This Selected Issues paper analyzes Spain’s sustainable growth rate. It sheds some light on Spain’s medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The paper suggests Spain is likely to face a long period of moderate growth (about 1½–2 percent) and high unemployment, but policy action—especially that directed toward reducing structural unemployment and raising productivity—could lead to much better outcomes.

Abstract

This Selected Issues paper analyzes Spain’s sustainable growth rate. It sheds some light on Spain’s medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The paper suggests Spain is likely to face a long period of moderate growth (about 1½–2 percent) and high unemployment, but policy action—especially that directed toward reducing structural unemployment and raising productivity—could lead to much better outcomes.

What is Spain’s Sustainable Growth Rate?1

A key question for policy makers is how much can Spain grow over the medium term. The answer to this question will determine what will happen to unemployment, living standards, public debt, and many other critical economic variables. This note attempts to shed some light on medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The note suggests Spain is likely to face a long period of moderate growth (around 1½–2 percent) and high unemployment; but, policy action, especially directed towards reducing structural unemployment and raising productivity, could lead to much better outcomes.

A. Background: Growth and Productivity over Past Decades

1. The Spanish economy expanded at an impressive pace after the 1992–93 recession. It grew by 3½ percent on average between 1995 and 2007. This was the highest and longest growth period since the 1970s and helped Spanish GDP per capita surpass the EU average in the early 2000s. The unemployment rate reached the lowest level (8 percent) in almost 3 decades in 2007—between 1985 and 2007, employment almost doubled with the creation of more than 9 million new jobs. However, per capita growth decelerated significantly in the last decade, in part explained by the crisis, but also due to other factors as discussed below.

A01ufig01

GDP per capita growth was already decelerating during the 2000s

(percent)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: Ameco; INE; and IMF staff estimates.

2. The boom was driven by a surge in population and capital. Using a production function approach to identify the composition of growth shows that the expansion relied heavily on accumulation of factors of production (labor and capital) rather than higher productivity.

A01ufig02

The population surge was driven by migrants

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: INE.
  • Total hours worked expanded at an unprecedented pace, about 3 percent a year in 1995–2007. This was driven by several factors, including a fast growing working age population (in part reflecting large migration inflows) and a rise in the labor force participation rate. The rise in migration was partially driven by the housing boom—almost ¼ of all new jobs were created in the construction/real estate sectors.

  • The capital stock also grew at a robust pace benefiting from easy borrowing conditions. The construction sector played an important role—investment in construction jumped to 22 percent of GDP in 2006–07 from an average of 15 percent in the 1990s)—but, business investment (machinery and equipment) boomed as well in the years prior to the crisis. As a result the capital output ratio reached record high levels (and surpassed EU average of 2.8 in 2007)—indicating declining growth returns from the investment boom.

A01ufig03

Employment growth received a big boost from construction boom

(annual % change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: INE; and IMF staff estimates.
A01ufig04

Capital stock expanded at a faster pace than GDP in the pre-crisis period

(% change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: Ameco; and IMF staff calculations.
A01ufig05

Growth and its components, 1980–2013

(contributions to growth, percentage change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: AMECO; Eurostat; INE; and IMF staff calculations.

3. But the productivity performance was very weak. While the expansion observed in the 1970s was driven to a large extent by productivity gains, this was not the case in the latest boom. Indeed, labor productivity growth has been declining for more than two decades. This trend continued in the 2000s despite significant capital deepening, reflecting very weak total factor productivity.

  • The large expansion of the financial sector and construction likely explain part of the decline in average productivity. Cecchetti and Kharroubi (2013) argue the expansion of the financial sector (and credit booms) hurt total factor productivity growth as they seem to undermine R&D intensive sectors. Related to that, overall productivity performance in the 2000s suffered from the construction boom.

  • But other factors have likely been more relevant. Mora Sanguinetti and Fuentes (2012) argue the expansion of the construction boom does not explain the large difference in productivity relative to other high-income countries—weak productivity growth was widespread across sectors. Several factors seem to be at play, including the inflexible and highly segmented (“dual”) labor market, the large dependence on small firms that tend to have relatively lower productivity (Lopez-Garcia et al., 2007), and limited flexibility in the business environment (e.g. low turnover of firms). Several institutional characteristics appear to hamper productivity growth, including, inefficiencies in the judicial system and business bankruptcy legislation, as well as regulatory barriers (e.g. cost of starting a business, barriers to entry into the retail trade sector).

A01ufig06

Productivity growth has declined sharply over the last decades

(Labor productivity=GDP per hour; yearly average %change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: INE; Eurostat; and IMF staff estimates.
A01ufig07

Labor productivity has been lower and composition worse than international peers, 1995–2007

(% change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: OECD.
A01ufig08

Spain’s competitiveness deteriorated in the 2000s

(Nominal unit labor costs, 2000=100)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: Eurostat.

4. This growth model proved unsustainable and led to a deep recession, made worse by the global financial crisis. The expansionary growth period was sustained by a high degree of private sector leverage, a housing bubble, and accumulation of large external imbalances (the current account deficit reached 10 percent of GDP in 2007) as Spain lost competitiveness. Eventually, the credit/housing bubble burst, external funding dried up, and the economy entered a financial crisis and a double-dip recession lasting 6 years. Credit and house prices fell sharply, about a fifth of all jobs were destroyed, and poverty and inequality rose.

B. Potential (or Sustainable) Output Growth Has Declined Sharply in Recent Years

5. The crisis has led to a substantial decline in potential output growth. While it is always difficult to estimate potential output (especially in the aftermath of a deep crisis), there is evidence that potential growth has fallen sharply. After hovering around 3 percent in 1995–2007, potential growth is estimated to have fallen to somewhere between 0.4 percent (OECD) and -½ percent (EC) in 2013. Some of the reasons are directly linked to the crisis and may be reversed in the short-term to some degree, but others reflect structural weaknesses that are likely to have long-lasting effects.

A01ufig09

Potential output growth

(percent)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: Ameco; OECD; and IMF staff estimates.
A01ufig10

Population is expected to decline over the next years

(Index, 2014=100)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: INE.
  • Demographics turned negative. After expanding at a fast pace until 2007, population growth slowed significantly and turned negative in 2012. This is likely to be a new trend, as INE projects working-age population to continue to decline over the next years.

  • Capital deepening has decelerated significantly as investment collapsed during the crisis. While there has been a recent rebound in business investment (from very depressed levels), construction continues to decline.

  • The NAIRU has increased substantially. It is particularly challenging to estimate the level of structural unemployment in Spain given the wide and long unemployment cycles.2 Still, the evidence suggests the NAIRU, after declining in the 2000s, increased significantly in recent years—partly reflecting the lack of flexibility in responding to the crisis. Both the EC and OECD estimate the (short-term) NAIRU to be around 20 percent, which seems plausible given the very large increase in long-term unemployment (which rose from 1 percent in 2007 to 16 percent in 2013). At the same time, the EC estimates the long-term structural unemployment to likely be around a still high 16 percent (unemployment averaged 17 percent since 1980).

  • There has been some improvement in productivity, but to a large extent seems to reflect cyclical factors, namely the large labor shedding in some of the most affected sectors (construction and real estate services)—and not a substantive, long-lasting, improvement (Mora Sanguinetti and Fuentes, 2012; and Maroto-Sanchez and Cuadrado-Rouda, 2013). Latest data already shows signs productivity is slowing (as employment stops falling).

A01ufig11

Unemployment and credit gap

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: Bank of Spain; INE; and IMF staff estimates.
A01ufig12

Labor productivity increased during crisis reflecting the large job losses

(average annual growth, %)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: INE; and IMF staff estimates.

6. However, traditional approaches may be underestimating the effect of other factors, namely credit and housing prices, on the sustainable level of output and unemployment. The estimates of potential output discussed above are based on the traditional production function approach and tend to rely on a Phillips curve to estimate the NAIRU and potential output. However, these methods have been particularly unreliable (as per discussion above). In particular, growth could be based on accumulation of large imbalances, while CPI inflation remains under control. This was particularly the case with the credit boom in Spain. Unemployment cycles have been closely associated with credit cycles—periods of excess credit relative to historical averages tend to be associated with (unsustainably) low unemployment rates—which may have led to overestimating the sustainable level of unemployment and growth during the last boom. It also suggests the level of sustainable unemployment is well above the levels observed in the mid-2000s and possibly closer to 20 percent in the near term.

7. Alternative approaches indicate a larger output gap at the height of the boom, but confirm sustainable/potential output growth has declined with the crisis. While these approaches are still being developed and the results should be taken with some caution, they provide a useful complement to the analysis above. They suggest the traditional approaches underestimated how much the economy was growing above sustainable levels in the mid-2000s.

Assessment of Output gap for Spain

article image
Sources: Ameco; EC; and OECD Outlook.
  • Borio et al. (2013) estimate a “finance-neutral” measure of potential output, by taking into account financial factors that influence economic cycles (namely credit and property prices). The results suggest the positive output gap during the boom was larger than estimated by production function approaches—reflecting the fact credit (and house prices) was well above sustainable levels. At the same time, the analysis suggests the output gap in 2011 (around minus 2 percent) was smaller than other estimates, indicating that potential output grew at a slower pace than for example EC estimates.

  • Alberola, Estrada, Santabarbara (2013) estimate sustainable output growth defined as the output growth that does not generate or widen macroeconomic imbalances, identified through a wide set of domestic and external indicators (e.g. prices, current account, housing, debt). From 2000 to 2007, the sustainable growth rate was much lower than actual (around 2½–3 percent, as severe imbalances were building up), with the output gap reaching plus 6 percent in 2007. However, after the crisis, the correction of the imbalances meant that the decline in sustainable growth was far lower than that in potential growth. The output gap is also larger (negative) as sustainable output growth does not fall as much—sustainable output growth is estimated at slightly below 1½ percent in 2011.3

C. International Growth Experience Following Financial Crises

8. Countries tend to face deeper recessions and weaker recoveries after financial crisis and credit booms. The aftermath of financial crises are associated with deeper and more prolonged contractions, and the severity of these tends to be correlated with the size of the credit boom in the run up to the crisis (Jorda et al., 2012). Countries that experienced a credit boom and financial crisis, such as Spain, have a very high probability of facing a creditless recovery (Abiad et al., 2011), which tends to be weaker (studies suggest growth is about ⅓ lower in the first years than in normal recoveries). In particular, the fall in investment tends to be much larger and has a disproportionally lower contribution to growth than in “normal” recoveries.4 Darvas (2013), however, notes that the incidence of creditless recoveries is much lower in high-income economies (which may be more dependent on credit) and exchange rate depreciation seems to play an important role to sustain growth.

9. The international experience also suggests that while per capita GDP growth tends to eventually return to pre-crisis levels, there is a permanent loss of output (WEO, 2009; Cerra and Saxena, 2008). Some of the main findings in the literature on prospects for medium-term growth following financial crisis:

  • Output growth tends to be depressed substantially and persistently following banking crises. Studies suggest financial crisis can permanently reduce potential output by 1.5-4 percent (e.g. Furceri and Mourougane, 2009). Per capita growth does, however, eventually return to its pre-crisis rate for most economies.

  • The weaker performance results from long-lasting reductions of the employment rate, the capital-to-labor ratio, and total factor productivity. The level of total factor productivity recovers somewhat to its pre-crisis trend over the medium term, although there is wide diversity across countries. In contrast, capital and employment suffer enduring losses relative to trend (e.g. Hobza et al., 2009, find that employment does not recover even after 10 years in the countries analyzed).

  • Some economies succeed in avoiding the medium-term output loss. The evidence suggests that economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn after a crisis tend to have smaller output losses over the medium run. There is also evidence that structural reform efforts are associated with better medium-term outcomes.

  • In addition, a favorable external environment is generally associated with smaller medium-term output losses. Haugh, Ollivaud, and Turner (2009) note the importance of depreciated currencies to help the recovery.

10. The cases of Sweden and Japan illustrate two possible and very different paths after financial crisis and provide some additional insight on the challenges to Spain.

  • Japan. Japan never fully recovered from the financial sector problems and bursting of asset bubbles in 1992. It faced a balance sheet recession, with private demand falling as the private sector increased dramatically its savings during the deleveraging process (Koo, 2011). Potential output growth fell to less than half the 3½ percent average the decade before (Hobza et al., 2009). The loss in potential output was initially due to a drop in investment—leading to lower labor productivity (due to both weaker capital deepening and lower TFP growth); but over time adverse demographics become an even more key factor. Hoshi and Kashyap (2013) argue the long stagnation after the crisis partially reflects the lack of decisive policy action to recapitalize banks and not recognizing that major structural reforms were needed to support growth (and not just short-run stimulus policies).

  • Sweden. Sweden managed to quickly recover from a deep recession in early 1990s. While potential output fell in the immediate aftermath of the crisis, it rebounded in the years after, thanks to a significant increase in labor productivity (reflecting higher TFP and capital deepening). This compensated the negative impact due to a higher NAIRU and lower participation rate (partly reflecting a rigid labor market). Sweden benefited from a significant nominal depreciation in late 1992 and supportive policies (including a gradual fiscal tightening) to help boost the creditless recovery—credit only returned 3 years after the start of the recovery. Sweden managed to raise productivity growth over the long term also thanks to major structural reforms over the years (tax reform including broadening the tax base, pensions, labor market, fiscal, reforms to reduce excessive regulation and increase competitiveness, including liberalization of professional services).

A01ufig13

Japan’s output per capita growth never recovered

(Output per capita, log scale)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: WEO (2009).
A01ufig14

Potential output growth declined in Japan, while it rebounded in Sweden after the crisis

(average growth 10 years before and after the 1992 banking crisis in Japan and the 1991 recession in Sweden)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: DG-ECFIN (Occasional paper 49, June 2009).
A01ufig15

Sweden’s output per capita growth accelerated, but did not recover fully from crisis

(Output per capita, log scale)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: WEO (2009).

11. The international experience thus suggests Spain faces modest medium-to long-term growth prospects. The severity of downturn, size of credit boom, and limited policy space (fiscal, monetary, exchange rate) all indicate Spain faces a more modest, creditless, recovery than in the past. Even returning to the pre-crisis productivity growth trend, as cross-country experience suggests, would still imply weak growth prospects given the subpar productivity performance in recent decades. The international experience also suggests that aggressive macro and structural policies could significantly improve Spain’s prospects (e.g. Sweden).

A01ufig16

Debt of Non-financial Corporations, 1995–2007

(change, % GDP)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: OECD.
A01ufig17

Household Debt, 1995–2007

(% disposable income)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: OECD.

D. Looking Forward: How Much Can Spain Grow over the Medium-to Long-Term?

12. Potential (or sustainable) output growth is expected to be significantly lower than in the pre-crisis period over the medium/longer term. As discussed above, the crisis has led to a significant deterioration in potential growth and such dynamics are likely to persist for some time. Staff estimates that potential growth will gradually rise but remain modest over the medium term, around 1 percent (Table 1)—this is similar to projections by OECD for Spain and IMF staff projections for potential output growth for the Euro area (around 1 percent over 2014–19)—as:

  • Capital deepening is likely to continue at a moderate pace. While business investment is rebounding based on higher corporate margins, other types of capital (e.g. construction) will likely remain weak due to fiscal consolidation, tight credit conditions, and the continued housing sector adjustment.

  • Labor dynamics will make a much weaker contribution to potential output. Demographics will be a drag on growth due to declining working-age population (emigration and ageing). The Spanish statistical agency (INE) expects working-age population to fall by 1 percent a year over the medium term. Still, staff projections assume some compensation will come from further rises in labor force participation to levels somewhat above euro area average, but still lower than some other countries (e.g. UK, Portugal). The short-term NAIRU (the one more relevant for policy) is expected to remain high, though declining, over the coming years, reflecting rigidities in the labor market and high long-term unemployment.

  • Labor productivity will be constrained by the slower capital deepening, but also by the weak total factor productivity (TFP). Staff assumes TFP growth to be close to the 1990s average (and above the 2000s)—the expectation is that ongoing reforms, and less dependence on construction, will contribute to increase productivity even as the unemployed return to work.5

Table 1.

Path for Potential Output Growth Components 1/

(Percent change)

article image
Sources: AMECO; INE; and IMF staff estimates.

Output-labor elasticity assumed to be 0.65 and output-capital elasticity assumed to be 0.35.

Working-age population refers to population 16–65 years of age. Projections as published by INE.

13. Given the structural impediments and need to resolve the legacies from the crisis, a moderate recovery seems the most likely scenario. Staff projections over the medium-term of growth around 1½–2 percent, will allow to gradually close most of the output gap by end of the decade. However, it implies a pace slower than recoveries from past recessions—e.g. after both the early-1980s and early-1990s recessions growth quickly rebounded to rates around 3–4 percent (see also Box 1). A key issue is that aggregate demand is constrained: unemployment is very high, the private sector is deleveraging, fiscal consolidation needs to continue for many years (given need to reduce public debt), and Spain does not have an independent monetary policy or currency.

14. There is a significant degree of uncertainty around long-term projections. Staff’s baseline already assumes a stronger path than what international experience suggests—i.e., per capita growth would be expected to return to pre-crisis trend. In particular, GDP per capita was already slowing during the years preceding the crisis to around 1¾ percent. Taking INE’s population projections, this would translate in yearly GDP growth just above 1¼ percent over the medium term—while staff assumes 1½–2 percent. The baseline assumes stronger pace of growth reflecting the process of closing a very large output gap and the pay-off from the reform process. Still there are upside and downside risks to the baseline:

  • Population dynamics may prove better than projected by INE. In particular, population tends to be procyclical (and so do projections), as migration flows respond to the state of the economy. For example, if the fall in working-age population was half of projected, potential would be higher by about ⅓ percent a year. However, given ageing dynamics, high unemployment, and a much smaller construction sector (a driver of immigration) it is difficult to envisage a positive contribution from demographics over the medium term.

  • Total factor productivity could prove stronger than projected. While staff assumes that Spain will be able to partially reverse the decades-long deterioration in productivity growth, further efforts could lead to even higher productivity—however, as shown by international experience, it would likely require significant reforms.

  • An alternative scenario, where reforms (say by further liberalizing product markets and professional services, Box 2) are implemented increasing TFP growth to double the trend in the 1990s, would raise potential output by about ½ percent a year. Under such a scenario, GDP would be about 3 percent higher in 2019 than in the baseline and unemployment would be close to 16 percent (rather than 19 percent).

  • On the downside, TFP growth could return to the 2000s sub-par growth, implying GDP growth below 1½ percent over the period and higher unemployment.

A01ufig18

GDP per capita is projected to grow above pre-crisis average

(GDP per capita, %change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: INE; IMF staff projections.
A01ufig19

GDP over medium term

(Index, 2013 = 100)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: IMF staff projections.
A01ufig20

Unemployment rate over medium term

(%)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Source: IMF staff projections.

15. An ambitious reform program could double potential growth over the medium term. Under a reform scenario (chart above) where the NAIRU falls to 14 percent by 2019 and TFP grows at a faster pace, yearly potential growth would be 1 percentage point higher than staff’s baseline (although the effect of the lower NAIRU would eventually die down). To achieve such gains (or even higher) it would require an aggressive implementation of planned reforms, but also a broader national effort to make the Spanish economy more competitive and increase its GDP per capita above EU/OECD averages. While there has been progress, recovering the lost productivity (and raising per capita income levels to OECD/European standards) will demand converging towards the best performers on many areas: business and regulatory environment, labor market, education, among others.6 Andres and Domenech (2014) also stress the need for structural reforms, improve human and technological capital, and improve economic institutions in Spain. Dustman, Fitzenberger, Schonberg, and Spitz-Oener (2014) note that in Germany, such a positive outcome required a much more flexible labor market and improvements in productivity across both tradable and non-tradable sectors.

A01ufig21

GDP per capita remains below OECD average due to weak productivity performance

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: OECD; and IMF staff estimates.

E. Policy Implications

16. Policies need to be directed not only to strengthen the cyclical recovery, but also to raise potential output and reduce structural unemployment. As indicated by international experience, the recovery from a financial crisis (and credit boom) is likely to be modest, especially if the room for policy stimulus is small (as it is in Spain). Both fiscal (gradual adjustment) and monetary (at European level) policies will need to remain as supportive as possible to protect the recovery and avoid more long-lasting negative effects (e.g. hysteresis from long-term unemployment). At the same time, international experience also shows that ambitious structural reforms can prevent a long period of low growth.

Can Spain Grow Without Credit? An Historical Perspective

Credit to the private sector is falling sharply and is not expected to grow until 2016. Spain’s experience with (real) credit contractions suggests the economy can still grow, but slowly.

Since 1980, credit and output have been highly correlated. While there have been episodes of “creditless” growth, these were accompanied by a weak real effective exchange rate (REER) and little or no drag from fiscal consolidation—neither of which will apply in the next few years. Looking at the three episodes of real credit contraction:

1983–85: real credit fell about 3 percent a year and growth averaged almost 2 percent. The REER fell sharply in 1982 and 1983 and was well below its historical average during this period. The fiscal deficit widened.

1992–94: real credit fell about 1 percent a year and growth averaged ½ percent. The REER fell sharply following the 1992–93 ERM crisis to well below its historical average. The fiscal deficit widened.

2009–13: real credit fell about 7 percent a year and growth averaged -1½ percent. The REER weakened slightly but remained above its historical average. The fiscal deficit also widened over this period, though with a sharp deterioration in 2009 and gradual consolidation since.

A01ufig22

Spain: Real Credit vs. Real GDP, 1981–2013

(percent change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: BIS, WEO; and IMF staff calculations.
A01ufig23

Spain: Output, Fiscal balance and REER

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: BIS; WEO; IMF staff projections.

There Is Room to Further Liberalize Professional Services

Professional services are often highly regulated, although there is great diversity across countries. Some (Scandinavian countries, UK, and Switzerland) have already achieved low levels of regulation. Others, including Spain and Germany, have made important progress but remain far more restrictive than the more liberalized economies.

A01ufig24

Professional Services: Change in regulations over last 10 years

(decrease=less restrictive; increase=more restrictive, 2013 versus 2003)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: OECD, IMF staff estimates
A01ufig25

Professional Services regulation

(Index scale of 0–6, with 0 being the least restrictive; 2013)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A001

Sources: OECD

Spain has made important strides towards improving business environment and increase competition, but still lags the best performers. Over the decades, Spain has opened up markets to more competition including in the context of the EC services directive. However, it still lags in several areas—e.g., the range of professional services that have specific qualification requirements is unusually large and in some professions regulations remain more restrictive than the OECD average (engineers and architects) and in others more restrictive than best performers (accounting and legal services). The World Bank’s Doing Business indicators also confirm that Spain continues to lag the best performers in some key dimensions—e.g. the cost of start a business remains one of the highest in the European Union despite important progress (Monteagudo, Rutkowski, and Lorenzani, 2012).

The evidence suggests excessive regulation hurts growth. While some degree of regulation is justifiable (e.g., safety standards), regulation restricts competition, thus raising markups in the rest of the economy and reducing the quality of services. The literature suggests that regulatory reform of product and service markets raises investment, productivity, and jobs—the positive spillovers for other sectors of the economy can be substantial (this is particularly important as Spain needs to improve competitiveness). Some countries have achieved significant liberalization and improvements in productivity. For example, Sweden adopted wide-ranging structural reforms including product market reform and deregulation of services, which helped boost productivity and growth—Sweden now has the least restrictive professional services regulations in the OECD. During the 1990s, the Netherlands greatly increased competition in product markets, including a new competition law. Many professional services were liberalized, including accountants, realtors, notaries, and lawyers (all inputs into business costs). Coinciding with these reforms, productivity growth improved in services.

References

  • Abiad, A., G. Dell’Ariccia, and B. Lin, 2011, “Creditless Recoveries,IMF Working Paper 11/58 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Alberola, E., A. Estrada, and D. Santabárbara, 2013, “Growth Beyond Imbalances. Sustainable Growth Rates and Output Gap Reassessment,Documento de Trabajo N. 1313 (Madrid: Banco de Espana).

    • Search Google Scholar
    • Export Citation
  • Andres, J., and R. Domenech, 2014, “Los retors a largo plazo de la economía española,BBVA research.

  • Borio, C., P. Disyatat, and M. Juselius, 2013, “Rethinking Potential Output: Embedding Information About the Financial Cycle,BIS Working Papers No. 404 (Basel: Bank for International Settlements).

    • Search Google Scholar
    • Export Citation
  • Cerra, V. and S. W. Saxena, 2008, “Growth Dynamics: The Myth of Economic Recovery,American Economic Review Vol. 98, pp. 43957.

  • Darvas, Zsolt, 2013, “Can Europe Recover Without Credit?,Bruegel Policy Contribution, Issue 2013/03.

  • Dustmann, C., B. Fitzenberger, U. Schonberg, and A. Spitz-Oener, 2014, “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy,Discussion Paper Series N. 06/14 (London: Centre for Research and Analysis of Migration).

    • Search Google Scholar
    • Export Citation
  • European Commission (DG-ECFIN), 2014, Quarterly Report on the Euro Area, Volume 13 No 1.

  • Furceri, D. and A. Mourougane, 2009, “The Effect of Financial Crises on Potential Output: New Empirical Evidence from OECD Countries,OECD Economics Department Working Paper No. 699 (Paris: Organization for Economic Co-operation and Development).

    • Search Google Scholar
    • Export Citation
  • Haugh, D., P. Ollivaud, and D. Turner, 2009, “The Macroeconomic Consequences of Banking Crisis in OECD Countries,OECD Economics Department Working Paper No. 683 (Paris: Organization for Economic Co-operation and Development).

    • Search Google Scholar
    • Export Citation
  • Hobza, A., K. Mc Morrow, and G. Mourre (editors), 2009, “Impact of the Current Economic and Financial Crisis on Potential Output,Occasional Papers 49 (Brussels: Directorate-General for Economic and Financial Affairs, European Commission).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2009, “What’s the Damage? Medium-Term Output Dynamics after Financial Crises,” in World Economic Outlook (Washington, October).

    • Search Google Scholar
    • Export Citation
  • Jorda, O, M. Schularick, and A. Taylor, 2012, “When Credit Bites Back: Leverage, Business Cycles, and Crises,Working Paper 2011–27 (San Francisco: Federal Reserve Bank of San Francisco).

    • Search Google Scholar
    • Export Citation
  • Koo, Richard, 2011, “The World in Balance Sheet Recession: Causes, Cure, and Politics”, Real-World Economics Review, Issue no. 58, 12 December 2011, pp.1937

    • Search Google Scholar
    • Export Citation
  • López-García, P., Puente, S. and A. L. Gómez, 2007, “Firm Productivity Dynamics in Spain,Documento de trabajo No. 0739 (Madrid: Bank of Spain).

    • Search Google Scholar
    • Export Citation
  • Mora Sanguinetti, J. S. and A. Fuentes, 2012, “An Analysis of Productivity Performance in Spain Before and During the Crisis: Exploring the Role of Institutions,OECD Economics Department Working Papers No. 973683 (Paris: Organization for Economic Co-operation and Development).

    • Search Google Scholar
    • Export Citation
1

Prepared by Paulo Medas (EUR).

2

Several studies have noted the difficulty in estimating robust measures of the NAIRU, especially based on the relation with inflation. Partially this reflects structural changes over the past decades, including the significant reduction in inflation, the entry in the Euro area, as well as the effect of migration. A study by the European Commission (2014) also recently noted the estimates for the NAWRU using the Phillips curve approach are highly sensitive to specifications for Spain (much less so for other countries).

3

The key difference is that the Alberola et al (2013) approach has a more stable equilibrium unemployment (vis-à-vis the NAIRU)—according to the sustainable growth methodology, fell from 15.9 percent in 1993 to 14.2 percent in 2004 and then rose to 17.1 percent in 2011.

4

A high pre-crisis investment share of GDP is a reliable predictor of high medium-term output losses, because of its correlation with the dynamics of capital after the crisis (WEO, 2009).

5

Spain’s productivity tends to be countercyclical, contrary to other economies. As such, productivity growth would likely fall as the economy recovers, after rebounding during the crisis. Nevertheless, the projections assume that the reforms will help sustain trend TFP growth around the 1990s average.

6

Several indicators and studies from OECD (product and services regulation, education, labor market regulations), World Bank’s Doing Business, and International competitiveness show that Spain’s lags the best performers, most competitive economies in Europe and OECD.

Spain: Selected Issues
Author: International Monetary Fund. European Dept.
  • View in gallery

    GDP per capita growth was already decelerating during the 2000s

    (percent)

  • View in gallery

    The population surge was driven by migrants

  • View in gallery

    Employment growth received a big boost from construction boom

    (annual % change)

  • View in gallery

    Capital stock expanded at a faster pace than GDP in the pre-crisis period

    (% change)

  • View in gallery

    Growth and its components, 1980–2013

    (contributions to growth, percentage change)

  • View in gallery

    Productivity growth has declined sharply over the last decades

    (Labor productivity=GDP per hour; yearly average %change)

  • View in gallery

    Labor productivity has been lower and composition worse than international peers, 1995–2007

    (% change)

  • View in gallery

    Spain’s competitiveness deteriorated in the 2000s

    (Nominal unit labor costs, 2000=100)

  • View in gallery

    Potential output growth

    (percent)

  • View in gallery

    Population is expected to decline over the next years

    (Index, 2014=100)

  • View in gallery

    Unemployment and credit gap

  • View in gallery

    Labor productivity increased during crisis reflecting the large job losses

    (average annual growth, %)

  • View in gallery

    Japan’s output per capita growth never recovered

    (Output per capita, log scale)

  • View in gallery

    Potential output growth declined in Japan, while it rebounded in Sweden after the crisis

    (average growth 10 years before and after the 1992 banking crisis in Japan and the 1991 recession in Sweden)

  • View in gallery

    Sweden’s output per capita growth accelerated, but did not recover fully from crisis

    (Output per capita, log scale)

  • View in gallery

    Debt of Non-financial Corporations, 1995–2007

    (change, % GDP)

  • View in gallery

    Household Debt, 1995–2007

    (% disposable income)

  • View in gallery

    GDP per capita is projected to grow above pre-crisis average

    (GDP per capita, %change)

  • View in gallery

    GDP over medium term

    (Index, 2013 = 100)

  • View in gallery

    Unemployment rate over medium term

    (%)

  • View in gallery

    GDP per capita remains below OECD average due to weak productivity performance

  • View in gallery

    Spain: Real Credit vs. Real GDP, 1981–2013

    (percent change)

  • View in gallery

    Spain: Output, Fiscal balance and REER

  • View in gallery

    Professional Services: Change in regulations over last 10 years

    (decrease=less restrictive; increase=more restrictive, 2013 versus 2003)

  • View in gallery

    Professional Services regulation

    (Index scale of 0–6, with 0 being the least restrictive; 2013)