million tons by 1982.8 These weaknesses were compounded by the rapid increase in real wages after 1974, which raised the relative price of labor at a time when the terms of trade loss would have required a moderation of labor costs. Between 1975 and 1979 employment in industry declined by over 20 percent.

Table 1.

Import of Oil by OECD Countries, 1973–86

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Source: Organization for Economic Cooperation and Development, Economic Outlook, June 1987.

Excluding Iceland.

Summing up the plight of the Spanish economy over the second half of the 1970s Graham (1984) suggests that the problems experienced by Spanish industry in the early 1980s could in good measure be attributed to the errors (e.g., continued investment in energy-intensive industries) made then.

Before these investments began to pay for themselves, recession set in, creating overcapacity. Energy costs put up production and wage costs. To cover these extra charges more money was borrowed at a time when cheap interest rates had evaporated. Industries which had been making steady profits for more than a decade were suddenly overmanned, over producing, their margins being squeezed into the red by the high financial charges. The list was a long one covering the whole steel industry, shipbuilding, cars and trucks, textiles, domestic appliances, paper, chemicals and aluminum.9

The absence of an adjustment to the substantially different set of environmental parameters imposed by the first oil price rise may also be inferred from the role of exchange rate policy over this period, which sought to offset, to the extent possible, its impact on domestic prices and eventually on disposable income. Between 1975 and 1979, the peseta appreciated by over 35 percent in real effective terms, while the stock of external debt rose from US$8.5 billion to US$19.5 billion. The adjustment that should have begun after the first oil price rise began to take place in Spain in 1980 just at the outset of the second oil crisis. It was only then that the magnitude of the crisis became fully evident and that a national energy plan was brought into being with the aim of reducing dependence on imported oil.

The early 1980s witnessed a rapid deterioration of the Spanish economy. The combination of an adverse external environment, precipitated by the second oil shock and the ensuing international recession, and an inconsistent stance of domestic policies led to the emergence of major imbalances. The current account of the balance of payments moved from a surplus of 0.6 percent of GDP in 1979 to deficits in excess of 2.4 percent of GDP over 1980–81. Although much of this deterioration can be attributed to the terms of trade loss of 21 percent over the period 1980–81, there is no doubt that it was also linked to the delayed impact of the appreciation of the peseta, which in 1979 alone rose by more than 16 percent in real effective terms. Exports remained stagnant in 1980 while tourist arrivals fell for the first time in more than 20 years. As the recession deepened—GDP grew by less than 1 percent on average over the three-year period ending 1982—the financial position of the general Government worsened steadily, with the nonfinancial public-sector deficit rising from 1.6 percent of GDP in 1979 to about 5½ percent in 1982 under the impetus of rapidly rising social security expenditures, increasing transfers to troubled enterprises, and a tax burden that did not and could not keep pace with the growth of expenditures. Nominal wages, although on a decelerating trend with respect to the rates of growth registered during the late 1970s, continued to rise above the rate of inflation. These factors and the concomitant rapid expansion of the monetary aggregates resulted in a worsening of inflation performance and led to a widening of the price differential with respect to Spain’s trade partners, particularly in the EC.