Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Summary of WP/92/78
“Spain: Landmarks in Economic Development, 1939-92” by Erich Spitäller and Michel Galy
The recent success of the Spanish economy is frequently attributed to the benefits from its membership in the European Community (EC) and its participation in the exchange rate mechanism of the European Monetary System. By contrast, this paper takes the view that, to a large extent, Spain’s economic success originated in earlier financial stabilization programs and structural reform and that the benefits from EC membership are best seen as reinforcing the favorable trends already in effect. Most significant were the “orthodox” stabilization and reform program under the auspices of the IMF in 1959, the “heterodox” adjustment program pursued on transition to democracy in 1977, the differences in policy response to the oil crises of the early and late 1970s, and the industrial restructuring accomplished largely in the first half of the 1980s.
The orthodox program, which included calls for the strengthening of financial policies, a devaluation of the peseta, and an opening up of the economy, brought about substantial improvements on the inflation and balance of payments fronts, as well as medium-term output gains. However, reductions in trade barriers and in price controls were limited. The heterodox stabilization program, accompanied as it was by fundamental political reform, combined devaluation of the peseta and monetary tightening with a successful incomes policy made possible by the new social consensus. At the same time, as part of that consensus, social expenditure was increased and, despite improved revenue buoyancy in the wake of a tax reform, fiscal policy remained accommodating. Stabilization under this program induced a sustained decline in inflation and a recovery of the current account. When oil prices increased in 1979-80, the Spanish authorities remained committed to monetary and income restraint, in contrast to the policy response to the 1973 oil crisis, thereby strengthening investment and sustainable output growth over the medium term.
Two main lessons can be drawn from the Spanish experience. First, sound financial policies without fundamental structural reform cannot succeed in bringing about durable price stabilization and sustained growth. Second, a policy mix that associates a restrictive monetary policy and income restraint with a lenient fiscal stance may help mitigate the social costs of restructuring the economy, thereby preserving the social consensus needed to implement the reforms. However, such a policy mix is bound to boost real interest rates, which tends to offset the favorable investment effects of lower labor costs and burden the budget.
On the whole, Spain’s approach to financial stabilization was radical, and its approach to structural reform gradual. The paper concludes that by mid-1980 Spain had largely accomplished the transition to a modern economy, and prospects were favorable for sustainable expansion over the medium term. Against this background, Spain’s subsequent integration into the EC lent further impetus to its progress.