Abstract

The Spanish authorities’ stabilization effort was supported by a number of important structural reforms. This section focuses on the progress made thus far in industrial restructuring, energy policy, privatization, financial market liberalization, social security and pension reform, and the labor market. Liberalization measures in the context of EC accession adopted in the latter part of the adjustment period (1985–86) are also discussed.

The Spanish authorities’ stabilization effort was supported by a number of important structural reforms. This section focuses on the progress made thus far in industrial restructuring, energy policy, privatization, financial market liberalization, social security and pension reform, and the labor market. Liberalization measures in the context of EC accession adopted in the latter part of the adjustment period (1985–86) are also discussed.

Industrial Reconversion Program

The deceleration of industrial activity in Spain in the second half of the 1970s, particularly in the traditionally important steel, shipbuilding, textiles, and home appliances sectors, reflected a sharp deterioration in the financial position of a large number of public and private enterprises. Although several of these sectors were adversely affected by worldwide excess capacity, the excessive growth of labor costs, inefficient pricing policies, overmanning, and delays in the modernization of capital stock all contributed to this deterioration. The first comprehensive attempt to integrate financial support through the budget with a restructuring of Spanish industry began in 1981 with the signing of the Industrial Reconversion Act. This law envisaged a significant retrenchment of a number of sectors, accounting for about 30 percent of total industrial activity. Employment reductions were to be accompanied by the restoration of enterprises’ balance sheets and the subsequent implementation of an investment program designed to speed up the technological modernization of those sectors with good profit prospects.

From the start there were serious difficulties and delays in the implementation of the program, stemming largely from anticipated employment cutbacks and their differential impact on industries and geographic areas. The restructuring effort was given a special boost in 1983 with the publication of a White Paper on reindustrialization and the subsequent approval, in mid-1984, of a new Law on Reconversion and Reindustrialization and the setting of specific employment targets for individual sectors. The program called for a reduction in employment of approximately 67,000 over 1984–86, equivalent to about 26 percent of total employment in those firms affected, or about 2½ percent of industrial employment (Table 9). By the end of 1986 about 77 percent of the anticipated employment reductions had actually taken place, with particularly pronounced cutbacks in the shipbuilding, steel, and textile sectors.

Table 9.

Spain: Employment Impact of the Industrial Reconversion Program

(In thousands)

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Source: Ministry of Industry and Energy.

As of December 31, 1986.

The program has sought to lessen the social costs associated with this process of retrenchment through a number of complementary measures aimed at facilitating the return to the labor force of those workers who lost their jobs. Fiscal and financial incentives have been set up for firms willing to settle in those geographic areas most affected by the reconversion (the so-called Zones of Urgent Reindustrialization).22 Workers over 55 have been given the option of taking early retirement while others have received severance payments and unemployment compensation for up to 18 months. Workers have also been given the option of surrendering their severance payment to the Employment Promotion Fund, whose revenues would be used to supplement unemployment benefits and, through retraining, to assist the workers in seeking new employment opportunities, offering subsidies to firms willing to hire them on a permanent basis. Developments to date indicate that, of the total number of workers affected by the Program, 25 percent had taken early retirement, 35 percent had decided to participate in the Employment Promotion Fund, and the rest had been made redundant.

The financial costs of the Program have been considerable. By end-December 1986 about Ptas 820 billion (equivalent to 2½ percent of GDP) had been spent in an effort to restore enterprises’ balance sheets through subsidies, other transfers, and various loan guarantee schemes through the Instituto Nacional de Industrias (INI) and the Official Credit Institute. Well over four fifths of these resources had been absorbed by the steel, shipbuilding, and textile sectors. The total cost of the program is presently estimated at over Ptas 1.1 trillion, most of which would have been spent by the end of 1987. As the employment reductions and financial restructuring foreseen in the reconversion program approach their expected targets, the associated investment program is scheduled to come on stream. Investments in the second half of 1986 in the sectors affected by the reconversion effort amounted to Ptas 208 billion, a figure only slightly above the total for the previous three-and-a-half-year period.

Provisional estimates through the end of 1986 on profitability and productivity in the sectors affected point to significant improvements in the cashflow positions of all sectors,23 particularly steel, and an acceleration of productivity growth. Despite the programs’ high financial costs, the authorities are of the view that industrial restructuring could not have been postponed and that important net savings are likely to be generated in coming years.

Energy Policy

Despite Spain’s heavy dependence on imported oil, energy consumption after the first oil crisis continued to rise as domestic prices were not adjusted to reflect the sharply higher import costs. Although domestic energy production, mainly through the use of coal, rose by over 60 percent between 1973 and 1980, the growth of demand was sufficiently strong to maintain the self-sufficiency ratio largely unchanged—at around 29 percent—and to lead to widening deficits on the external energy balance. By the early 1980s, net imports of energy products were well in excess of US$12 billion, equivalent to 40 percent of merchandise imports. While the consumption of primary energy per unit of output in the OECD as a whole exhibited a decelerating trend after 1973, in Spain it actually rose. Time series data for the period 1973–85 show that while Spain’s consumption per unit of output rose by some 6 percent, the average for the OECD over the same period actually fell by over 21 percent.

A concerted approach to Spain’s energy problem was first introduced in mid-1979 with the implementation of the National Energy Plan (NEP), later updated in 1983 and approved by Parliament in 1984. The Plan’s underlying strategy was based on both demand- and supply-oriented policies. It sought to reduce oil consumption through a more realistic pricing policy that reflected more rapidly changes in international prices.24 As part of the NEP, domestic energy prices were raised several times between 1980 and 1986, and the gap with respect to the European average was substantially reduced. Legislation was passed in mid-1982 offering tax benefits, grants, and concessionary loans to the industrial sector for oil-substitution projects. At the same time, energy conservation measures were adopted, including compulsory energy-audit procedures for the industrial sector. The NEP targeted, for the period 1984–92, a cumulative reduction in energy consumption per unit of output of 10.5 percent. These policies have been largely successful. Between 1982 and 1986 total energy consumption rose by 2.3 percent against a real GDP growth of 9.5 percent. Over the previous decade the cumulative rates of growth for these two aggregates had been 20.2 and 18.6 percent, respectively. The diversification away from oil products was particularly pronounced as their share in the consumption of primary energy fell from 62.2 percent in 1982 to 52.5 percent in 1986.

On the supply side, the NEP sought to reduce Spain’s external energy dependence through the expansion of domestic sources, particularly hydropower, coal, and nuclear energy. The share of energy requirements covered by domestic sources rose from 34 percent in 1982 to 42 percent in 1986 and is projected to rise further to 46 percent by 1992 (Table 10). The share of oil in total primary energy consumption is targeted to decline further to 47 percent by 1992. Nuclear energy has played an increasingly important role as a domestic energy source. The NEP’s nuclear program has seen a rapid expansion in the share of nuclear energy in total primary energy consumption, from 1.6 percent in 1980 to nearly 9 percent in 1986. This share is expected to rise to 12 percent by 1992 as two more nuclear power plants come on stream in addition to the eight currently in operation.

Table 10.

Spain: Sources of Energy Supply and Self-Sufficiency Ratios, 1973–92

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Source: Ministry of Industry and Energy.

Provisional.

Targets of the 1983 National Energy Plan.

Privatization

In recent years, INI, Spain’s largest state holding company, which controls a large number of basic and strategic industries, including several in the communications and transport sectors, has conducted a far-reaching and long-overdue program of financial restructuring. INI was established in the 1940s with the aims of creating an industrial base to meet the rapidly expanding needs of the domestic market and of fostering the development of industries necessary for national defense. Throughout the 1950s and 1960s, INI invested heavily in large-scale energy-intensive industries. As this was a period of buoyant worldwide economic growth in which Spain performed remarkably well, INI grew in size and influence, eventually including in its portfolio dozens of enterprises, employing over 200,000 people and responsible for over 15 percent of total industrial production. By the early 1970s INI had become the largest industrial concern in Spain and was among the 20 largest in Europe. Most of INI’s output was absorbed by the domestic market.

In the mid-1970s, however, as a result of the adjustment imposed on the Spanish economy by the oil crisis, INI began to be increasingly used by the Government as an escape valve, absorbing the substantial employment losses being registered in virtually every sector of the Spanish economy but which were particularly pronounced in the industrial sector. This role frequently included the take-over of failed or bankrupt enterprises. As a result, losses mounted rapidly, reaching Ptas 107 billion by 1981 and Ptas 204 billion by 1983, with the burden of financing largely falling on the budget.

A process of rationalizing INI’s enterprises was set in motion by the new government, aimed at the containment of the losses of its enterprises and the restoration of sound balance-sheet positions. At the same time there was a shift in its overall industrial strategy, with greater emphasis being placed on adapting capacity and type of productive enterprise to the present and prospective nature of domestic and external demand, with particular accent on the requirements and needs of the European market. A key element in the consolidation and improvement of the financial position of INI was the realization that a number of firms under its control, deemed neither to be of strategic national interest nor to fulfil some other essential public role, such as providing employment opportunities in particularly disadvantaged regions of the country, might, for technological or economic considerations, fare better in private hands or benefit from some type of mixed ownership. Thus in 1985 and 1986, a number of key enterprises in both the industrial and the services sectors were sold to private concerns. The Swedish firm SKF, for instance, acquired total ownership of a ball-bearings enterprise in which it had had a minority interest. On a larger scale, Volkswagen acquired a controlling interest in SEAT, Spain’s largest auto manufacturer, with a commitment for total ownership by 1990. INI’s decision to part with SEAT had been precipitated by mounting losses (over US$3 billion between 1980 and 1985) and the recognition that it lacked the technical expertise and the marketing skills needed to make the firm viable. In 1987 the government announced its intention to sell minority holdings, through the stock exchange, in several large state-owned companies, including Iberia Airlines and the oil concern REPSOL, S.A. Such sales, while still permitting the Government to retain control over the companies’ long-term strategies, were expected to make the firms more responsive to market signals and thus to enhance efficiency.

INI’s operational losses fell for the fourth consecutive year in 1987, reaching an estimated Ptas 50 billion, over Ptas 150 billion below 1983 levels (Table 11). Employment, which had peaked in 1982 at 219,000, had fallen by 1986 to 169,000 and is estimated to have fallen by an additional 6,000 in 1987. Furthermore, losses have been increasingly concentrated in a few sectors, such as steel, shipbuilding, and heavy transportation equipment. Losses in the steel sector in 1986 were partly attributable to the elimination of export subsidies stemming from Spain’s entry into the EC. This process of retrenchment has had a beneficial impact on the budget. Whereas in 1982 state transfers covered over 71 percent of INI’s participation in the financing of the operational losses and capital expenditures of its enterprises, by 1986 this share had fallen to 30 percent.

Table 11.

Spain: Operational Losses of Public Sector Enterprises, 1981–871

(In billions of pesetas)

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Source: Secretariat of Economics and Planning.

Profits and losses of public sector enterprises before government transfers.

Fund staff estimates.

Financial Sector Reforms

The liberalization in early 1987 of interest rates on demand deposits and on savings deposits of less than six months and the accompanying substantial reduction in the banks’ mandatory investment coefficients were two significant steps in a process of deregulation, which, for at least a decade now, has attempted to reduce some of the distortions associated with a highly regulated financial market. Prior to the introduction of the above measures, more than half of total bank deposits were subject to administrative controls that kept rates below market ones. At the same time, approximately 48 percent of the liabilities of financial intermediaries were subject to reserve and investment coefficients. Thus a large share of the financial system’s assets was deposited with the Bank of Spain or invested in assets with below-market yields. Not surprisingly, over time the spreads between borrowing and lending rates tended to be large as the tax on the financial system implied by the reserve and investment coefficients was reflected in the rates of return on unregulated assets (Chart 3).

The deregulation of interest rates mentioned above (rates on deposits of one year or more had been free since 1977, while rates on time deposits of six months or more were set free in 1981) is expected to enhance competition among Spanish banks, a process likely to be gradually reinforced by the implementation of the agreements negotiated with the EC in the Treaty of Accession, which contemplate the unrestricted access of EC financial institutions to the Spanish market by the end of 1992.

The reduction of the mandatory investment coefficient from 23 percent to 11 percent was a particularly welcome development. This coefficient has two components: one for monetary control and one for investment in specific productive sectors. The first, stipulating the share of bank deposits that must be kept in the form of treasury bills, is to remain at 10 percent; the second, which took the form of preferential credit facilities at lower than market rates for state-directed investments, particularly for housing, agriculture, capital goods, and exports, was reduced from 13 percent to 1 percent. This reduction was expected to increase the supply of loanable funds and was viewed as an important step in the authorities’ efforts to ease rigidities and eliminate distortions in the financial markets. These liberalization measures coincided with the marked improvement in the profit position of the Spanish banks—pre-tax profits in 1986 rose by over 20 percent with respect to 1985 to Ptas 230 billion (US$1.64 billion)—associated with the recovery of the Spanish economy.

Labor Market Policies

Unemployment Trends

Labor market conditions in Spain have deteriorated significantly over the past decade. The labor survey puts the official rate of unemployment for 1986 at 21½ percent, the highest of all OECD countries. While there is evidence that the development of a sizable underground economy has lessened the adverse social consequences of this historically high rate, unemployment remains too high. Over the ten-year period ending in 1985, more than 1.9 million jobs were lost, as total recorded employment fell by about 16 percent and the number of unemployed persons rose from½ million in 1975 to nearly 3 million by the end of 1985. Furthermore, the duration of unemployment in Spain has been longer than in most other countries in Western Europe, with the share of persons unemployed for one year or more reaching 57 percent of total unemployed in 1985, compared with 17 percent in 1975. The rising level of unemployment has reflected particularly large employment reductions in the industrial and agricultural sectors where, over 1975–85, more than 1.8 million positions were lost—by far the largest sectoral employment decline in Western Europe. The official statistics also show that the burden of unemployment in Spain has been unevenly distributed, falling disproportionately on women and youth.

A question frequently raised about Spain’s unemployment problem concerns the apparent contradiction between the large number of unemployed, as estimated by the Official Labor Survey (EPA), and the widespread perception that the country has enjoyed a relatively large measure of social peace. This question was at the forefront of economic policy discussions in mid-1986 when, notwithstanding the continued deterioration of labor market conditions over the preceding four-year period, the Government of Mr. Felipe Gonzalez was reelected for a second term with a sizable majority.

A number of hypotheses have been advanced to explain this phenomenon. The OECD, for instance, claims that on account of strong family ties the extent of moral and financial support to the young unemployed, who account for nearly half of the total unemployed, is more widespread than elsewhere in Europe, as demonstrated by the fact that 94 percent of the young live with their parents or other family members. The EPA has itself shown that the unemployment rate among “heads of households” has been closer to 7–10 percent and that 42 percent of these receive unemployment compensation, while an estimated 53 percent derive some income from the underground economy. These statistics suggest that the “typical” Spanish family is one in which the father is likely to be employed, earning considerably more in real terms than in the early 1980s, and enjoying a substantially expanded level of social services, such as education and public health. His wife, and particularly his working-age children, on the other hand, would have experienced difficulties in securing employment. An important proportion of the latter would have found employment prospects sufficiently discouraging to decide to postpone entry into the labor force and pursue higher education, as evidenced by the 50 percent increase in educational enrollment between 1977 and 1985 for those in the 20–29 age group. Appendix I further examines the incidence of concealed or irregular employment in Spain and the extent to which the official rate of unemployment overstates the associated social costs.

A number of demographic and economic factors help explain these unfavorable labor market developments. Spanish growth throughout the 1960s and early 1970s was led by the industrial sector. The rapid expansion of capacity and the development of such industries as steel, chemicals, and transport equipment induced substantial changes in the sectoral composition of employment. Employment in industry rose from 2.7 million in 1965 to 3.3 million in 1974, even as employment in agriculture under a process of modernization partly induced by the expansion of the industrial sector fell from 4.1 million to 3.1 million over the same period.25 This drastic reduction in agricultural employment in itself had no adverse impact on the unemployment rate as a rapidly expanding economy and important migratory flows to other European countries absorbed the excess supply of labor.26 Furthermore, the rate of female participation in the labor force remained very low.27

The onset of the oil crisis had a particularly devastating impact on the Spanish economy. Industrial production, which over 1970–74 had grown at an average annual rate of over 10 percent, fell by 6½ percent in 1975. Spain’s dependence on imported energy sources (its self-sufficiency ratio in 1974 was below 30 percent) and the increasingly energy-intensive character of its exports resulted in a substantial deterioration of export performance. The sizable changes in relative prices brought about by the oil crisis had an impact on Spanish industry that went well beyond that felt in other oil-importing European countries. Spanish growth over the previous decades had been based on an inward-looking set of policies that, in an increasingly interdependent world, had sought to promote self-reliance and independence through a high level of protectionism and official intervention in the economy. These policies had in time given rise to an economy that was not only the most closed in Western Europe (Table 12),28 but that also proved to be ill-equipped to withstand the competitive pressures brought about by the oil crisis and to adjust to a significantly different external environment. The concomitant deceleration of output growth in Spain’s most important partner countries brought about a reversal of the migratory flows seen over the 1960s and early 1970s, which had absorbed much of the excess labor generated by the transformation of the agricultural sector.

Table 12.

Spain: Selected Foreign Trade Figures, 1986

(In percent of GDP)

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Source: Organization for Economic Cooperation and Development, Economic Surveys.

At current prices and exchange rates.

Other factors that brought pressure to bear on the labor market were those associated with the changing age structure of the Spanish population. For reasons thought to be partly related to the sustained period of growth enjoyed by Spain throughout the early 1960s, the birth rate accelerated. This gave rise to a demographic “bubble,” which was to burst with full force in the early 1980s.29 The acceleration in the rates of growth of the labor force over the period 1981–85 (over 1 percent a year with respect to the no-growth period 1976–80) certainly reflects the impact of such higher birth rates and coincides with the most marked increase in Spanish youth unemployment.

The drastic reduction in employment levels in the second half of the 1970s and the concomitant increase in the rate of unemployment coincided with a substantial acceleration of labor costs. A number of measures of the price of labor are shown in Chart 6 which is reproduced from the 1986 study by Dolado and others on Spanish industrial unemployment. Regardless of the measure used, it is evident that real labor costs in Spain have shown a sharp upward trend, particularly after 1975. Between 1975 and 1979 the real cost of labor faced by employers in the industrial sector (defined to include social security contributions) rose at an average annual rate of 9 percent, an increase without any parallel in the OECD. This period also witnessed the fastest rise in employers’ social security contribution rates, from 19½ percent of gross pay in 1975 to over 24 percent in 1979, one of the highest in Western Europe.30 Even if allowance is made for the effect of taxes on wages, an acceleration can be noted of wages net of employees’ social security contributions and direct and indirect taxes after 1975, the terms of trade loss notwithstanding. That much of the rise in real labor costs cannot be interpreted in terms of secular improvements in productivity is made clear by a brief examination of the evolution of real unit labor costs (Table 13). Although output per employee rose substantially over this period, the rise in real labor costs per person was sufficiently high to more than offset this gain in productivity, and real unit labor costs rose between 1975 and 1979 by over 25 percent. In sharp contrast, real unit labor costs rose only slightly or actually fell in most of Spain’s European partners.31

Chart 6.
Chart 6.

Spain: Real Wage Developments, 1964–84

(1964 = 100)

Source: Dolado, Malo de Molina, and Zabalza, 1986.1 Gross pay inclusive of employer’s social security contributions.2 Real gross pay.3 Real gross pay minus employee’s social security contributions, adjusted for changes in indirect taxes.4 Real wage minus income taxes.
Table 13.

Real Unit Labor Costs in Industry in Selected OECD Countries, 1975–85

(1975=100)

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Sources: Bank of Spain; and Fund staff calculations.

Although real wages in the industrial sector continued to rise after 1979, they did so at a substantially reduced pace. The decline in real unit labor costs registered thereafter was induced by persistent labor shedding; between 1979 and 1985 employment in industry declined by 20 percent. The evolution of the real wage gap in the industrial sector over the period 1970–85 is shown in Chart 7. Prior to 1975 actual productivity and real labor costs per employee rose at approximately the same rates of growth, so that the real wage gap remained constant and small with respect to the base period chosen (1970). Thereafter until 1979, the real wage gap widened by nearly 46 percent. Although employment did not fall immediately, by 1978 the labor market had begun to adjust, and employment in industry fell by nearly 2 percent and continued to do so every year thereafter. Although real wages decelerated after 1979, the narrowing of the wage gap reflected primarily the fall in employment.32 By 1985 the real wage gap had nearly returned to its 1975 size but the rate of unemployment stood at 21.9 percent of the labor force. That unemployment after 1979 rose rapidly despite the substantial deceleration of real labor costs may be interpreted in terms of the overmanning of Spain’s industrial sector (throughout the 1970s employment in the industrial sector of the great majority of Spain’s European partners, such as the United Kingdom, the Federal Republic of Germany, Denmark, Belgium, and Holland, had fallen steadily and sometimes substantially), the continued structural transformation of Spanish agriculture (in the six-year period ending 1985 agricultural employment had fallen by a further 15 percent), and “increasing business uncertainties and the impact of rising interest rates and raw material prices on cash flow and profits.”33

Chart 7.
Chart 7.

Spain: Real Wage Gap, 1970–85

(1970 = 100)

Source: Bank of Spain, and Fund staff estimates.1Adjusted for effect of reduction in employment.

Wage Policy

Throughout the 1980s sectoral wage negotiations in Spain have been largely conducted within the framework of national agreements between the employers’ federation and the trade unions. The Government’s role has varied over time; in certain years (1983, for instance) the authorities did not intervene directly in the negotiations, limiting their participation to the implementation of a wage policy at the public sector level, which was judged consistent with the overall inflation objectives and which, it was hoped, would serve as the point of reference for the private sector. In other periods, notably in connection with the negotiations leading to the Economic and Social Agreement (AES) covering 1985–86, the Government was an active partner, setting the agenda and entering into a number of legislative commitments involving, inter alia, labor market flexibility, social security reform, and better working conditions. Occasionally, as in 1984 and 1987, no agreement was arrived at and wage negotiations were conducted at the level of the firm.

The above wage bargaining process has had benefits and costs. Among the costs may be noted the limited scope for wage differentiation to reflect differences in productivity and in the financial condition of enterprises that the setting of a narrow band for wage settlements at the sectoral level necessarily imposes. It could also be argued that the inclusion of a wage revision clause in the agreements, triggered in the event that consumer prices exceeded the official target, strengthened the linkage between prices and wages and may have retarded the needed adjustment of real wages and undermined competitiveness. Wage drift, the high cost of layoffs, and other nonwage costs at times resulted in nominal labor costs rising at rates above the upper margin contemplated in the wage agreements. There is a broad consensus in Spain, however, that viewed against the background of the disorderly conditions prevailing in the labor market prior to 1978, the year in which the first such agreement became operational and which had witnessed the rapid acceleration of real wages and a concomitant deterioration of employment, the agreements contributed to the emergence of greater social consensus on labor issues. The periodic process of consultation among the social partners coming, as it did, after several decades of interventionism in which wage policy consisted mainly of government decrees implemented through the Ministry of Labor is thought to have been an important factor in the consolidation of democracy in Spain. At a more practical level, the agreements led to a dramatic reduction in the number of days lost to strike activity, from a high of 16.1 million man-days in 1977 to about 2 million man-days in 1986.

Labor Market Flexibility

The substantial reduction in employment levels over 1975–85 would suggest that the relatively high degree of wage rigidity that has characterized the Spanish labor market would have as its counterpart some flexibility as regards quantity adjustments. A number of indicators, however, point to precisely the opposite. A frequently quoted survey of a large number of major Spanish enterprises carried out in 1983 showed that the average duration of employment in Spain is nearly 15 years, among the longest in the OECD.34 This observation is consistent with the predominance of open-ended labor contracts in most Spanish enterprises and the high level of severance payments for firings.

The above statistics on the duration of employment also corroborate the well-known fact that the Spanish labor market is greatly segmented, with a core of some eight million workers enjoying a relatively high degree of job security and a peripheral group of about two million people—among whom women and youth are overwhelmingly represented—for which the rate of job turnover is extremely high and for which the average duration of employment is below one year. Not only is the annual flow of new contracts as a proportion of total employment in Spain one of the highest in the OECD, but it has risen substantially in recent years reaching over 17 percent in 1984.35 The very high female and youth rates of unemployment have reflected the increasing polarization of labor market conditions in Spain. Perhaps nothing underscores better the segmented nature of the Spanish labor market than the fact that it is characterized by both the highest average duration of employment and one of the highest proportions of long-term unemployed in total unemployment in the OECD.

Nearly 50 percent of the overall increase in employment in Europe over the mid-1970s and early-1980s can be explained in terms of the growth of part-time employment. The OECD interprets this trend as a labor market response to the increased rigidity of wages. The reduction in the average number of hours worked per employee registered throughout most OECD countries is thought to be directly related to the greater incidence of part-time in total employment. While the number of hours worked per employee has also fallen in Spain over the same period, it is well known that until 1984 the flow of part-time employment was insignificant. Dolado and Malo de Molina (1985) indicate that the ratio of part-time to total employment in Spain was ten times smaller than the average for the EC. The reduction in the number of hours worked in Spain has instead been the result of legal measures that have, over time, shortened the normal length of the working week and of various provisions stemming from the collective wage agreements, which, inter alia, significantly increased labor costs for overtime work. Thus, while in most other European countries wage rigidity had as a counterpart some increased flexibility through recourse to more part-time employment, in Spain wage rigidity was actually accompanied by a drop in the number of hours worked per full-time employee and a concomitant increase in labor costs per hour.

As part of a comprehensive effort to encourage the creation of new employment opportunities, the Spanish authorities have introduced over 1984–85 a variety of legal measures intended to foster greater labor market flexibility. Among these stand out the introduction of fixed-term contracts and part-time employment, the granting of fiscal incentives to reduce firms’ labor costs, such as reductions in the social security contributions paid by employers or the granting of direct subsidies, the reduction in the retirement age at full pension, and a general tendency toward a relaxation of the rules governing layoffs.

The deterioration of labor market conditions in Spain came to a halt in the second half of 1985. Employment, which had fallen uninterruptedly for a number of years, began to recover in the third quarter of the year despite a further drop in employment in agriculture. The recovery in the industrial sector was regarded by the authorities as a particularly significant development given the sector’s steady decline over the previous decade. The process of recovery continued over 1986–87 with employment rising between the first quarter of 1986 and the second quarter of 1987 by 6.3 percent. With the exception of agriculture, for which there was a drop of 5 percent over the same period, employment continued to expand in all sectors and, as in the case of services, which account for over half of total employment, at the particularly high rate of 8.4 percent. That the reduction in the rate of unemployment was small—from 21.9 percent in 1985 to 20.5 percent in 1987–is attributable to a substantial acceleration in the rate of growth of the labor force from 0.8 percent in 1985 to 1.8 percent in 1986 and an estimated 2 percent in 1987, stemming from a strong recovery in the labor force participation rates for females and the young.

The significant improvement in the employment outlook for the young (aged 16 to 24 years) appears to be directly related to the measures taken in recent years to eliminate long standing rigidities in the Spanish labor market. During 1986 alone more than 300,000 positions were created as limited duration contracts rose by 24 percent, part-time contracts by 44 percent, and apprenticeship and training contracts by 51 percent with respect to 1985. All of these types of flexible employment were initially conceived as measures to improve the employment outlook for the young; the statistics suggest a significant measure of success.

Social Security and Pension Reform

Substantial improvements in the level and coverage of social security benefits without commensurate increases in contributions led to a steady deterioration in the financial situation of the social security agencies since the mid-1970s. Pensions, which account for over 60 percent of total social security expenditures, had risen between 1977 and 1985 by nearly 40 percent in real terms. The growth of expenditures along with a marked fall from 95 percent in 1977 to 77 percent in 1985 in the share of total revenue accounted for by contributions led to increased reliance by the system on financing through the budget. Furthermore, demographic changes in the structure of the Spanish labor force and some abuse of the pension schemes had induced, in recent years, a drop in the relationship between the active and the passive populations within the system. From a ratio of 3 to 1 in 1977 it had fallen to about 2 to 1 in 1985 and was, on then prevailing trends, projected to fall further to 1.5 to 1 by 1993.

The unsustainable nature of the imbalances affecting the social security system and the risks they posed for the budget led the Spanish authorities to undertake a comprehensive reform of the pension system in mid-1985. Attempting both to increase the number of contributors and to reduce the number of beneficiaries, the new pension law tightened significantly eligibility requirements by increasing the length of the period required to qualify for a pension from 10 to 15 years of contributions and by raising the coverage of the income on which contributions are paid. The law also made the size of the pension dependent on the average of the wages earned over the last eight years of work instead of the previous two as had been the norm, a practice which had frequently led to the artificial inflation of salaries over this period. These measures are thought to have been instrumental in the increase in the number of contributors and the volume of contributions during 1986, as well as for the stabilization of the ratios of pensioners to contributors and of total expenditures on pensions to contributions. They also contributed to a marked deceleration in the rate of growth of disability pensions from an annual average of 8.5 percent over 1981–84 to 2.5 percent over 1985–86.

Liberalization in the Context of EC Accession

The increasing relative importance of the EC as both Spain’s principal market and supplier underscores the presence of a process of integration that has been in operation in some form or other for well over a decade. As far back as 1970 Spain had signed a Preferential Agreement with the EC as part of which the latter eliminated quantitative restrictions on Spanish industrial exports and substantially reduced tariffs on industrial and agricultural products, while Spain undertook to reduce, over a seven-year period, trade barriers against imports from the Community. This gradual opening up to the EC was given impetus in the late 1970s when formal negotiations got underway with the aim of attaining full membership. Spain’s (and Portugal’s) accession to the Community on January 1, 1986 thus brought to an end several years of detailed and often difficult negotiations dealing with a vast array of issues affecting virtually every sector of the economy. Trade liberalization, capital and labor mobility, industrial and agricultural policy, regional development, financial relations, transport, education, and the law are but a few of the areas in which some direct or indirect impact is anticipated as a result of accession.

Perhaps the most important short-term implication of accession concerns the further opening up of the Spanish economy stemming from the gradual reduction in the level of protection vis-à-vis both the EC and the rest of the world. Tariffs on industrial imports from EC countries had already been reduced by 22 percent by early 1987 and are scheduled to be phased out by 1992, while those against imports from non-EC countries will have been reduced, also by 1992, to the EC’s Common External Tariff. Non-tariff trade barriers between Spain and the EC were eliminated on accession with some quantitative restrictions on certain imports from the Community remaining for a period of four years. Spanish quantitative import restrictions vis-à-vis third countries for products for which the Community does not maintain restrictions were likewise eliminated upon accession. Furthermore, under the terms of the Treaty of Accession, Spain became a party to the various bilateral and multilateral preferential trade agreements which were signed by the Community with third countries and for which the CET was not binding. Thus, for instance, as part of the terms negotiated by the Community under the Lome Convention, Spain abolished, without reciprocal benefits, customs duties on virtually all exports of 65 countries of Africa, the Caribbean, and the Pacific (ACP). It also extended to all other developing countries, under the EC’s system of generalized preferences, zero tariffs on their exports of industrial and semi-finished goods and reduced tariffs on well over 300 processed agricultural products.36

In mid-1985, as part of a policy intended to facilitate Spain’s transition into full membership in the EC, the Spanish authorities undertook a substantial liberalization of the regulations governing foreign direct investments. Before the introduction of these measures, prior administrative authorization was required for foreign investments involving more than 50 percent ownership of those enterprises with capital in excess of Ptas 25 million. Foreign investment in smaller enterprises and where the share of foreign ownership did not exceed 50 percent needed to be declared to the Directorate General of Foreign Transactions, and, in the absence of a reply within a 30-day period, could be taken as approved. The liberalization measures taken in mid-1985 consisted mainly in the extension of the procedures governing investment in small enterprises to all foreign investments, regardless of the size of the enterprise or the extent of foreign participation.37 Largely as a result of this liberalization, inflows of foreign direct investment in 1986 amounted to Ptas 401 billion, a 43 percent increase with respect to the previous year. The share of foreign direct investment originating in EC countries during 1986 rose to 65 percent, a significant increase with respect to the 47 percent registered in 1985. It is thought that traditionally important investors, such as the United States, the Federal Republic of Germany, and other EC partners, will find Spain’s investment climate more attractive as a result of the greater political stability necessarily implied by the forging of closer ties with the rest of Europe.

Direct investments abroad by residents were also liberalized in late 1986, more than two years ahead of the schedule agreed upon in the EC Accession Agreement. Within generous limits, financial institutions and resident individuals are now free to purchase foreign securities in foreign stock markets.38

The introduction of the value-added tax on January 1, 1986 resulted in the elimination of the system of fiscal adjustments at the border, which had sought to offset the effects of indirect taxation on domestically produced goods. Recent studies carried out by the Secretariat of State for Commerce suggested that a number of subsectors of Spanish industry appeared to have received some level of protection through both the tariff structure and higher rates for the special compensatory tax on imports than would have been warranted by the indirect tax burden on domestically produced goods. Frequently, these same subsectors—steel being the most important example—also appeared to have benefited from export subsidies through tax rebates at rates in excess of the levels needed to offset the effect of the turnover and other indirect taxes. Although the elimination of these subsidies has had an adverse short-term impact on key sectors of Spanish industry,39 there is a widespread consensus that in the medium term it could not but enhance competition and lead to a more efficient allocation of resources.