Spain: A Modern European Economy (Modern Economic and Social History)

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Spain: A Modern European Economy

Modern Economic and Social History Series General Editor: Derek H. Aldcroft Titles in this series include: The Skilled Compositor, 1850–1914 An Aristocrat Among Working Men Patrick Duffy Wheels and Deals The Automotive Industry in Twentieth-Century Australia Robert Conlon and John Perkins Railways in Britain and the United States, 1830–1940 Studies in Economic and Business History Geoffrey Channon Lancashire Cotton Operatives and Work, 1900–1950 A Social History of Lancashire Cotton Operatives in the Twentieth Century Alan Fowler Technology, Industrial Conflict and the Development of Technical Education in 19th-Century England Bernard Cronin Merchants and Migrations Germans and Americans in Connection, 1776–1835 Sam A. Mustafa The Myth of Mr Butskell The Politics of British Economic Policy, 1950–55 Scott Kelly The Rise of Management Consulting in Britain Michael Ferguson Industrial Clusters and Regional Business Networks in England, 1750–1970 Edited by John F. Wilson and Andrew Popp Business Structure, Business Culture and the Industrial District The Potteries, c. 1850–1914 Andrew Popp

Spain: A Modern European Economy JOSEPH HARRISON and DAVID CORKILL

© Joseph Harrison and David Corkill All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form of by anymeans, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publisher. Joseph Harrison and David Corkill have asserted their moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the authors of this work. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hampshire GU11 3HR England

Ashgate Publishing Company Suite 420 101 Cherry Street Burlington Vermont 05401–4405 USA

Ashgate website: http://ashgate.com British Library Cataloguing in Publication Data Harrison, R. J. (Robert Joseph), 1944– Spain: A Modern European Economy. – (Modern Economic and Social History). 1. Spain—Economic conditions—20th century. 2. Spain—Economic policy— 20th century. I. Title. II. Corkill, David. 330.9’46’08 Library of Congress Cataloging in Publication Data Harrison, Joseph, 1944– Spain: A Modern European Economy / R.J. Harrison and David Corkill. p. cm. – (Modern Economic and Social History) Includes bibliographical references and index. 1. Spain—Economic conditions—1975– . I. Corkill, David. II. Title. III. Series. HC385.H334 2004 330.946–dc22 2003064701 ISBN 0 7546 0145 5 Typeset by Bournemouth Colour Press, Parkstone, Poole, Dorset. Printed and bound in Great Britain by MPG Books Ltd, Bodmin.

Contents List of tables General editor’s preface Preface List of abbreviations 1 The bumpy road to EMU

vi viii ix xiii 1

2 Demography

23

3 Agriculture

47

4 Industry

71

5 The services sector

98

6 The external sector: trade and foreign investment

124

7 The employment crisis and the labour market

144

8 European integration and the Spanish regions

170

Bibliography

199

Index

231

List of tables 2.1 2.2 2.3 2.4 2.5

Evolution of the Spanish population in the twentieth century 24 Fertility rates in Spain in the twentieth century 26 Mortality in twentieth-century Spain 31 External migration, 1901–60 35 Population movement between Spain and Western Europe, 1960–73 36 2.6 Internal migration in Spain, 1961–94 43 3.1 The decline of the agricultural sector, 1964–2000 54 3.2 The mechanization of farms by size of holding, 1962–82 56 3.3 Distribution of total land surface by size of holding, 1962–89 57 3.4 Number of farms by size, according to the 1989 Agricultural Census 58 3.5 The effects of concentración parcelaria, 1962–89 61 3.6 The level of cover of foreign trade in agricultural products, 1964–85 64 3.7 Spain’s foreign trade in agricultural products, 1986–94 69 4.1 Annual rates of industrial growth in Spain and Europe, 1913–50 72 4.2 Rates of growth of industrial production by sector, 1935–50 74 4.3 The composition of Spain’s gross industrial product, 1960–72 77 4.4 The distribution of majority holdings of foreign investment in Spain, 1960–74 79 4.5 The size of industrial establishments, 1962–75 79 4.6 Added value in European manufacturing industry, 1978–84 82 4.7 Spain’s balance of industrial trade, 1970–85 83 4.8 Gross fixed capital formation in manufacturing industry in Spain and other OECD countries, 1984–88 86 4.9 Foreign direct investment in Spanish manufacturing companies, 1981–90 89 4.10 Primary energy in Spain in 1997 96 5.1 Distribution of GDP, at constant prices, and employment by sector 100 5.2 Total visitor numbers, 1973–2000 101 5.3 World tourism earnings, 2000 102

LIST OF TABLES

5.4 5.5 6.1 7.1 7.2 7.3 8.1

Spain’s big two: BBVA and BSCH compared Europe’s top ten banks by market capitalization Total Spanish FDI abroad, 1975–96 Spain’s unemployment rate, 1965–2002 Labour force distribution, 1975–98 Unemployment: long-term; employment: part-time and temporary, 1990–2000 Spain’s regional GDP compared to EU-15 and EU-27 averages

vii 115 118 135 144 146 155 186

Modern Economic and Social History Series General Editor’s Preface Economic and social history has been a florishing subject of scholarly study during recent decades. Not only has the volume of literature increased enormously but the range of interest in time, space and subject matter has broadened considerably so that today there are many subbranches of the subject which have developed considerable status in their own right. One of the aims of this new series is to encourage the publication of scholarly monographs on any aspect of modern economic and social history. The geographical coverage is world-wide and contributions on non-British themes will be especially welcome. While emphasis will be placed on works embodying original research, it is also intended that the series should provide the opportunity to publish studies of a more general and thematic nature which offer a reappraisal or critical analysis of major issues of debate. Derek H. Aldcroft University of Leicester

Preface Spain has undergone a remarkable economic transformation during the past four decades or so. To the surprise of many, it succeeded in making the leap from a predominantly agricultural-based country, containing only a few isolated pockets which had begun to industrialize, to a modern diversified economy with important manufacturing and service sectors. A latecomer to the process of modernization, Spain is nowadays a major European economy, the world’s eighth industrial power with a per capita GDP gradually converging with European Union average. Its 40 million inhabitants make up roughly 12 per cent of the EU’s population, while the Spanish economy produces 9 per cent of its output. Moreover, the nation boasts some of the continent’s most important industrial and agricultural regions, and includes its leading service industry, tourism. Despite this impressive achievement, not surprisingly, perhaps, old stereotypes persist. The well-known romantic myth, which portrays the Iberian nation as an inflexible, unchanging economy and society, is hard to shake off. Our book does its best to dispel that misleading picaresque image – once carefully nurtured by General Francisco Franco’s tourism authorities – and demonstrate just how rapid and profound economic modernization and structural transformation have been south of the Pyrenees. We have tried to evaluate the main aspects of Spain’s recent economic history, not least following the opening up of the country’s semi-autarkic economy after the 1960s. Inevitably, whenever rapid change occurs, there are both winners and losers. No modernization process is devoid of casualties. In the Spanish case, a real success story has been tempered by the country’s disturbingly high unemployment rate since the late 1970s, occasionally running at double the European average. Catching up with the rest of Europe caused serious upheavals, as well as generating countless opportunities. The decline of traditional agriculture, the contraction of smokestack industries and the challenge posed by opening up to the outside world all contributed to the destruction of hundreds of thousands of jobs as well as the disappearance of familiar landscapes, communities and ways of life. Rapid urbanization brought with it the abandonment of rural communities, as millions of migrants set out to better themselves in the towns and cities of Spain and Western Europe. Yet later, integration into

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Europe secured a market six times larger than Spain, while making it eligible for the transfer of much-needed funds on a scale that could only have been dreamed of previously. This book sets out to fill a gap in the existing literature about one of the most important economies in the European Union. Our aim is to convey some of the latest research findings in a readable and accessible manner. We offer an assessment of how a peripheral and relatively backward economy dealt with such matters as structural change, international competitiveness and convergence with the advanced European core. One advantage of treating Spain as a case study is that it allows for comparisons with other southern European economies or with Spain’s partners in an increasingly integrated Europe, not to mention those states joining an enlarged EU after 2004. When writing on any economy, the first task of any commentator is to offer a coherent framework. We have deliberately chosen a thematic approach in the belief that it allows us to address the key issues associated with rapid, albeit uneven, economic growth and structural change since the late 1950s. Chapter 1 provides readers with a historical overview, outlining Spain’s economic development from the early twentieth century down to the present day. It identifies a number of key turning points, including the impact of the destructive Spanish Civil War, the far-reaching Stabilization Plan of 1959 bought in by Franco’s technocrats, the unprecedented industrial boom of the 1960s and early 1970s, the deep recession of 1975–85 – just as the politicians embarked on a new era of democracy – and finally membership of the European Economic Community in 1986. Chapter 2 examines the country’s main demographic developments. Spain underwent dramatic shifts, from high birth rates and high mortality rates in the first decades of the last century to worryingly low fertility rates and an ageing population since the 1980s. Spain is now the fifth largest EU member in population terms, although it still remains relatively sparsely peopled. Key trends are identified, including a large-scale emigration to Western Europe in the 1960s, contrasting with the country’s growing attractiveness as a ‘new immigration’ centre in more recent times. Thereafter, the three main sectors of the economy – agriculture, industry and services – are each analysed in turn. Chapter 3 assesses the rapidly changing structure of the Spanish countryside. Despite the decline in importance of agriculture, Spain remains a major food exporter and, alongside its southern European neighbours, retains a sizeable farming community. Chapter 4 focuses on manufacturing industry, which underwent massive restructuring in the mid-1980s and has been much altered in recent years by an extensive privatization programme. The burgeoning service sector is discussed in Chapter 5. Services became a key element in Spain’s

PREFACE

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economic growth, making a vital contribution to GDP and employment. All three chapters examine the consequences of closer integration with Europe, along with Spain’s reactions to the competitive forces unleashed by its growing exposure to the global economy. Two vital elements in Spain’s recent economic history (tourism and foreign investment) are considered next. Chapter 6 highlights the transformation of Spain from a leading recipient of foreign direct investment into a major overseas investor. Trade issues, including the changing structure of imports and exports, are also dealt with in this chapter, which examines the country’s shift from autarky and interventionism towards liberalization and the single European market. The dynamics of the labour market – one of the most problematic areas for the Spanish economy – are analysed in Chapter 7. Related issues, such as labour market rigidities, the human capital deficit and the failings of the education and training system are also addressed. Finally, Chapter 8 traces Spain’s growing interdependence with the economies of the European Union. Europe, we argue, played a central role in Spain’s modernization process. Among the issues examined are Spain’s terms of entry in 1986, the impact of the single market and the country’s surprise qualification for the first wave of entry into the euro zone. While monetary union will no doubt help Spain slay some of its bogies (aboveaverage inflation, chronic budgetary deficits, and so on), it may do relatively little to tackle structural weaknesses that continue to plague the Spanish economy, among them low productivity and poor human capital. At this point, our focus switches to the regional dimension, in particular the uneven nature of Spain’s economic transformation as reflected in inequalities between the nineteen autonomous communities and the varying degrees of progress made in the convergence process. It also raises the intriguing question of whether Spain can be treated as a single economic area. Echoing Harold Macmillan’s famous dictum of the late 1950s ‘You’ve never had it so good’, Spain’s prime minister, José María Aznar, confidently declared during his 2000 re-election campaign that ‘España va bien’ (Spain’s doing fine). His opponents accused him of staggering complacency, although the majority of the Spanish electorate voted with their wallets. The voters, it seems, opted for continuity, and not only because living standards were rising. Satisfaction that the country is at the forefront of the European integration process also reflected an overwhelming desire never to be marginalized in the way that Spain had been for successive generations following the final loss of its empire in the New World. It would be no exaggeration to say that the location of the Spanish economy within the European framework lies at the heart of the country’s contemporary identity and aspirations. Now that the

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initial stage of integrating with European norms is almost complete, the emphasis has switched to sustainability and dealing with the problems associated with rapid growth, including rising inequalities, social exclusion, damage to the environment, and so on. The number of people whose ideas and suggestions contributed to the writing of this book is enormous. As well as our departmental colleagues in Manchester, who provided us with a stimulating academic environment, we would like to express our special gratitude to the following individuals for their help and encouragement over the years as we tried to unfathom the workings of the Iberian Peninsula: Rafael Aracil, Sebastian Balfour, Carlos Barciela, Albert Broder, Justin Byrne, William Callahan, Albert Carreras, Santiago Castillo, María-Jesús Cava Mesa, Gérard Chastagneret, William Chislett, Francisco Comín, Antonio Escudero, Eloy Fernández Clemente, Josep Fontana, José Luis García Delgado, José Luis García Ruiz, Ángel García Sanz, Ramon Garrabou, Richard Gillespie, Manuel-Jesús González, Manuel González Portilla, Juan Hernández Andreu, Jordi Maluquer, Pablo Martín Aceña, Pedro Martínez Méndez, José Antonio Miranda, Jordi Nadal, Jordi Palafox, Leandro Prados, Paul Preston, John Reeder, Juan Carlos Rojo, Keith Salmon, Pedro Schwartz, James Simpson, Angel Smith, Carles Sudrià, Pedro Tedde de Lorca, Ignasi Terradas, Gabriel Tortella and Jesús María Valdaliso. Among the librarians who set us on the right tracks were those of the Bank of Spain, Biblioteca Nacional (Madrid), the Biblioteca de Catalunya, the Casa de Velázquez, the Foment del Treball Nacional, the John Rylands Library and Manchester Metropolitan University Library. Our thanks also go to Professor Derek Aldcroft – a longstanding friend of both of us – for urging us to write this book in the first place. Finally, although this work is a collaborative effort, it was based on a clear division of labour. Readers should be aware that the first four chapters were the responsibility of Joseph Harrison, while David Corkill wrote the remaining chapters. Joseph Harrison David Corkill

List of abbreviations AIE BBVA BSCH CAP CC.OO CEOE CiU CMT CSF EAGGF EC ECB EEC EIIR EIRO EMU EPA ERDF ERM ESF ETA EU FCI FDI FUTURES GATT GDP ICEX IMF

Agencia Industrial del Estado (state holding company) Banco Bilbao Vizcaya Argentaria Banco Santander Central Hispano Common Agricultural Policy Comisiones Obreras (Workers’ Commissions) Confederación Española de Organizaciones Empresariales (Spanish employers’ confederation) Convergència i Unió (Catalan regional party) Comisión del Mercado de las Telecomunicaciones (Telecommunications Market Commission) Community Support Framework European Agricultural Guidance and Guarantee Fund European Community European Central Bank European Economic Community European Industrial Relations Review European Industrial Relations Observatory European Monetary Union Encuesta de Población Activa (Survey of Employed Population) European Regional Development Fund Exchange Rate Mechanism European Structural Fund Euskadi Ta Askatasuna European Union Fondo de Compensación Territorial (InterTerritorial Compensation Fund) Foreign direct investment Tourism Competitiveness Programme General Agreement on Tariffs and Trade Gross domestic product Instituto Español de Comercio Exterior (Spanish Foreign Trade Institute) International Monetary Fund

xiv INE INEM INI IRI ISI IT LEADER MECDE MERCOSUR MNC NIC OECD OEEC OPEC PEN PER PICTE PP PSOE PTA R&D SCH SEPI SME UCD UGT UNCTAD WTO YPF ZUR

LIST OF ABBREVIATIONS

Instituto Nacional de Estadística (National Statistics Institute) Instituto Nacional de Empleo (National Employment Institute) Instituto Nacional de Industria (state holding company) Istituto per la Riconstruzione Industriale (Italian state holding company) Import-substitution industrialization Information technology Initiative for Rural Development Ministerio de Educación, Cultura y Deporte (Education, Culture and Sport Ministry) Southern Cone Common Market Multinational corporation Newly industrializing country Organisation for Economic Co-operation and Development Organization for European Economic Co-operation Organization of Petroleum-Exporting Countries Plan Energético Nacional (National Energy Plan) Plan de Empleo Rural (Rural Employment Plan) Plan Integral de Calidad del Turismo Español (Quality Tourism Plan) Partido Popular (People’s Party) Partido Socialista Obrero Español (Spanish Socialist Workers’ Party) Preferential trade agreement Research and development Santander Central Hispano Sociedad Estatal de Participaciones Industriales (State industrial holding company) Small and medium-sized enterprise Unión de Centro Democrático Unión General de Trabajadores (General Workers’ Union) United Nations Conference on Trade and Development World Trade Organization Yacimientos Petrolíferos del Fisco (Argentine oil company, now largely owned by Repsol) Zona de Urgente Reindustrialización (Urgent Reindustrialization Zone)

CHAPTER 1

The bumpy road to EMU Spain entered the twenty-first century with a modern European economy. Over the previous five years the Spanish economy consistently grew at a faster rate than the rest of the European Union. Spaniards from all of the country’s nineteen autonomous communities enjoyed rising living standards. Indeed, the inhabitants of Spain’s most prosperous regions, including Madrid and the Balearic Islands, now belong to the wealthier half of the EU. In January 1999 the country, which not so long ago was dismissed as an agrarian backwater on the southern fringes of the European continent, famous for its lost empire in the New World, its endemic political corruption, civil wars and inwardlooking military dictatorships, became a founder member of the European Monetary Union (EMU). Along with other EMU members, it adopted the euro as its sole currency on 1 January 2002. Spain’s participation in the euro zone followed four decades of intense economic, social and political change. Initially, the main evidence of this change was confined to the economic and social spheres. From the late 1950s onwards, a new generation of economic liberals gradually opened up Spain’s relatively closed economy to the process of globalization (Pamuk and Williamson 2000). At astonishing speed, Spain was transformed from a traditional agricultural society into a broad-based industrial nation and finally a predominantly service economy (Requeijo 1989–90; Myro 1997, 49–72). With its fertile irrigated zones, productive car-assembly plants and crowded tourist beaches, the Spanish economy is today a major success story (Ringrose 1996, 3–4; Juliá 1996). From the mid-1970s, Spain was also engaged in the process of political transformation. To the surprise of many observers, especially outside the Iberian Peninsula, the death of General Francisco Franco in November 1975 set in motion a sequence of events which, in less than a decade, put an end to 36 years of authoritarian rule and saw the consolidation of a remarkably resilient democratic state (Pérez Díaz 1993, 17; Preston 1987). Indeed, so successful was the nation’s progress from dictatorship to democracy under the restored monarchy of King Juan Carlos that political scientists often cite Spain as a paradigm case for subsequent political transitions, above all the dismantling of communism in Eastern Europe after 1989 and the return of democratic

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rule in Chile in the 1990s following the demise of the Pinochet regime (Casanova 1996; Tusell and Soto 1996). For long periods of its modern history, Spain’s economy languished. During the nineteenth century, when other European nations experienced their economic take-offs, Spain provides us with a classic example of economic backwardness. Far from closing the gap on the more advanced capitalist nations north of the Pyrenees, Spain fell further behind (Comín 1995, 78). Recent estimates by Leandro Prados and Jorge Sanz (1996, 355–56), for example, show an acceleration of economic growth after 1850 which they ascribe to the spread of freetrade ideas. However, the return of protectionism after 1891, along with such factors as the country’s failure to adopt the gold standard and its costly colonial wars of 1895–98 (resulting in the loss of the highly lucrative Antilles market) led to a slowing down of growth in the years before the First World War. Despite the appearance of economic nationalism, Spain witnessed a further upsurge in growth between 1913 and 1929. Yet the inter-war depression, the impact of the destructive Spanish Civil War of 1936–39 and the ‘hungry years’ of early Francoism brought a further deceleration, putting paid to any possibility of economic convergence. Moreover, while throughout Western Europe the reconstruction of war-torn economies after 1945 took less than a decade to accomplish, Spain’s post-Civil War recovery remained incomplete until the early 1960s. Although the country’s economic performance during the first two decades of Francoism (1939–59) was disappointing, the introduction of a far-reaching Stabilization and Liberalization Plan in June 1959 is invariably regarded as a major turning point in Spanish economic history (Rubio 1968, 3; Carr and Fusi 1979, 53–54). Above all, the opening up of Spain’s semi-autarkic economy by a number of exogenous factors – foreign trade, inward investment, income from foreign tourism and emigrant remittances – ushered in a delayed industrial spurt. The 1960s boom marked the beginnings of a lengthy and discontinuous phase of catching up between Spain and the European Economic Community (later the European Union) (Comín 1995, 84; Raymond Barra 1995, 517; Requeijo 1998). Throughout the 1960s and early 1970s, Spain experienced unprecedented levels of economic growth that were matched by dramatic changes in its economic and social structure. Approximately 1.5 million landless labourers and peasant smallholders quit the countryside for the burgeoning industrial conurbations, while another 2 million Spaniards migrated northwards in search of a better life in the booming core economies of Western Europe (see below, Chapter 2). During the final two decades of Francoism, the proportion of the

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Spanish population employed on the land fell from 50 to 25 per cent. Thus, a process which took nearly three-quarters of a century to accomplish in neighbouring France was compressed into a single generation south of the Pyrenees (Martínez Serrano et al. 1982, 39; Dehesa 1994, 124; García Delgado 1996, 239). As a late developer whose rapid industrial expansion in the 1960s resulted in a huge dependence on imported oil, Spain felt more sharply than any other Western European nation the international depression of the late 1970s triggered by the decision of OPEC (Organization of Petroleum-Exporting Countries), the oil producers’ cartel, to quadruple the price of crude oil in 1974 and to raise it again in 1979–80. As the country’s inexperienced leadership grappled with a string of outstanding political issues, among them the organization of free elections, the drafting of a democratic constitution and the devolution of power to the regions, the urgent task of readjusting the economy to take account of escalating energy prices was placed on the back burner (Heywood 1995, 37–56; Serrano Sanz 1996, 135–64). Thus, while Spaniards recovered their right to vote or join a trade union, at the same time over a million workers, above all in manufacturing industry, paid a heavy price for the primacy of politics over economics with the loss of their jobs (Pérez Díaz 1999, 108). Coincidental with Spain’s entry into an enlarged European Economic Community in January 1986, the economy embarked upon a new phase of economic growth. Yet, before long, recovery was once more interrupted by a Europe-wide recession exacerbated by the collapse of the Soviet bloc and the effects of German reunification (Viñals 1996a, 423). As a result, the catching-up process, begun in 1959, was again curtailed. In common with other second-ranking economies, Spain displayed a marked tendency to converge with the European average during periods of expansion while diverging at times of recession (Martín 2000, 10). Writing in 1994, José Viñals of the Bank of Spain’s research department questioned whether Spain would ever close the gap on its European partners. In a pamphlet entitled ‘Is convergence in Spain possible?’, Viñals (1994, 21–25) calculated – somewhat pessimistically – that Spain’s per capita GDP, expressed as a percentage of the EU average (at purchasing power parity), was incapable of breaking through a ceiling of around 80 per cent. Viñals shared the belief, commonly held by Spanish economists, that the chief obstacle to real convergence was the inability of the Spanish economy to generate long-term employment in line with increases in productivity (Martín 1995a, 11–15; Dehesa 1997–98, 51–52; Viñals and Jimeno 1997). During the second half of the 1990s, the Spanish economy again grew faster than the majority of its European neighbours. Meanwhile, José

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María Aznar’s centre-right Partido Popular (PP) government, which came to power in March 1996, put full unemployment at the top of its political agenda. Between 1996 and 1999, Spain created as many new jobs as the rest of the European Union put together (Financial Times 2000). Its per capita GDP climbed to 87.8 per cent of the EU average in 2002 (La Caixa 2003, 47). To some extent, the country’s renewed convergence reflected the poor performance of the leading European economies, especially Germany, which were beset by their own economic difficulties. Moreover, convergence did not herald a return to Spain’s spectacular growth performance of the 1960s (Requeijo 1998, 161). A study by Carmela Martín (2000, 10) estimated that it would require another three decades for Spain to reach the average level of European welfare.

The failure of autarky, 1939–59 During the first decade of the Franco dictatorship, dubbed Spain’s ‘lost years’ by its critics, the economy did little more than make good the losses incurred during the destructive Spanish Civil War. The most reliable estimates available of the country’s post-Civil War economic performance by Prados and Sanz (1996, 356) indicate that the Spanish economy stagnated in the 1940s. In the 1950s, however, their findings show a pronounced improvement in the Spain’s economic fortunes, with average yearly growth of 3.8 per cent. The Franco regime – which seized power in April 1939 with the military and financial backing of Hitler’s Germany and Mussolini’s Italy – was supported by a heterogeneous coalition comprising the armed forces, the Catholic Church, the business community, peasant farmers and sections of the middle class. After three years of fratricidal struggle against the democratically elected Second Republic, the triumphalist New State undertook a brutal repression of its defeated enemies, mainly drawn from the urban and rural lower classes. Up to half a million Republicans, among them the flower of Spain’s intellectuals, artists, doctors and scientists, as well as tens of thousands of workers with irreplaceable skills, were forced into exile. Another 200,000 men and women who stayed on in the Peninsula after the cease-fire were executed by Franco’s firing squads, while the same number died of starvation as a result of the harsh treatment meted out by the victors. In his account of this repression, Michael Richards (1998, 10–11) argues that the material well-being, the identity, conscience and ideals of the country’s ‘Reds’ were cruelly sacrificed in the interests of ‘national resurgence’. The purging of former Republican sympathizers from the

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bureaucracy, along with the desire of the victors to reward their loyal supporters, meant that everyday decisions about the management of the economy were entrusted to a coterie of army and navy officers, military engineers and pro-Hitler ‘zealots’ (Hamilton 1943, 104). The newly installed ministers and their civil servants attempted to run the country as if it were a military barracks (Fusi 1985; Velasco 1984, 1988). Dismissive of market forces, the New State’s incompetent authorities paid little or no attention to commodity prices, comparative advantage or opportunity cost. Their prime concerns appear to have been national prestige and technical feasibility (Schwartz and González 1978, 15–37). The dispassionate advice of Spain’s tiny band of professional economists was usually ignored. In the dark days of the 1940s, the Franco dictatorship’s blundering attempts at state intervention and its arbitrary system of rationing gave rise to a society based on privilege, favouritism and corruption. Throughout the Peninsula, a black market, known as the estraperlo, came into operation – often larger than the official market – for a vast array of items including bread, olive oil, medicines, coal, scrap iron and raw cotton (Barciela 1998, 89–90). During the formative years of the New State, the policy-makers pursued the illusory goal of economic self-sufficiency. The main aspect of their strategy was import-substitution industrialization (see below, Chapter 4). From the very start, commercial policy was directed towards the restriction of imports. Rather than following the orthodox practice of raising the level of tariff protection, this was to be achieved through such devices as bilateral trading agreements, quotas on foreign trade, import and export licences, and the imposition of exchange controls. In addition, Spain’s xenophobic authorities imposed severe curbs on muchneeded inward investment (Eguidazu 1978). Spain’s obsession with half-baked schemes for autarky was partly in response to difficulties which the pro-Axis regime encountered in obtaining energy products, raw materials and machinery from the belligerents in the course of the Second World War. Yet it also reflected the fascist ideology of Franco’s New State. Jordi Catalán (1995a, 73) maintains that the Spanish authorities simply copied the autarkic policies of the German Third Reich and fascist Italy. In contrast to the more open economies of Portugal, Sweden, Switzerland and Turkey, which, like Spain, remained neutral or non-belligerent during the conflict, the Franco dictatorship – with its commitment to economic self-sufficiency – was unable to benefit from an unparalleled opportunity to expand its exports and build up the country’s gold and foreign currency reserves. After 1945, due to the undemocratic character of the regime, Spain was excluded from the main post-war initiatives in intra-European and

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transatlantic cooperation. Above all, the country was kept out of the European Recovery Programme (Marshall Aid) and denied membership of the Organization for European Economic Co-operation (OEEC) and the European Payments Union. Isolation imposed considerable costs on the Spanish economy. How did General Francisco Franco’s pariah state survive in this hostile political climate? Traditional interpretations emphasize the massive relief which Spain received from the sympathetic Peronist regime in Argentina during the period 1947–48, and the Pact of Madrid of 1953 which permitted the United States to construct air and naval bases in Spain in return for economic and technical aid (Viñas 1984, 205–37; Rein 1993; Crafts and Toniolo 1996, 24). In contrast, Fernando Guirao (1998) highlights Spain’s commercial relations with Western Europe. Guirao sees the period 1945–57 as a time of transition, when the Franco regime’s autarkic philosophy was gradually dismantled in favour of the new doctrine of development. Francoist Spain’s early drive for industrialization increased rather than diminished the country’s reliance on foreign trade. Spanish industry, he contends, was incapable of substituting domestic production for imports. Without imported raw materials and capital goods, economic activity faced a series of insurmountable bottlenecks. Since foreign aid was ruled out in the late 1940s for largely political reasons, vital inputs for agriculture and manufacturing had to be financed by additional exports, mainly to Western Europe. After the Second World War, Guirao argues, the Spanish economy was viewed by Western European governments as a valuable resource at a time of widespread destruction, starvation and economic dislocation. As a result, the Allies made no serious attempt to topple the discredited Caudillo. Indeed, notwithstanding the decision of the French government in March 1946 to close its Pyrenean frontier indefinitely and the United Nation’s boycott of Spain’s ‘fascist regime’ in December 1946, political ostracism was toned down significantly for economic reasons. Despite the fact that Spain’s foreign trade was comparatively tiny, it still played a significant role when relief and Western European reconstruction had to be carried out with depleted national resources. Purchases from Spain reduced the pressure on imports from the dollar area and saved hard currency for more urgent needs. After 1951, the Spanish economy started to recover the ground it had lost since the 1930s. In 1954, the 1929 level of per capita GDP – its previous peak – was attained. Manuel-Jesús González (1979, 47) argues that even before Spain’s celebrated Stabilization Plan of 1959 the country experienced ‘extraordinary rates of growth with acceptable stability’. In the opinion of José Luis García Delgado (1987, 170–77), the 1950s constitute a ‘hinge’ decade separating the inward-looking

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1940s from the outward-looking 1960s. This belated improvement in Spain’s economic fortunes coincided with Franco’s decision – in the midst of popular protests in the large cities and a deteriorating cold war situation abroad – to reshape his cabinet in July 1951. Among key changes were the appointments of more pragmatic figures, like Rafael Cavestany at the Ministry of Agriculture and Manuel Arburúa at Commerce. In 1953, Spain signed a series of pacts with the United States and a concordat with the Vatican. These agreements were, in principle, conditional on the willingness of Franco’s authoritarian regime to open up the economy and allow a modest degree of pluralism in society. In economic terms, Article 2 of the Defense Support Programme committed the recipient nation to stabilize its currency, establish a realistic exchange rate, balance the budget, eradicate monopolistic practices, stimulate competition and encourage foreign trade. Such fine sentiments were later to inspire the architects of the 1959 Stabilization Plan (Harrison 1991, 109). Yet, in reality, the economic reforms of the early 1950s were little more than a half-hearted attempt at liberalization which soon lost momentum. Cavestany has been praised by some economic historians for permitting agricultural prices to rise in an effort to eradicate the black market for farm products. Even so, his policies still gave excessive protection to inferior goods such as wheat, rice and wine without paying adequate attention to items with increasing demand such as animal and dairy products (see Chapter 3). For his part, Arburúa has been portrayed by his admirers as the originator of a Spanish version of the Soviet NEP (New Economic Policy), struggling to put an end to the prevailing dogma of self-sufficiency (Viñas et al. 1979, II: 849–67). Other scholars, however, while acknowledging the minister’s entrepreneurial flair, stress his indecisiveness and legendary dishonesty. Despite authorizing the allocation of sizeable quantities of foreign currency to purchase raw materials, semi-manufactures and capital equipment for Spanish industry, Arburúa remained firmly committed to the regime’s ultimate goal of import substitution. His conversion to economic liberalism, his critics contend, was merely a ruse in order to obtain a larger slice of American aid (Clavera et al. 1978, 261; González 1979, 102–03; Payne 1987, 465–66). Of greater significance in the long run, the Franco regime’s improved relations with the United States in the 1950s helped undermine what a future Finance Minister referred to as its ‘almost allergic mistrust of any relationship whatsoever with international organizations’ (Navarro Rubio 1991, 108). As farmers and farm labourers were transformed into factory labourers and construction workers, the availability of cheap and abundant supplies of unskilled labour created the preconditions for the

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1960s industrial boom. However, before the Stabilization Plan of 1959, the prospects for Spanish business were far from encouraging. At home, low levels of aggregate demand severely constrained business profits, while the poor quality and lack of competitiveness of Spanish goods held back exports. Equally disturbing for the policy-makers, the level of inflation gathered pace from 1954 onwards, mainly due to a series of public deficits. In April 1956, thousands of factory workers in the Basque Country, Navarre and Barcelona downed tools in protest against the rising living costs. After 1957, Spain was plunged into a balance-ofpayments crisis. As Franco’s autarkic experiment hit the buffers, a bitter dispute raged within the ruling élite between, on the one hand, the defenders of the old politics (inflation and industrialization) and, on the other, the proponents of the new politics (liberalization and stabilization). When Spain’s gold and foreign currency reserves were finally exhausted in the spring of 1959, this argument was resolved in favour the liberalizers (Fuentes Quintana 1993, 16). Confronted with the threat of national bankruptcy, the Caudillo again reshuffled his government. Amongst the cabinet changes of February 1957, out went the old guard of timid reformers and in came a new breed of technocratic modernizers with close ties to the Catholic lay group, Opus Dei. Alberto Ullastres, a professor of Economic History, replaced Arburúa at the Ministry of Commerce, while the Finance portfolio was handed to Mariano Navarro Rubio, a director of the Banco Popular who was married to Miss Spain. The two men, both still in their early forties, joined forces with another member of their association, Laureano López Rodó, already appointed Technical Secretary of the Presidency in December 1956. The technocrats were ably assisted by a brilliant team of professional economists, prominent among them Joan Sardà, head of the research department at the Bank of Spain, and the brains behind the Stabilization Plan, Manuel Varela at the Ministry of Commerce and Juan Antonio Ortiz Gracia at the Finance Ministry (González 1979, 27–35; Fuentes Quintana 1984, 29–30; Varela 1989–90; Estapé 2000, 191–95). The new ministers and their advisers set out, hesitantly at first, along the obstacle-strewn path from autarky to greater openness. Even so, economic liberalization was not accompanied by the slightest move towards democratic government, the acceptance of free trade unions or a more progressive taxation system. Moreover, the decisions which the technocrats took at this stage hardly added up to a coherent set of economic policies. Instead they consisted of a number of isolated initiatives aimed at tackling the most pressing issues. Among the achievements of the so-called pre-stabilization era were a simplification of Spain’s system of multiple exchange rates and the belated devaluation

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of the overvalued peseta. Even so, a plethora of economic controls was maintained and, in many cases, extended. Fortunately, the growing rapprochement between Madrid and Washington permitted the Spanish authorities to become a member of a number of supranational organizations which were to offer financial support to the 1959 Plan. These included the Organization for European Economic Co-operation (OEEC), soon to become the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and the World Bank. In particular, the OEEC and the IMF provided the Spanish authorities with invaluable technical assistance and facilitated the acceptance of new ideas and methods. Indeed, it was pressure from these two bodies which persuaded Navarro Rubio and Ullastres that it was their duty to convince a reluctant Franco that his regime’s very survival necessitated a radical shift in economic policy (González 1979, 134–98; Muns 1986, 19–52; Navarro Rubio 1991, 106–57). The Stabilization and Liberalization Plan of June 1959 had two sets of economic objectives. Internally, it aimed to restore financial stability and restrain inflation. Its second goal was to liberalize foreign trade and encourage inward investment (Sardà 1970, 474–77). Behind these stated goals, however, some commentators argue that the real purpose of the Plan was a continuation of the development process (desarrollismo) along with greater integration into the international economy, starting with Europe (Fuentes Quintana 1993, 8–9). As part of the Plan’s preparations, the Ministry of Finance sent out a questionnaire to leading institutions, among them the Bank of Spain and the Chambers of Commerce, soliciting their views on a number of key topics including a possible application by Spain for full membership of the recently established European Common Market (Fernández Navarrete 1998, 387). The main aspects of the Stabilization Plan, set out in a memorandum which the Spanish government dispatched to the OEEC and the IMF, were the devaluation of the peseta, the introduction of a single exchange rate, a programme of fiscal and monetary restraint, and a liberalization of price controls and trade restrictions (Dehesa 1994, 125). To bring down inflation and balance the budget, the authorities imposed drastic cuts in public-sector borrowing. Direct advances by the Bank of Spain to public institutions such as the Instituto Nacional de Industria (INI) and the state-owned railway network (Renfe) were reduced from 11.1 billion pesetas in 1958 to 3.4 billion in 1959. Taxes on tobacco and petroleum – both state monopolies – were increased. In the short term, more serious damage to business activity resulted from the decision to raise the central bank’s rediscount rate from 5 to 6.5 per cent. The most far-reaching measures concerned Spain’s foreign trade and payments

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system. To tackle the country’s deteriorating balance-of-payments crisis, a single unified exchange rate of 60 pesetas to the US dollar was established – in reality a 30 per cent devaluation of the Spanish currency. Quotas and other restrictions were removed from about one-half of imports from OECD countries. Even so, in the defence of Spain’s backward manufacturing sector, customs duties were raised. Elsewhere, foreigners were permitted to invest in a Spanish company up to one-half of its social capital without having to obtain prior permission from the Council of Ministers, while legislation was brought forward offering guarantees and incentives to outside investors. Among other undertakings, proposed or implied in the Plan, were a revision of Spain’s outdated tariff legislation, measures against restrictive practices, a reform of the tax system and the initiation of long-range economic planning (Anderson 1974, 129–56; Donges 1976, 105–15; González 1979, 199–226; Martí 1989–90). Since the introduction of the Stabilization Plan, the Spanish economy has gone through four main phases: 1 2 3 4

Development, 1959–73 Crisis, 1974–77 Adjustment, 1977–84 Recovery, from 1985.

Economic development, 1959–73 In the short term at least, the Stabilization Plan achieved mixed results. On the positive side, many of the technocrats’ aspirations were soon fulfilled. Spain’s inflation rate tumbled from 12 per cent in 1957–59 to 2.3 per cent in 1959–61, despite the fact that the devaluation of the peseta made imported foodstuffs more expensive. The country’s visible trade deficit also fell, from 7 per cent of GDP in 1957–58 to 3.2 per cent in 1961. Spain even experienced a balance-of-trade surplus in 1960, for the first time since 1951. On the negative side, the Plan created a number of losers. The traumatic shock which it unleashed paralysed economic activity for the next eighteen months. Marginal firms collapsed, while private investment fell as entrepreneurs experienced a sudden crisis of confidence. Industrial output plummeted. Among the worst-affected sectors were textiles, paper and machinery, which were already suffering from a fall in domestic demand. Yet the principal victims of the Stabilization Plan were Spain’s working class, unprotected by democratic trade unions. The number of registered unemployed rose from 74,000 in the third quarter of 1959 to nearly 200,000 at the end

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of 1960. It was largely thanks to unplanned-for developments – not least the take-off of mass tourism along the Spanish costas – that the Plan’s strong medicine did not provoke a major recession (Rubio 1968, 19–20; Donges 1976, 58–64; González 1979, 227). Despite its immediate shortcomings, the 1959 Stabilization Plan provided a genuine stimulus to economic activity. During the second half of 1961, Spain entered a ‘Golden Age’ characterized by rapid growth, mild cyclical variations and socially acceptable inflation, similar to that enjoyed earlier by the core economies of Western Europe (Crafts and Toniolo 1996, 3). Between 1960 and 1973, per capita GDP rose by 7.2 per cent a year and investment by 10.7 per cent a year, while the labour market reached full employment. Within the developed world, only Japan boasted faster and more sustained rates of growth. Yet this expansion was far from evenly distributed across the economy. Industrial production went up by an annual rate of 10.2 per cent, the service sector by 6.7 per cent and agriculture by a mere 2.3 per cent (Fuentes Quintana and Requeijo 1984, 5). A combination of exceptional circumstances – many of them fortuitous – accounted for Spain’s so-called Golden Age. The decision to open up the Spanish economy in 1959 coincided with a prolonged expansion of the global economy. Spanish entrepreneurs benefited from cheap supplies of imported energy and raw materials. New sources of finance made their appearance, including emigrant remittances, earnings from foreign tourism and inward investment. The catching-up process was facilitated by incorporating and adapting the latest technology from abroad. Spain’s industrial boom also took advantage of the availability of huge reserves of non-militant labour in the countryside (Martínez Serrano et al. 1982, 34–43; García Delgado 1990, 149). However, as Jacint Ros Hombravella (1979, 32) concedes, between 1959 and 1963, Spanish economic policy was surprisingly coherent, imaginative and ambitious. Some of the economists associated with the Stabilization Plan even dared hope that before long economic growth would pave the way for enhanced political freedoms. They were to be bitterly disappointed (Lluch 1996, 251). Sadly, the initial impetus for much greater economic liberalization and openness, set in motion by the Stabilization Plan, quickly evaporated. A new tariff, introduced in 1960, was denounced by the economists who had worked on the Plan as avowedly protectionist (Fuentes Quintana 1986, 144–46; Piña González, 1989–90, 137–38). Although Spain joined the General Agreement on Tariffs and Trade (GATT) in 1963, the administration’s only genuine attempt at trade liberalization was a limited preferential agreement with the EEC, known as the Luxembourg Accord, signed in 1970. Moreover, the most salient

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feature of this agreement was a reduction in import duties on Spanish goods into the markets of the ‘Six’ (Martí 1989–90, 71; Fernández Navarrete 1998, 391–94). Interventionist measures remained in force. Labour markets were still as inflexible as ever, while the loudly proclaimed reform of the country’s financial system in 1962 was dismissed by Raimundo Poveda (1975, 35–36) of the Bank of Spain as a type of ‘enlightened financial despotism’. The introduction of indicative planning in 1964 only confirmed the return of interventionism. The Commissioner of the Plan, Laureano López Rodó, who was appointed in 1962, and the new Industry Minister, Gregorio López Bravo, have been described as representatives of a new ruling élite comprising the industrial and financial bourgeoisie (Fuentes Quintana 1993, 23). This second generation of technocrats, which replaced Ullastres and Navarro Rubio, demonstrated little desire to push through full-blown liberal reforms, not least since this course of action might jeopardize the continuation of Spain’s authoritarian regime. Hence, the so-called Men of Development (Hombes del Desarrollo) deliberately ignored the World Bank’s advice for ‘progressive exposure to foreign competitors’ in favour of increased intervention and more discretionary powers (Anderson 1974, 170). In the opinion of Manuel-Jesús González (1979, 321, 346), a state economist who worked on the development plans, their prime objective was to secure a level of growth compatible with prolonging their own tenure in office. By convincing the ageing dictator of the political advantages of their particular mish-mash of economic policies, they would gain power. To this end, he recounts, the Men of Development ‘watered down the pure wine of 1959’. Under a system known as concerted action (acción concertada), López Rodó and López Bravo conceived of Spanish industry as a huge company of which they were the managing directors. Businessmen were invited to compete with one another for official prizes. Indeed, the majority of economists agree that, had Spain persevered with economic liberalization and exposure to market forces, the country would have secured not only faster growth but also lower inflation and greater economic efficiency (Fuentes Quintana 1993, 25–30). Spain’s planning system was, in essence, a poor imitation of French indicative planning then in vogue. The policy-makers were largely oblivious to such matters as how well this model was suited to the peculiar structural problems of the Spanish economy or whether the country’s entrepreneurs would respond to the stimuli offered by the Plans in a similar way to their Gallic counterparts (Tamames 1989–90, 59). Three four-year plans were implemented over the period 1964–75. Their principal objectives were threefold:

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1 Prolonged economic development 2 The promotion of a market economy, including the participation of the public sector 3 Opening up the economy, leading to further integration into the global economy, above all the European Common Market. Social objectives, meanwhile, were relegated to a purely secondary level. All three plans (1964–67, 1968–71, 1972–75) aimed at securing substantial increases in production. They encouraged investment, but at the expense of consumption. Hence industry was assigned a higher priority than agriculture. Apart from the second plan, inflation and a current account deficit were deemed a necessary price to pay for rapid growth (Alsina 1987). Overall, the planners’ ‘stop–go’ policies coincided with an annual increase of 6 per cent in Spanish GDP between 1964 and 1975. However, none of the Planning Commission’s forecasts was borne out by subsequent developments. After 1973, the destabilizing effects of the first oil shock blew the third plan completely off course. Moreover, bearing in mind the favourable international environment before 1973, it seems more than likely that the Spanish economy would have prospered anyway. Although the Men of Development claimed all the credit for Spain’s ‘economic miracle’, their critics point out that the highest rates of growth were achieved in the period 1961–63, that is, before the plans came into operation. Following the implementation of the First Development Plan in 1964, the pace of growth slowed down appreciably. Indeed, there is a general consensus among Spanish economists that the main consequences of the planners’ neointerventionism were unbalanced growth and a closing down of opportunities for economic development (Ros Hombravella 1979, 32; González 1979, 312; Fuentes Quintana 1993, 28–29).

Crisis, 1974–77 During the summer of 1973, the Spanish economy was growing at an annual rate of 8 per cent in real terms. Furthermore, Spain’s gold and foreign currency reserves stood at a healthy $6 billion, while the level of unemployment was a mere 2 per cent. To the policy-makers, the only dark cloud on the horizon was an inflation rate that was running at 12 per cent, more than twice the OECD average. A series of reports published in that year by the Bank of Spain, the Instituto de Estudios Fiscales and the OECD called for the liberalization of Spain’s economic institutions (García Delgado and Serrano Sanz 1990, 3–9). Yet, just as

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the experts diagnosed Spain’s economic problems in terms of institutional imperfections, the Spanish economy was plunged into a profound conjunctural crisis. This crisis had three main components. The first of these was the oilprice shock of 1973. Owing to the Franco regime’s pro-Arab foreign policy, Spain continued to receive oil cheaply until the first quarter of 1974. As time went by, however, the country was unable to resist this supply shock. In that year, the nation’s bill for imported oil more than trebled, from 62 billion pesetas to 199 billion. According to the Bank of Spain, this increase was equivalent to a full 3 per cent drop in national income (García Delgado and Serrano Sanz 1990, 9; García Díez 1998, 406). The effects of the oil shock were exacerbated by a second set of factors due to changes in the structure of international trade which favoured the newly industrializing countries (NICs), especially in the Far East, where labour costs were significantly lower. Spanish producers faced cut-throat competition in such items as textiles, footwear, electrical goods, iron and steel and shipbuilding (see below, Chapter 4). The third component of the crisis was a big increase in real wages between 1974 and 1977, as social groups struggled to maintain their existing income levels (Rojo 1987, 190–200; 2002, 397–435; Serrano Sanz and Costas 1993, 23–24). The response of the Madrid authorities was both belated and wholly inadequate. It was Spain’s misfortune that the economic crisis of the mid-1970s struck at a time of enormous political uncertainty. From the autumn of 1973 to the summer of 1977, the country was governed by a succession of weak and unstable administrations, all lacking in political legitimacy. In just four years, Spain witnessed three prime ministers (Luis Carrero Blanco, Carlos Arias Navarro and Adolfo Suárez) and four finance ministers (Antonio Barrera de Irimo, Rafael Cabello de Alba, Juan Miguel Villar Mir and Eduardo Carriles). In addition, the political authority of the old elites was seriously challenged by a re-emergent civil society (Pérez Díaz 1993). Thus, when energy costs began to climb in the second half of 1974, Barrera de Irimo felt compelled to adopt a so-called ‘compensatory policy’ whereby the full extent of any increase in the price of imported oil was not passed on to consumers. The minister also deluded himself into believing that the oil crisis was merely a transient phenomenon, and that before long OPEC’s monopoly power would be broken by resolute international action. Alas, this process was to take much longer than Spain’s politicians anticipated (García Delgado and Serrano Sanz 1990, 13; Etxezarreta 1991, 37; Fuentes Quintana 1993, 38–39). Overall, during the so-called pre-transition period – that is, before the first democratic elections of June 1977 – the policy-makers pursued an

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economic strategy based on a mixture of mild monetarism along with a moderate dose of fiscal reform, which the future Finance Minister Juan Antonio García Díez (1998, 407) later dismissed as too expansionist. Although generating a period of ephemeral growth, these measures gave rise to rampant inflation, a large budgetary shortfall and an unsustainable current account deficit (García Delgado and Segura 1977, 133–47; Serrano Sanz 1996, 141–46).

Adjustment, 1977–84 In the summer of 1977, Spain’s annual inflation rate broke through the 40 per cent barrier. Over the previous twelve months, hourly wages in the manufacturing sector had risen by 30 per cent before taxation. Innumerable industries were in a state of crisis. Unemployment, while not yet the political issue it was about to become, accounted for 6 per cent of the active labour force. Against such a menacing background, the minority Unión de Centro Democrático (UCD) government of Adolfo Suárez decided upon the need to take resolute action. Above all, Suárez hoped to strengthen the legitimacy of Spain’s fragile democracy as well as to ensure the survival of his fledgling political party (Fuentes Quintana 1990, 26). The prime minister faced the stark choice between gradualism and shock therapy. Both options were fraught with obvious dangers. Any attempt to push through rapid economic adjustment – radical structural changes together with restrictive monetary and fiscal policies – might easily spark a bout of social unrest. At the opposite extreme, by settling for a continuation of moderate reforms, in order to avert a confrontation with the nascent trade unions, Suárez risked endangering the political transition. Denied a parliamentary majority by the voters, he decided upon the second option, to be implemented via a series of political, economic and social pacts with the opposition (Dehesa 1994, 127–28; Pérez Díaz 1993, 218). In the economic sphere, the main achievement of Adolfo Suárez’s consensual approach was the Moncloa Pacts of October 1977, named after the prime minister’s official residence on the northern outskirts of the Spanish capital. The core of the proposals – an unorthodox mélange of incomes policy together with tight monetary policy and an accommodating fiscal policy – were drawn up by the Bank of Spain and the leading economist Enrique Fuentes Quintana, whom Suárez had recently appointed Second Vice President for Economic Affairs (Prados and Sanz 1996, 373; Soto 1998, 121–25). The Moncloa Agreements represent what Paul Heywood (1999, 107) calls a high point in topdown élite accommodation. The negotiations involved face-to-face

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meetings between Suárez and the leaders of the Partido Socialista Obrero Español (Felipe González) and the Spanish Communist Party (Santiago Carrillo) (Gibbons 1999, 113). Although the trade unions and employers’ organizations were deliberately kept out of the discussions, both sides were expected to go along with the proposals. As a quid pro quo for their acceptance of wage moderation, the unions were promised a series of institutional and structural reforms, including a workers’ statute, union recognition, better working conditions and improved unemployment benefits (Dehesa 1994, 128). The primary objective of the Moncloa Pacts was to control inflation and resolve Spain’s balance-of-payments difficulties. To curb rocketing inflation, a ceiling of 22 per cent was imposed on pay increases while, for its part of the bargain, the government proclaimed its intention of bringing down the rate of inflation to 15 per cent by the end of 1978, a promise which it only narrowly missed. Due partly to the revival of foreign tourism and a renewal of inward investment, Spain’s current account deficit of $2.2 billion in 1977 was transformed into a healthy surplus over the next two years (Serrano Sanz 1996, 152). Critics of the accords, however, contend that the policy-makers made no serious attempt to tackle rising unemployment. On the contrary, a drop in the number of those in work was viewed by the administration as ‘the cost of the crisis’ (Etxezarreta 1991, 40–41). The Moncloa Agreements had two main unforeseen consequences: a sharp dip in the rate of economic growth and a jump in unemployment. Matters might have been even worse had it not been for a buoyant international economy. While domestic consumption collapsed, the foreign sector replaced it as the engine of Spanish growth. Unfortunately for Suárez, just when his government’s macroeconomic adjustments appeared to be bearing fruit, the second oil shock of 1979 exposed even more starkly than before the uncompetitive nature of a large part of manufacturing industry. From that moment onwards, there was general agreement among Spanish economists that the nation’s economic crisis was, first and foremost, an industrial crisis (Segura et al. 1989). Between 1978 and 1982, when, in the words of José Luis García Delgado (1996, 242), the Spanish economy ‘crossed the desert’, one in eight jobs was destroyed. Over this five–year period, the number of Spaniards in employment fell by a spectacular 1.35 million. Approximately 700,000 jobs were lost in manufacturing, along with a further 300,000 in the construction sector (Punset 1980; Linde 1990, 35–57; Lluch 1996, 252–63; Serrano Sanz 1996, 151–59). Before the general election of October 1982, which resulted in a landslide victory for the PSOE, the political situation in Spain was characterized by a weak government and a strong opposition. In

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consequence, the minority UCD administrations of Adolfo Suárez (1977–81) and Leopoldo Calvo Sotelo (1981–82) put off taking controversial decisions. To make matters worse, government departments were frequently at odds with one another. Above all, there was a heated debate within the cabinet on the speed of Spain’s economic adjustment. For its part, the Ministry of Industry, with the endorsement of big business, defended the tactic of gradualism, largely as a means of gaining time. By contrast, the Economics Ministry, supported by the central bank, urged rapid adjustment. This clash of opinions in turn provoked a government split which was only resolved by the resignation of Fuentes Quintana. The main thrust of UCD economic policy then consisted of a loose incomes policy plus tight monetary discipline imposed by the Bank of Spain. Although the policy-makers continually stressed their commitment to implementing basic structural reforms, particularly of the financial and labour markets, such issues were never pursued with any real enthusiasm (Linde 1990, 42–54; Serrano Sanz and Costas 1993, 22–27). When the Socialists – with their huge majority – took power in 1982, the political elite finally recovered its capacity to take decisive action on economic issues (Aróstegui 1999, 311–14). While in opposition, the PSOE’s charismatic young leader, Felipe González, had attacked UCD policies for not being sufficiently ‘social’ or ‘progressive’ (Dehesa 1994, 130). On the eve of the polls, party spokesmen described Spain’s unemployment level of 2.2 million as ‘unbearable’ (Pérez Díaz 1999, 104). Before the elections, the Socialists demanded increased social expenditure and the nationalization of key sectors of the economy. Their bold manifesto promised that a Socialist government would create an additional 800,000 jobs during its first term alone, a commitment which the veteran left-wing economist Ramón Tamames (1996, 201) dismissed as ‘political marketing’. However, once he was installed in the Moncloa Palace, Felipe González championed the cause of orthodox economic reform. His U-turn on economic policy was partly in response to the bad experiences of the Mitterand administration in 1981, which attempted unsuccessfully to reflate the French economy in splendid isolation. More importantly, it also reflected key changes in the PSOE’s ideology. Following their second rejection by the Spanish electorate in March 1979, the PSOE discarded the Marxist ideas enshrined in the party’s statutes for what Victor Perez Diaz (1999, 41) describes as ‘a vague social-democratic outlook of a pragmatic kind’. Indeed, in the course of the 1982 electoral campaign, Gonzalez bent over backwards to try to persuade Spanish business that an incoming Socialist administration would not damage its interests (Holman 1996, 182). The main direction of Socialist economic policy after 1982 can be

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summed up as modernization and full integration into the European Economic Community (Holman 1996, 80). González appointed Miguel Boyer, an economist from the Bank of Spain, as his ‘super minister’ for Finance and Economics, a position which the latter held until 1985. A member of the Madrid smart set known as ‘los beautiful’, Boyer played a vital role in moderating the radical ideas of most of his Socialist colleagues. Under his stewardship, Spain’s first Socialist government (1982–86) adopted a new and more aggressive business strategy (Holman 1996, 184). Backed by a large contingent of state economists, the authorities set about extending and deepening existing reforms (Fuentes Quintana and Requeijo 1984). To the annoyance of the PSOE’s rank and file, consensus politics (pactismo) was largely scrapped in favour of unilateral action (decretismo). Boyer and his team even adopted the Thatcherite slogan Tina, ‘There is no alternative’, portraying themselves as neutral ‘technicians’, not afraid to enact highly unpopular measures. In future, unemployment would be tackled as a structural rather than as a social problem, while only slow progress was deemed possible. Among other aspects of their ‘stabilization therapy’ were wage moderation, above all in the burgeoning public sector, and bringing down Spain’s huge budgetary deficit. The Socialists’ proclaimed goal of securing EC membership by the end of its first term in office was used by Boyer as a justification for the introduction of a number of unpopular measures, including a reform of the public sector (see below, Chapter 4). By 1985, the modernizers could fairly claim a degree of success. After two years of negative growth, the Spanish economy began to grow again, creating new jobs (Segura 1990, 59–77; Solbes 1990, 486–87; Serrano Sanz and Costas 1993, 30–36).

Recovery after 1985 After nearly a decade of painful adjustment, during the second half of the 1980s Spain once more expanded faster than almost all other European countries. Between 1985 and 1991, the Spanish economy expanded by roughly 5 per cent per year, buoyed up by a surge in domestic demand and a new wave of foreign direct investment. Over this period, 2 million net additional jobs were created. From 1989, the rate of economic growth flagged, turning into a full-blown recession in 1992–93 which witnessed the destruction of half a million jobs. However, after 1995 the Spanish economy resumed its upward trend, with manufacturing exports and receipts from foreign tourism acting as the main driving forces (Sevilla 1997, 108–18; Scobie et al. 1998, 2–5). The amelioration of Spain’s economic fortunes in the mid-1980s

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received a strong boost from the country’s entry into what was to become the European Union. Although Spain, together with neighbouring Portugal, joined the EU in January 1986, there is agreement that the approval of its application for membership in June 1985 served as a catalyst for expansion. A mood of optimism quickly set in among all sections of society based on the naïve belief that most, if not all, of the country’s problems would be resolved merely by the Spanish government appending its signature to the Treaty of Accession (Fuentes Quintana 1995, 133; Herrero de Miñón 1996, 12). For their part, Socialist policy-makers seized upon yet another opportunity to indulge in what Guillermo de la Dehesa (1995, 10–11) terms ‘shock therapy from above’, by arguing that the economic ‘rules of the game’ compelled the Madrid authorities to comply with Brussels directives. Spain’s membership of the EU presaged the relaunching of the process of economic liberalization initiated by the Opus Dei technocrats in 1959. Perhaps the country’s most impressive achievement after 1986 was to double the level of openness of the Spanish economy. The contribution of imports and exports to GDP rose from 36 to 65 per cent in the ten years after entry (Sevilla 1997, 30). If, during the period 1975–85, Spain was renowned for its all-embracing political transition, the remainder of the century was marked by a profound economic transition, as the country’s outdated interventionist model was well and truly buried (Dehesa 1995, 10–11; Malo de Molina 1995; Viñals 1996a, 411). Even so, Spain’s delayed economic transition did not proceed as smoothly as the policy-makers had imagined. No doubt, they should have been alerted by the difficulties that accompanied the country’s application for EU membership, a process which took six years to sort out. Among the many stumbling blocks to entry were the fears of existing members – above all France and Italy – that competition from Spanish agricultural products would hurt the interests of Mediterranean farmers (see Chapter 3). Ireland, too, expressed alarm at the prospect of increased competition for Europe’s depleted fish stocks from Spain’s sizeable fleet of vessels, while the German Federal Republic was worried about uncontrolled emigration from south of the Pyrenees (Fuentes Quintana 1995, 70; Fernández Navarrete 1998, 406–08). Upon its entry, Spain gained access to a market fourteen times as large as its domestic market in terms of spending power. Yet, in the short term at least, the benefits for Spain’s foreign trade were more apparent than real as Spanish producers showed themselves unable to satisfy the demands of such a highly competitive market (see below, Chapter 4). During the second half of 1980s, Spain’s visible trade deficit rocketed from $4.2 billion in 1985 to $24.6 billion in 1989 (6.5 per cent of GDP).

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This disturbing trend was caused primarily by escalating imports of goods and services. One outcome of EC membership was that Spaniards rushed out to the shops to purchase all manner of cheaper and betterquality goods. Imports of motor vehicles, for example, went up sixfold between 1985 and 1992 (Fuentes Quintana 1995, 72; Salmon 1995b, 16). Thus, as Alfred Tovias (1995, 94) argues, in the early stages ‘it [was] the EC which [entered] Spain and not the other way round’. The gradual dismantling of investment controls consequent upon EU membership made Spain a very attractive destination for long-term capital investment. During the boom years of 1986–88, Finance Minister Carlos Solchaga unwisely proclaimed ‘Spain is the country where it is easiest to get rich quick’ (Tamames, 1996, 236). Foreign direct investment was encouraged by the Socialist government since it contributed towards the development of high-tech, less labour-intensive industries. Notwithstanding the dangers to Spain of handing over key decision-making to outsiders, multinational companies played a dynamic role in the modernization of the Spanish economy. Not least, foreign multinationals brought new forms of business organization and introduced state-of-the-art technology. They also actively promoted research and development, an area where native producers were notoriously deficient, and taught new skills to the poorly trained workforce (Salmon 1995b, 70–71). After 1986, Spanish economic policy was dominated by a series of measures to extend European integration. Otto Holman (1996, 80–91) refers to the consolidation of Operation Europe, the ‘hegemonic project’ of the Socialist administration. Europeanization, he argues, was pursued by Carlos Solchaga and his supporters to help them implement their neo-liberal ideology of social modernization and macroeconomic restructuring at the expense of jobs and the living standards of ordinary Spaniards. In 1989, the Spanish authorities took the calculated risk of joining the wide band of the Exchange Rate Mechanism (ERM) of the European Monetary System, with an overvalued currency, in order to reinforce monetary discipline. Yet fiscal policy remained lax in an attempt to appease the trade unions following the politically damaging general strike of December 1988 which brought the country to a standstill (Viñals 1996a, 418–19). In December 1991, Spain signed the Maastricht Treaty committing member states to meeting the EU’s convergence criteria so as to prepare them for entry into a future European Monetary Union. These criteria were: a public sector deficit of no more than 3 per cent of GDP, public debt no more than 60 per cent of GDP, interest rates no more than 2 points above the three lowest rates in the EC and inflation no more than 1.5 points above the three lowest rates in the EC. Successful candidates

THE BUMPY ROAD TO EMU

21

also had to remain within the narrow band of the ERM. Yet it was no secret that, at the time of signing, Spain failed to meet all but one of the so-called Maastricht criteria. Its public-sector deficit was 4.4 per cent at the end of 1991, interest rates were the highest in the EU, inflation was over 4 points adrift, while Spain was in the wide band of the ERM. Only in the case of public debt, which stood at 45.6 per cent of GDP in May 1992, was Spain on target (Salmon 1995b, 13–14). However, as Carmela Martín (1999, 4) points out, in a world characterized by the increasing globalization of markets and the strengthening of regional blocs, Spain could ill afford to be left behind. To this end, the Socialists drew up two Convergence Plans in 1992 and 1994. Put forward by Carlos Solchaga and his successor Pedro Solbes, they outlined a series of measures, including tighter fiscal policies, a reform of the highly regulated labour and capital markets, the breaking up of monopolies and an accelerated programme of privatizations. These plans were dismissed by Enrique Fuentes Quintana as ‘belated and unbelievable’ (Fuentes Quintana 1995, 68) and opposed by the trade unions, a number of political groups and a growing body of public opinion, not least because of proposed cuts in unemployment benefits (Salmon 1995b, 15). When an exhausted Socialist Party, weakened by scandals and corruption, was narrowly defeated by José María Aznar’s Partido Popular in March 1996, many of the key economic issues were unresolved, above all Spain’s high level of unemployment, inflation, interest rates and the public deficit (Sevilla 1997, 119; Pérez Díaz 1999, 70–102; Pérez 1999; Powell 2001a, 560). In the words of Spain’s Economics and Finance Ministry, the PP entered office committed to ‘the consolidation of public finances and the introduction of structural measures aimed at eliminating the rigidity and inefficiency of goods and services and productive factors’ (Murphy, 1999, 53). In April 1997, the new administration produced its own Convergence Plan for the period 1998–2000. The plan’s objective was sustainable rather than spectacular growth, with wage moderation and low interest rates encouraging higher levels of capital investment (Murphy 1999, 65). During the final years of the millennium, the country experienced its best economic performance since the late 1980s. Sound macroeconomic management, including fiscal consolidation, laid the basis for the country’s entry into EMU in January 1999. Spain received the plaudits of the OECD (2000, 9), which stated that: interest rates eased considerably prior to entry boosting economic activity in 1998 and 1999, while moderate wage claims and progress on reforming the labour market have bolstered job creation. Inflation has slowed to historically low levels, though it has remained above the euro area average. The good performance

22

SPAIN: A MODERN EUROPEAN ECONOMY

has been underpinned by important progress in critical areas of structural reform.

Writing in the Financial Times, the distinguished commentator Martin Wolf (1999) opined: ‘Spain is one of the countries that has benefited most from the constraints imposed by the convergence process laid down in the Maastricht treaty.’

CHAPTER 2

Demography With 41.3 million inhabitants in 2002, Spain was the fifth most populous nation of the European Union. Only Germany (82.4 million), the United Kingdom (60.2 million), France (59.5 million), and Italy (58.1 million) boasted larger populations. By comparison, the Benelux nations – the Netherlands, Belgium and Luxembourg – had fewer inhabitants (26.9 million), as did the three Scandinavian members of the EU – Sweden, Denmark and Finland – with a combined population of 19.5 millions. Elsewhere, Greece (11.0 million), Portugal (10.4 million), Austria (8.1 million) and Ireland (3.8 million) had only a fraction of the Spanish population. Thus, in demographic terms, present-day Spain constitutes a major presence in Europe, accounting for slightly more than one-tenth of the total EU population of 381.2 million (Population Reference Bureau 2002). Between 1900 and 1980, Spain experienced what the French demographer Adolf Landry (1934) termed a ‘demographic revolution’. This process was characterized by the transition from a high birth rate and a high mortality rate to a simultaneous fall in both. In Spain’s case, the country’s crude birth rate fell by more than a half between 1900 and 1980, while the crude death rate dropped by over two-thirds (Díez Nicolás 1971; Arango 1987, 201). In contrast to this earlier trend, from the early 1980s the country entered another phase in its demographic history – often referred to as its ‘second demographic transition’ (Van de Káa 1987) – whose main characteristics were a steep decline in fertility together with a modest increase in mortality (Vinuesa 1997, 268–69). While during the first of these transitions Spain benefited from faster population growth than at any time in its history, the second transition witnessed a dramatic fall in natural population growth. During the first eight decades of the twentieth century, Spain demonstrated a remarkable demographic vitality which closely mirrored the country’s economic modernization. The number of people living in the Peninsula and the surrounding islands more than doubled, from 18.6 million in 1900 to 37.7 million in 1980 (see Table 2.1). Spain’s highest rates of natural population growth were achieved in the periods 1926–36 and 1956–75. Thereafter, the Spanish population remained virtually static during the 1980s. However, the 2001 population census reveals a 5 per cent expansion of the Spanish population since the 1991

24 Table 2.1

Year 1900 1910 1920 1930 1940 1950 1960 1970 1981 1991 2001

SPAIN: A MODERN EUROPEAN ECONOMY

Evolution of the Spanish population in the twentieth century Population (in millions) 18.62 19.99 21.39 23.68 26.01 28.17 30.53 34.04 37.68 38.87 40.84

Annual growth (per cent) 0.74 0.70 1.07 0.99 0.81 0.86 1.12 1.12 0.31 0.52

Sources: S. del Campo, ‘Tendencias demográficas’, in S. del Campo (ed.), Tendencias sociales en España, 1960–1990 (Bilbao: Fundación BBV, 1994), vol. 1, p. 40; V. Pérez Moreda, ‘La modernización demográfica’, in A. Morales Moya (ed.), La modernización social (Madrid: Sociedad Estatal España Nuevo Milenio, 2001), p. 44.

census, largely due to a sharp increase in immigration (Pérez Moreda 1999, 37; Puyol 1999, 59–60; El País 2002a, 2002c). Such unexpected findings directly contradict an earlier report by the United Nations Population Division (2000) which estimated that the Spanish population would dwindle to as little as 30.2 million by 2050, that is, roughly where it stood on the eve of the country’s economic boom of the 1960s. While the UN calculated that Spain would require an average of 240,000 immigrants per year over the next half century simply to maintain the size of its working-age population, recent data from the Instituto Nacional de Estadística (INE) demonstrate that Spain experienced a quadrupling of the number of foreigners in the country over the previous decade, from 353,000 persons, according to the 1991 census, to over 1.5 million in 2001 (El País 2002a, 2002c). The demographic history of contemporary Spain is not particularly unique vis-à-vis the rest of Europe although, in the words of Gabriel Tortella (1995, 32), the country was closer to the fringe than the mainstream. In common with other southern European countries, its most unusual demographic features reflected the lateness of its ‘first demographic transition’ (Valero Lobo and Lencé Pérez 1995, 90; Castaño and Viaña 1997, 94). With a few exceptions, such as Catalonia

DEMOGRAPHY

25

and the Balearic Islands, where mortality rates started to decline earlier, before the 1890s the Spanish population displayed many of the features of a pre-industrial society. Its demographic transition was delayed by the persistence of ‘crisis death rates’ due to the recurrence of a number of virulent epidemics – above all cholera – leading to very high levels of infant and juvenile mortality (Fernández García 1985). In a number of agricultural backwaters, including Andalucía, Extremadura and the Canary Islands, the transition did not get under way until as late as the 1920s. Moreover, comparatively speaking, Spain experienced only moderate population growth during its ‘first demographic transition’ ranging from 0.7 per cent to 1.3 per cent a year. In contrast, many Western European countries experienced higher rates of natural population growth, starting earlier and spread out over longer periods of time. In the view of Spanish demographers, the lateness of Spain’s ‘first demographic transition’ bears much of the responsibility – along with geographical and climatic factors – for the country’s low population density (Nadal 1984, 263; Díez Nicolás 1990, 80–81). Indeed, the country continues to languish as one of the most sparsely populated countries in the European Union. In 2002, it supported no more than 79 inhabitants per square kilometre – a similar figure to Greece (81) – compared with 109 in France and Portugal, 192 in Italy, 233 in Germany, 244 in the United Kingdom, 337 in Belgium and 387 in the Netherlands. Within the EU, only Ireland (55), Sweden (20) and Finland (15) were less densely populated (CIA 2002).

A shortage of births In his seminal article on European marriage patterns, the British demographer John Hajnal (1965, 104) argued that between 1950 and 1965 the people of Europe married ‘more and earlier than in former times’. In addition, newly wed couples tended to produce two children shortly after marriage. Yet, from the mid-1960s, due to the sensitivity of marriage to rising living standards and changing social trends, the countries of Western Europe embarked upon a new population model. Its leading features consisted of the postponement of marriage until a later age, far greater variety in the forms of cohabitation, increasing illegitimacy, a higher ratio of families with either one child or no children at all and a rise in divorce rates. Before the middle of the 1970s, the Spanish nuptuality model essentially followed the earlier European pattern, with two key exceptions. First of all, the age at which Spanish women married was high by European standards and, second, the

26

SPAIN: A MODERN EUROPEAN ECONOMY

Spanish population as a whole contained an abnormally high ratio of spinsters (Valero Lobo 1992, 184). From 1975 onwards, however, the Iberian nation adopted Europe’s new population model described above – approximately ten to fifteen years after its northern neighbours (Sardon 1992). At this stage, fertility rates south of the Pyrenees began their long-term decline. Initially, the fall was a modest one. However, from around 1980 fertility in Spain plummeted, dropping well below the replacement level of the country’s population (Valero Lobo and Lencé Pérez 1995, 97). As we saw earlier in this chapter, fertility in Spain started to decline from the beginning of the twentieth century. Roser Nicolau (1989, 54) calculates that the country experienced a significant drop in fertility during the first four decades of the century, from 4.71 children per woman in 1900 to 2.97 in 1940 (see Table 2.2). According to David Table 2.2

Fertility rates in Spain in the twentieth century*

Year

Children

Year

Children

Year

Children

1900 1910 1920 1930 1940 1950 1960 1970 1971 1972 1973 1974 1975

4.71 4.43 4.14 3.63 2.97 2.46 2.76 2.82 2.85 2.84 2.81 2.85 2.80

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

2.79 2.66 2.53 2.31 2.20 2.03 1.94 1.80 1.73 1.64 1.56 1.50 1.45

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

1.40 1.36 1.33 1.32 1.27 1.21 1.18 1.17 1.18 1.20 1.20 1.24 1.24

* Number of children per woman. Sources: R. Nicolau, ‘La población’, in A. Carreras (ed.), Estadísticas históricas de España: siglos XIX–XX (Madrid: Fundación Banco Exterior, 1989), p. 54; F. Gil Alonso and A. Cabré, ‘El crecimiento de la población española y sus determinantes’, in R. Puyol (ed.), Dinámica de la población en España: cambios demográficos en el último cuarto del siglo XX (Madrid: Síntesis, 1997), p. 101; J.A. Ortega Osuna and H.P. Kohler, ‘¿Está cayendo realmente la fecundidad española? Separación de los efectos intensidad, calendario y varianza en el Índice Sintético de Fecundidad’, REIS (Revista Española de Investigaciones Sociológicas, 96 (2001), p. 117.

DEMOGRAPHY

27

Sven Reher (1997, 185–86), this fall reflected the practice of some measure of fertility control in most parts of the country. During the Spanish Civil War, a combination of marital separation, food shortages and political repression led to a reduction in fertility to a level which was not reached again until the late 1970s. After the conflict, Reher argues, fertility in Spain can be divided into four main phases: 1 A substantial rebounding in fertility after 1939 as families were reunited 2 Unstable levels of fertility during the 1940s and early 1950s 3 Relatively high fertility between 1955 and 1975 4 A pronounced decline in fertility from the mid-1970s onwards. Reher believes that it is hard to distinguish any specific trend in fertility in the decade after the Spanish Civil War. Yet, by the early 1950s, fertility levels in Spain had fallen to an all-time low, apart from during the conflict itself. This unwelcome development took place despite the manifest concern of the Francoist authorities for the institutions of both marriage and the family (Reher 1997, 2). From its inception, the New Order brought in a series of measures designed to encourage large families. An Act of July 1941 declared that ‘the Spanish state, guided by the Caudillo, wishes and will obtain many healthy and robust children’. In the following year, the regime announced its ‘demographic goal’ of 40 million inhabitants, which required every married woman to give birth to four children (Pérez Moreda 1999, 39–41; 2001, 50). For a brief period, financial inducements aimed at persuading married couples to produce two or more children enjoyed a fair amount of success (Campo 1991, 78–88; Meil Landwerlin 1995, 55; Alberdi 1997, 80). Depending on which indicator we prefer, somewhere between 1955 and 1975 Spain experienced either a levelling off in fertility or a modest increase (Reher 1997, 186). Indeed, there is plenty of evidence of a minor ‘baby boom’ between 1957 and 1965 (Gil Alonso and Cabré 1997, 53; Puyol 2001, 314). How do we explain this disparity? According to Reher (1997, 186), in the more advanced industrial societies of Western Europe, a fall in nuptuality, along with a simultaneous increase in divorce, led to a drop in the proportion of married women in the total population. This in turn resulted in lower fertility. By contrast, in Spain, the role played by rising living standards at this stage was instrumental in stimulating nuptuality – and hence fertility – within the framework of a predominantly traditional society. The Franco dictatorship’s pro-natalist ideology persisted throughout the 1960s. For example, the Second Development Plan (1968–71), introduced by the technocrats against a background of unprecedented

28

SPAIN: A MODERN EUROPEAN ECONOMY

emigration to Western Europe, had as one of its objectives ‘to ensure that the population grows at a faster rate’ (Campo 1974, 39). Nevertheless, in line with similar trends which prevailed in Italy, Greece and Portugal, fertility levels in Spain soon began to drift downwards (Muñoz Pérez 1987, 927–32). Before long, Spain’s ‘baby boom’ became a veritable ‘baby bust’. After 1975, fertility declined more rapidly than ever before. As Table 2.2 shows, the total fertility rate tumbled from around 2.80 in the mid-1970s to 2.03 in 1981, that is, below the replacement level of 2.1 children per woman. By the end of the millennium, it hovered around 1.2 – the lowest rate in the European Union along with Italy (Puyol 1999, 59–60; Ortega Osona and Kohler 2001, 114–15). Spain’s dramatic decline in fertility – a distinctive feature of its postindustrial age – was the product of a combination of factors – economic, social and cultural. Above all it reflected the rapidly changing role of women in nearly all areas of Spanish society (Valero Lobo and Lencé Pérez 1995, 90–91). Previously, working women entered the labour force at an early age and gave up employment when they married. As a result, the most productive years of their lives were spent bearing and raising children. From the 1970s, however, this pattern altered significantly, due above all to the profound changes taking place in education and employment. Ever-increasing numbers of adolescent girls stayed on at secondary school, acquiring extra qualifications. By the end of the 1980s, more young women than men went to Spanish universities. Reher (1997, 274–75) shows that, between 1975 and 1987, the ratio of females in higher education more than doubled, from 14.6 to 32.2 per cent, while that of Spanish males went up only slightly, from 26.2 to 30.7 per cent. As a result of their enhanced educational attainments, more and more young women entered the labour market, the vast majority of whom found employment in the service sector. Moreover, since many newly weds quickly discovered that it was well-nigh impossible to survive on a single income, Spanish women became increasingly reluctant to give up full-time employment after getting married. Another factor contributing towards declining fertility south of the Pyrenees was the proliferation of more tolerant attitudes towards birth control following the triumph of democracy. With the decline of reactionary social values associated with the defunct Franco regime, it was now much easier for Spanish women of childbearing age to obtain professional advice on family planning. In addition, the practice of contraception was decriminalized by the Suárez government in 1978 while, seven years later, the Socialists passed an Act which allowed the voluntary termination of pregnancy. Even so, the ratio of abortions to

DEMOGRAPHY

29

the total number of pregnancies in all age groups remains relatively low by comparison with the rest of Europe. A study by Margarita Delgado Pérez (1999, 86, 111–12), covering the period 1987–95, indicates that only in Germany and the Netherlands were fewer abortions performed than in Spain. During Spain’s ‘second demographic transition’ – which is still proceeding – both nuptuality and marital fertility had decisive impacts on declining fertility. Between 1975 and 1997, the number of marriages contracted per annum fell by more than one-quarter, from 271,000 to 193,000. Over the same period, births declined by almost a half, from 670,000 to 362,000 (Puyol 1999, 61–62; 2001, 22). Yet marriage still remained the norm for both family life and the procreation of children. This fact is clearly illustrated by the low rate of illegitimacy south of the Pyrenees, despite a recent tendency for it to rise. According to a recent study, unmarried fertility accounted for no more than 17 per cent of live births in Spain in 2001, compared with 10 per cent in Italy, 40 per cent in the United Kingdom, 43 per cent in France and 63 per cent in Iceland (Valero Lobo 1997). The age pattern of marital fertility in Spain also fluctuated significantly throughout the last century. During the first half of the century, the biggest declines in fertility took place among higher age groups. Later, the upswings in fertility which characterized the period 1955–75 were most evident in women of prime childbearing ages, especially those between 20 and 29. The post-1975 decline in fertility originally affected all age groups, although after 1980 its effects were most apparent among women in their twenties. Meanwhile, the age at which women contracted their first marriage – the so-called singulate mean age at marriage – fell from slightly above 26 years in the 1950s to 24.7 in 1970 and 23.4 in 1980. From the early 1980s, however, the singulate mean age at marriage again started to climb, reaching 26 years in 1991, roughly equivalent to the age at which women married after the Spanish Civil War (Delgado Pérez 1993, 128). Since the beginning of the 1980s, the highest levels of fertility have been in women between the ages of 25 and 29. According to Ángeles Valero Lobo (1997, 28–35), the most significant change in the age pattern of fertility concerned the age group in second place. During the period 1981–85, it was the younger age group of 20–24 years which occupied second position in terms of fertility. After 1986, however, the older age group of 30–34 years was ranked second – further evidence of later marriage – while the age group of 20–24 years was relegated to third place. Overall, the average age of Spanish women at the birth of their first child went up from 28.2 years in 1980 to 29.7 years in 1994 (Puyol 1999, 62; Ortega Osona and Kohler 2001, 114–15).

30

SPAIN: A MODERN EUROPEAN ECONOMY

For the authorities, at national, regional and local levels, these fluctuations in fertility rates – themselves the result of profound economic and social change – demanded urgent attention. In response to the ‘baby boom’ of the 1960s, the policy-makers finally undertook a root-and-branch reform of the country’s antiquated and under-funded education system, aimed at equipping Spain for the requirements of a modern industrialized economy. The General Education Act of 1970, introduced by Education Minister José Luis Villar Palasí, marked the beginnings of a long-term commitment to extending the provision and quality of public education at all levels (McNair 1984, 33–40; González Anleo 1985, 56–80). A breakdown of the statistics reveals significant spatial variations in levels of natural population growth – that is, excluding emigration and immigration – since the beginning of the 1960s. Using data from the population censuses of 1970, 1981 and 1991, Fernando Gil Alonso and Ana Cabré (1997, 58–60) compare rates of population growth in all of Spain’s seventeen autonomous regions. The 1970 census, they argue, indicates the high level of population growth for the country as a whole during the previous decade (1.1 per cent a year), along with significant regional variations. At the top end of the scale, the Canary Islands grew by almost twice the national average during the 1960s, while the industrializing regions of Madrid, Catalonia and the Basque Country, along with Murcia and Andalucía in the south, expanded faster than the national average. In the case of Murcia and Andalucía, this increase reflected the relatively young age structure of the population, while the Canary Islands, Madrid, Catalonia and the Basque Country benefited from the rejuvenation of their populations due to in-migration. At the opposite end of the scale, the regions with the most sluggish natural population growth, Aragón, Castilla y León, La Rioja, Galicia, Asturias and Castilla-La Mancha, were the perennial victims of the out-migration of young adults and the resulting ageing of their populations. For its part, the 1981 census reveals that during the 1970s regional patterns of population growth changed considerably. At this stage, the country’s natural population growth fell to 0.64 per cent annually. The population of the Canary Islands continued to expand more rapidly than elsewhere, followed by Murcia, Andalucía, Madrid and the Comunidad Valenciana. However, due to the economic crisis of the late 1970s, which was particularly severe among Spain’s mature industries, Catalonia and the Basque Country no longer appeared among the most rapidly growing parts of the country. Owing to return migration, both of these regions witnessed a net loss of young people, resulting in the ageing of their populations and a subsequent decline in fertility. During the same decade, the central and northern regions of Aragón, Asturias,

31

DEMOGRAPHY

La Rioja, Castilla y León and Galicia continued to expand, albeit by relatively insignificant amounts. Finally, according to these researchers, the 1991 census demonstrates a further deterioration in the rate of population growth. During the 1980s, ‘home-grown’ population growth collapsed to no more than 0.15 per cent per year. Only six autonomous communities experienced natural population growth above the national average, that is, the Canary Islands, Murcia, Andalucía, Madrid, the Balearic Islands and Extremadura. Among the net losers were Asturias, Galicia, Castilla y León, Cantabria, La Rioja and the Basque Country.

An ageing population The second explanation of Spain’s demographic modernization during the twentieth century is falling mortality rates (see Table 2.3). During the first four decades of the century, crude death rates declined by more than two-fifths, while the birth rate fell by only one-fifth (Pérez Moreda 1999, 38). However, the downward trend in mortality hid two major setbacks. First, the infamous Spanish flu of 1918–19, which claimed the lives of 260,000 Spaniards, constituted one of the worst epidemics ever Table 2.3

Mortality in twentieth-century Spain

Year

Crude death rate (per ’000)

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2001

28.4 23.2 23.0 17.2 16.1 10.7 8.9 8.5 7.8 8.5 9.1

Infant mortality at birth 204 149 165 124 114 70 44 28 12 8 5

Male life expectancy at birth 33.8 40.6 39.8 47.9 46.3 59.5 67.0 69.0 72.3 73.4 75.5

Female life expectancy 35.1 42.3 41.7 51.3 52.6 64.0 71.8 74.6 78.6 80.5 82.6

Sources: D.S. Reher, Perspectives on the Family in Spain, Past and Present (Oxford: Clarendon Press, 1997), p. 12; V. Pérez Moreda, ‘Población y economía en la España de los siglos XIX y XX’, in G. Anes (ed.), Historia económica de España: siglos XIX y XX (Barcelona: Galaxia Gutenberg, 1999), p. 44; Instituto Nacional de Estadística.

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SPAIN: A MODERN EUROPEAN ECONOMY

experienced south of the Pyrenees (Echeverri Dávila 1993). Second, Spain’s bloody Civil War of 1936–39 brought a further reversal of the downward trend in death rates. According to the calculations of Juan Díez Nicolás (1985), the conflict led to 558,000 deaths, directly or indirectly attributable to a combination of factors including warfare, hunger, malnutrition, poor living conditions and post-war repression. Even so, by the early 1950s crude death rates in Spain were similar to those prevailing throughout Western Europe (Gil Alonso and Cabré 1997, 68–69). Unfortunately for our purposes, crude death rates are of only limited usefulness as an overall indicator of mortality. This is because their composition is strongly influenced by the age structure of the population which, in the case of twentieth-century Spain, remained relatively youthful for long periods. Therefore, it is usual for demographers to place a greater reliance on two other indicators, that is, infant mortality – a major component of the death rate – and life expectancy at birth. Taken together, these indicators present a clearer picture of mortality patterns. They also bring out the close correlation between trends in mortality and the general level of economic and social development (Gil Alonso and Cabré 1997, 69). In the Spanish case, the rate of infant mortality – that is, the number of children who die before reaching their first birthday per thousand live births – offers ample evidence of the enormous strides that were made towards eradicating the most common causes of death among the youngest section in the population. Due to primitive birth control methods and a dearth of vaccines against the most common diseases, by 1900 infant mortality in Spain (204 per thousand live births) was among the highest in Europe, on a par with the Austro-Hungarian Empire. Only Russia fared worse (Pérez Moreda 1999, 11; 2001, 42). In spite of the negative effects of the post-First World War influenza epidemic and the Spanish Civil War, infant mortality fell steadily over the first four decades of the century. This downward trend was accelerated from the early 1940s, while by the late 1950s it had tumbled to below 50 deaths per thousand live births. Thereafter, infant mortality continued to plummet, falling to 4.85 deaths per thousand in 2002, one-fortieth of the figure for 1900 (Gil Alonso and Cabré 1997, 69, 74; CIA 2002). The sustained decline in infant mortality south of the Pyrenees was the leading cause of a parallel rise in the third indicator of mortality, life expectancy at birth. In the course of the twentieth century the Spanish population changed from suffering one of the lowest life expectancies in Europe to possessing one of the highest in the world, surpassed only by Japan, Australia, Switzerland, Sweden, Canada, Iceland and Italy. Increased longevity was particularly significant among the female

DEMOGRAPHY

33

population (Gómez Redondo 1995, 95–98). Between 1900 and 1960, life expectancy at birth doubled, from 34 to 67 years for men and from 35 to 72 years for women. Nevertheless, Spain still lagged behind the rest of Western Europe, with the single exception of Portugal. Two generations later in 2002, the average lifespan of Spaniards – 75.6 years for men and 82.8 years in the case of women – was slightly above the EU average (CIA 2002). The convergence in mortality rates between Spain and the rest of Europe after 1960 constituted additional evidence of the country’s rapid economic and social progress. Spanish women, in particular, benefited from enormous strides in medicine and health education, including the provision of ante-natal care, which coincided with the rise of the welfare state south of the Pyrenees (Gómez Redondo 1997, 43, 48–51). Following the virtual elimination of infectious diseases, including smallpox and tuberculosis, the main causes of death among Spaniards are now non-infectious diseases like cancer and cardiovascular problems. Among the age group 20 to 29, new infections like HIV/Aids have assumed greatest importance along with road accidents and violent deaths (Puyol 1999, 64). In the long term, the ageing of the Spanish population is bound to have a negative impact on both the economy and society. The policymakers expect the situation to deteriorate badly after 2020, when one in five Spaniards will reach the age of 65. Without a sustained rise in immigration, the future viability of the nation’s generous state pensions system is certain to be put in jeopardy. The ‘greying’ of the population will also impose huge strains on Spain’s hard-pressed health and social services. In addition, as the ‘baby boomers’ of the 1960s reach retirement age, the burden of higher expenditure on pensions may well have to be borne by a diminishing cohort of taxpayers (Fernández Cordón 1998, 98; Herce 1998, 194; Bandrés 1999, 649–57).

From a nation of emigrants to a new immigration centre As well as natural population growth, the second factor which contributes towards a country’s population size is migratory growth. This is defined as the net balance between emigration and immigration. For most of Spain’s modern demographic history, its migratory growth was overwhelmingly negative, as the number of Spaniards departing from their homeland far exceeded those foreigners wishing to settle in the Peninsula and its surrounding islands. Thus it can be argued, counterfactually at least, that if it were possible to exclude emigration and immigration from the statistics, Spain would be a more densely

34

SPAIN: A MODERN EUROPEAN ECONOMY

populated country. Just how much larger the Spanish population would be today is, of course, pure conjecture. Joaquín Arango (1987, 207) contends that, apart from two periods – the two decades before the First World War and the 1960s – when levels of emigration were abnormally high, the results would not have been very different. In addition, we should bear in mind that, from the 1980s, Spain benefited from migratory growth, as the country joined the ranks of Europe’s new immigration centres. Between the early 1880s and the First World War, more than 3 million Spaniards chose to emigrate. Ninety per cent of Spanish emigrants set sail for Argentina, Brazil, Cuba and Uruguay. In addition, there was seasonal emigration to Algeria, although the long-term trend was in decline. According to Blanca Sánchez Alonso (1995, 2000, 730–38), the marked preference shown by Spaniards for the countries of Latin America can be explained largely in terms of cultural, linguistic and former colonial links rather than as a direct result of specific government policies. Sánchez Alonso also contends that the classical hypothesis of demographic forces driving emigration should be rejected with regard to early twentieth-century Spain. Whilst a boom in natural population growth twenty years earlier acted as an important ‘push’ factor in both Italy and Portugal, in the Spanish case, she argues, the rate of natural population increase had been falling during the previous two decades. Spanish emigrants were therefore responding to economic conditions abroad in much the same way as their southern European counterparts. During the inter-war period, the ‘closed-door’ policies of the Latin American republics were partly responsible for the opening up of a new current of Spanish migration to neighbouring France. After 1918, the huge loss of life suffered by the French military on the battlefields of the Great War gave rise to an important new source of demand for foreign labour, not least temporary employment in the agricultural sector, as typified by the large numbers of emigrants who found work harvesting grapes in the southern region of Languedoc–Roussillon (García Fernández 1965, 32–34; Rubio 1974, 115–89). At the same time, the new job opportunities presented by the economic modernization of Spain led to an easing of the flow of emigrants. Before long, the movement of population abroad was interrupted by a succession of economic and political crises, above all the world slump of the early 1930s, the Spanish Civil War and the Second World War. None the less, an element of continuity prevailed as the final years of the 1940s saw the renewal of emigration to Latin America, albeit at lower levels than earlier in the century. According to the calculations of Jordi Nadal (1984, 202–04), between 1949 and 1958 an average of 40,000

35

DEMOGRAPHY

Spaniards per year embarked for Latin America, with Argentina, Venezuela and Brazil as the principal destinations. During the 1950s, however, the pattern of Spanish emigration altered irrevocably for two main reasons: the restrictive attitude of Latin American governments towards further immigration and, more significantly, the appearance of a new wave of mass emigration to the countries of Western Europe (Ródenas 1994, 60). Indeed, from the early 1950s onwards, the key factor which determined the nature and extent of emigration from Spain was the escalating demand for unskilled labour in the core economies north of the Pyrenees, led by France. Carmen Ródenas (1994, 57–59) calculates that Spain experienced a net emigration of 712,000 persons over the period 1951–60 (see Table 2.4), mainly to Western Europe. Emigration accounted for roughly two-fifths of all those leaving their place of origin, while internal migration was responsible for the remaining threefifths. In spatial terms, the outflow of migrant labour was unevenly distributed across the Peninsula. Approximately nine-tenths of all migrants originated in five predominantly rural regions: Extremadura, Andalucía, Castilla y León, Castilla-La Mancha and Galicia. In the case of Extremadura, emigration was seven times as large in the 1950s as it was in the 1940s, notwithstanding the implementation of the Badajoz Plan after 1952 which set out to create thousands of jobs in that part of rural Extremadura (Barciela, López Ortiz and Melgarejo 1998). Emigration from Andalucía, meanwhile, went up fivefold in the 1950s, while it trebled from the two Castiles. Nevertheless, it was during the 1960s that the most spectacular increases in emigration took place. The fact that large-scale emigration, mainly to Western Europe, accompanied unprecedented levels of Spanish economic growth is testimony to the increasing globalization of Table 2.4 Decade 1901–10 1911–20 1921–30 1931–40 1941–50 1951–60

External migration, 1901–60 (’000s) Emigration 949 878 1,169 804 1,054 2,295

Immigration

Balance

371 829 1,079 846 1,138 1,583

–578 –49 –90 42 84 –712

Source: C. Ródenas, Emigración y economía en España (Madrid: Civitas, 1994), p. 40.

36

SPAIN: A MODERN EUROPEAN ECONOMY

the Spanish economy in the wake of the 1959 Stabilization Plan (Fernández Asperilla 1998, 66). The full extent of Spain’s rural exodus was substantially underestimated by the official statistics which were collected by the Instituto Español de Emigración (Spanish Institute of Emigration) established by the Francoist authorities in 1956. Ródenas (1994, 83) reckons that, taking into account clandestine emigration, which went unrecorded by the Institute, 1.95 million people left Spain for Western Europe between 1960 and 1973, while immigration (mostly return migration) accounted for 1.08 million. Her calculations show a net emigration of 873,000 over the fourteen–year period. Including family dependants, the true figure is probably closer to one million. A detailed study of Ródenas’s figures demonstrates that emigration to Western Europe closely replicated fluctuations in the international trade cycle. As Table 2.5 indicates, the number of Spaniards leaving for Western Europe reached almost 200,000 in the boom of 1964–65, falling to 47,000 during the 1967 recession. Between 1968 and 1973, as economic growth reappeared in the major European economies, the upward trend resumed (Ródenas 1994, 83–89). As to the composition of Spanish emigrants at this stage, the majority consisted of adult males Table 2.5

Population movement between Spain and Western Europe, 1960–73

Year

Emigration

Immigration

Balance

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973

40,189 117,776 126,890 141,587 193,363 181,926 130,789 47,375 121,952 184,375 178,555 177,148 162,241 149,705

12,194 8,315 46,344 52,730 98,993 120,678 131,700 99,900 106,000 95,600 66,200 88,100 80,200 73,900

–27,995 –109,461 –80,546 –88,857 –94,370 –61,248 911 52,525 –15,952 –88,775 –112,355 –89,048 –82,041 –75,805

Total

1,953,871

1,080,854

–873,017

Source: C. Ródenas, Emigración y economía en España (Madrid: Civitas, 1994), p. 83.

DEMOGRAPHY

37

in their twenties and thirties, although by the end of the 1960s the proportion of women had risen to approximately one-quarter of all departures (Fernández Asperilla 1998, 67). Spain was not alone in exporting its surplus population. The insatiable appetite for unskilled labour in France, Germany and Switzerland, in particular, triggered a massive northerly drift of human capital from all corners of the Mediterranean basin, including the newly independent states of North Africa (Babiano and Farré 2002, 81–98). The vast majority of people on the move were economic migrants in search of higher wages, mostly in the manufacturing and service sectors. In the case of Spanish migrant workers, the choice of occupations varied to a surprising extent, depending on the country of destination. In West Germany, for example, roughly three-quarters of all male Spanish workers in 1970 found jobs in industry, especially in the metallurgy sector. By comparison, as few as one-fifth of Spanish males in Switzerland were employed in manufacturing in 1968, with a similar ratio in restaurants and hotels, and a further quarter in construction. The experiences of Spanish emigrants in France were altogether dissimilar. Using data from the 1968 French census as well as the incomplete figures of the Instituto Español de Emigración, Ana Fernández Asperilla (1998, 69) calculates that 15 per cent of Spanish migrants in France (39,300) secured full-time employment in agriculture, while nearly three times that figure (103,000) found temporary jobs on the land, notably in viticulture, sugar beet and rice cultivation. In that eventful year – which was marked by large-scale factory occupations during the summer months – agriculture accounted for a larger proportion of Spanish migrant workers in the Fifth Republic than manufacturing and the service sector combined. To the Spanish authorities, mass migration to Western Europe came as an unexpected bonus. In particular, it was greeted with almost unbridled enthusiasm by the technocrats, who were quick to seize upon its benefits, whether real or imagined. Among the expected windfalls were the repatriation of emigrant remittances to help finance the regime’s cherished goal of economic development, lower unemployment than might otherwise have been the case and a relaxation of political tensions (Navarro López 1981; 15–41; Campo and Navarro López 1987, 74). In addition, Spain’s policy-makers anticipated that the experiences of working abroad would give rise to the transfer of muchneeded skills, above all in manufacturing. In this respect, they were to be disappointed. Research by Antonio Oporto (1990, 106) indicates that there was little or no improvement in the stock of human capital as a result of Spanish emigration to Western Europe, not least since the majority of migrant workers tended to perform basic tasks for which

38

SPAIN: A MODERN EUROPEAN ECONOMY

they required little preparation. Oporto also found that whatever training migrant workers did receive abroad was, in the main, incapable of adaptation to the needs of Spain’s backward manufacturing sector. Elsewhere, in a study of southern agriculture, José Cazorla Pérez (1989, 65–71) ruled out the existence of a ‘dynamic effect’ on farming as a result of emigration, arguing that there was scant evidence of innovation among returning migrants. After 1973, the haemorrhaging of population through emigration came to a sudden and dramatic halt. Once more, Spain’s policy-makers had little influence over the course of events. Above all, the ubiquitous recession of the middle and late 1970s brought a dramatic collapse in the demand for foreign labour in the advanced economies. In consequence, emigration from Spain to the receptor nations of Western Europe fell by 47 per cent in 1974 and a further 59 per cent in 1975 (Ródenas 1994, 141). Confronted by hostile and frequently xenophobic press campaigns directed at immigrant communities, the West German and Swiss authorities offered financial inducements aimed at the voluntary repatriation of foreign workers and their dependants. In an attempt to cut wage costs, many firms introduced labour-saving equipment, thereby further diminishing the need for unqualified workers from southern Europe and the Mahgreb. Between 1976 and 1981, Spain witnessed a net immigration of 276,000 people, which included a small band of political exiles from the Franco dictatorship (Tezanos 1993, 78). Before long, however, return migration dwindled to almost insignificant levels. At the same time, according to the official statistics, emigration from the Peninsula collapsed too (Izquierdo Escribano 1996, 43). From the beginnings of the 1980s, Spain was transformed from a net exporter of population to a net importer. Based on official Spanish data, Carlota Solé and her team of researchers (2000, 136–37) distinguish four main stages in the process after 1960: 1 A significant influx of immigrants during the 1960s, when total numbers more than doubled from 65,000 to 148,000 2 A period of moderate growth in the 1970s, with numbers rising from 148,000 to 200,000 3 A second phase of fast growth during the first half of the 1980s, as the immigrant population increased from 200,000 to 275,000 4 A surge in immigration from the mid-1980s onwards. Total numbers nearly trebled between 1986 and 1998, from 275,000 to 720,000. Recent research indicates a further stage, beginning in 2000, as the total number of immigrants exceeded one million, amidst fears of an

DEMOGRAPHY

39

‘invasion’ and calls for increased restrictions on entry (Cachón Rodríguez 2002, 105). Among the legally resident foreigner population, the principal source of new immigrants, especially after 1986, was the European Union. In order of importance, their main countries of origin were the United Kingdom, Germany, Portugal, France and Italy (Izquierdo Escribano 1997, 248). According to Rafael Puyol (1999, 67–68), over two-fifths of legally resident foreigners in Spain in 1996 hailed from EU countries. The main features of this group included an above-average ratio of women and single people, as well as a higher incidence of ageing than among the indigenous population. A growing colony of third-age residents from EU countries demonstrated, more than any other factor, the allure of the Spanish costas – with their warm climates and low living costs – as a place for retirement. Although levels of economic activity among this cohort were relatively low, the majority of those who did find work were employed in the tertiary sector. Despite the persistence of chronic unemployment in many Spanish regions, the last two decades of the twentieth century witnessed a growing influx of migrant workers from as far apart as North and West Africa, Latin America, Asia and Eastern Europe. Among legally resident immigrants from non-EU countries, roughly one-fifth came from Morocco. Next in importance, Ecuador and Colombia were the leading sources of migrants from Latin America, while Romania, the Russian Confederation and Bulgaria became the main suppliers of foreign labour from Eastern Europe. In addition, immigrants from China, the Philippines, Algeria, sub-Saharan Africa (Senegal, Gambia, Nigeria) and Pakistan also established a major presence in Spain (Izquierdo Escribano 1996, 51; Puyol 2001, 28–30). Furthermore, tens of thousands of immigrants entered the country illegally each year from Morocco, crossing the Straits of Gibraltar at night in small wooden boats with a single outboard motor, known as pateras. Even though the distance between Africa and Spain is only 14 kilometres at its narrowest, the dangerous crossing has claimed many lives (Chislett 2002, 31). As late as 1992, immigrants accounted for less than 2 per cent of the country’s population, according to official statistics. This figure compared with 6 per cent in France, 9 per cent in Belgium and Germany, and as much as 26 per cent in Luxembourg (Izquierdo Escribano 1996, 231). Yet, due to clandestine immigration – much of it organized by criminal gangs – the true figure was much higher (Izquierdo Escribano 2002). In a survey of the Moroccan community in Spain, José Cazorla Pérez (1995, 121–22) argues that in 1992 for every ‘regular’ immigrant in Spain there were four ‘irregulars’. In some regions, the proportion of illegal immigrants was even greater. For every legal immigrant in

40

SPAIN: A MODERN EUROPEAN ECONOMY

Castilla-La Mancha there were thought to be eight illegal immigrants, while in Murcia the ratio was roughly 13 to 1. Although ‘push’ factors, including war, famine and demographic pressure, were important, possibly the principal cause of this increasing inflow was the changing demand for labour in the receptor nations. Facing cut-throat competition in the global marketplace, many Spanish employers grew to depend on cheap non-unionized foreign labour. In 2000, farmers’ representatives maintained that they needed as many as 300,000 workers per year to undertake the sort of back-breaking seasonal work which local labourers refused to perform – notwithstanding the high level of unemployment. For their part, migrants became increasingly reliant on the most precarious types of job. Thus, during the recession of 1992–93, workers from the Mahgreb – completely unprotected by Spain’s social legislation – were among the first to be laid off (Cazorla Pérez 1995, 121; Solé et al. 2000, 144; Corkill 2000, 49–53). Ghettoized and pushed to the margins of society, immigrants were frequently the victims of racism and discrimination. Matters came a head in the small agricultural municipality of El Ejido in the Andalusian province of Almería in February 2000 when North African farm labourers were attacked and driven from their homes after three local girls were murdered, allegedly by Moroccan immigrants. Over 600 police had to be dispatched to the town in order to quell the country’s first major race riot. Yet El Ejido epitomized the problems which many parts of Spain had to confront in the assimilation of growing number of immigrants. Out of its 55,000 inhabitants, at least 20,000 were legal or illegal immigrants from the Mahgreb and sub-Saharan Africa who worked on farms producing hot-house vegetables for the markets of Western Europe (Izquierdo Escribano 2000; Azurmendi 2001a; 2001b, 8–17; Chislett 2002, 34). Foreign workers bore the brunt of the European Union’s restrictive immigration legislation. Because of the Schengen Agreement of 1985 dealing with the free mobility of peoples among the signatory nations, countries on the periphery of the EU were put under extraordinary pressure to act as a Europe’s policeman. In July 1985, six months before Spain joined the EU, the Socialist administration of Felipe González approved the Ley de Extranjería (Foreigners’ Act), which restricted the rights of foreigners to enter and work in the country. Before long, detention centres were set up for illegal immigrants awaiting expulsion (Zapata Barrero 2000, 170; Solé et al. 2000, 139–44). In July 2000, the second Aznar government tightened the existing legislation still further, introducing heavy penalties for traffickers in illegal immigrants and for businesses which knowingly employed immigrants without work

DEMOGRAPHY

41

permits. Following the erection of a nine-foot-high perimeter fence along the border between Spain’s North African enclave of Melilla and neighbouring Morocco, the Spanish authorities planned to install an electronic warning system along large tracts of its southern coastline so as to detect incoming immigrant boats (Chislett 2001, 25–26). According to a 1991 study, the typical legal immigrant in Spain was a young male between 20 and 35 years who was employed either in agriculture or the construction sector. Other immigrants, especially women, found work in the hotel trade and domestic service (Cazorla Pérez 1995, 123; Izquierdo Escribano 1997, 226–32: Cachón Rodríguez 2002, 119). Geographically, the bulk of Spain’s immigrant population was concentrated in six autonomous communities: Madrid, Catalonia (mainly Barcelona), Andalucía, the Comunidad Valenciana, the Canary Islands and the Balearics (Puyol 1996, 612; 2001, 33). In 1994, the largest proportion of immigrants in the province of Madrid were from South America, while in Barcelona the main countries of origin were Morocco and Gambia. Moroccans too predominated in Murcia and Almería, as did the British in Alicante and Málaga. There were also sizeable communities of Britons and Germans in the Balearic and Canary Islands, and a large Portuguese colony in the adjacent province of Huelva (Izquierdo Escribano 1997, 250).

Internal migration Internal migration has made a decisive contribution to the spatial distribution of the Spanish population. According to Spain’s 1991 population census, almost one-half of the country’s inhabitants (46.8 per cent) lived in municipalities other than the one in which they were born. Nearly one-quarter of all Spaniards (23.9 per cent) had migrated to another province. Out of a total population of 38 million, 17.8 million individuals had changed address at least once, of whom 8.7 million had embarked on long-distance migration (García Coll and Puyol 1997, 178). For most of the twentieth century, the general trend of internal migration throughout the world was from the countryside to the big cities. In Spain, this process took off in the 1920s and reached a climax during the mid-1960s. However, from the late 1970s – slightly later than similar developments in the more advanced European economies – there were growing signs that rural-to-urban migration in the Peninsula was giving way to the more recent phenomenon of ‘counter-urbanization’. In addition, many of Spain’s more remote rural areas surprisingly achieved demographic growth due to net in-migration, while the population as a

42

SPAIN: A MODERN EUROPEAN ECONOMY

whole was more evenly distributed across the landscape. The speed of this rural population turnaround, along with the reversal of metropolitan migration, was further evidence of Spain’s profound economic restructuring and social change. To some scholars, this ‘revolutionary’ trend was indicative of the shift from an industrial to a ‘post-industrial’ society. Yet, with the passage of time, other commentators adopted a more cautious approach. In several countries, it was noted, population deconcentration began to slow down, while a few countries, such as the Netherlands, Norway and Sweden, saw the reemergence of traditional urbanization patterns (Champion 1989, 1–18, 230). Due to the marked geographical concentration of its main industrial and service sectors, Spain’s rural exodus was initially directed towards only a handful of urban areas. Before the Spanish Civil War, five provinces alone attracted the vast majority of migrants. In Madrid and Barcelona, newcomers made up approximately 40 per cent of all residents. Next came Vizcaya with 25 per cent, followed by Valencia and Seville each with 10–15 per cent (Bernabé Maestre and Albertos Puebla 1986, 186). In contrast, almost all other provinces were net exporters of population. With the exception of Madrid, Spain also experienced a chronic depopulation of its interior, while coastal regions increased their share of the total population. During the Franco dictatorship’s disastrous autarkic experiment of the 1940s, the drift of Spaniards away from the countryside towards the big conurbations slackened off, due above all to the poor performance of manufacturing industry. However, from the mid-1950s, as job opportunities in industry increased, internal migration again gathered pace. Thanks to improvements in the collection of Spain’s population statistics after 1961, it is possible to discern a number of important trends in both the nature and direction of internal migration during the last four decades of the twentieth century (Table 2.6). Juan Romero González and Juan M. Albertos Puebla (1996, 175–89) distinguish three phases of population movement in Spain, roughly coinciding with the country’s economic performance. These phases are: 1 A continuation of the rural exodus between 1960 and 1975, due to profound economic development 2 A marked decline in population mobility from 1976 to 1985, in response to economic crisis and deindustrialization 3 A renewed dynamism in internal migration after 1986, resulting from economic recovery and the diversification of the economic structure.

43

DEMOGRAPHY

Table 2.6

Internal migration in Spain, 1961–94

Year

Total

Year

Total

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977

175,340 349,346 444,587 498,203 448,126 280,082 383,259 370,523 389,908 380,351 216,010 358,993 438,919 493,406 396,704 224,011 421,092

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

379,524 418,682 371,985 167,965 305,166 363,426 386,827 443,952 250,991 473,322 589,087 662,193 685,966 419,608 615,522 695,060 757,448

Source: A. García Coll and R. Puyol, ‘Las migraciones interiores en España’, in R. Puyol (ed.), Dinámica de la población en España: cambios demográficos en el último cuarto del siglo XX (Madrid: Síntesis, 1997), p. 171.

During the first of these stages, following the implementation of the 1959 Stabilization Plan, Spain’s industrial boom, along with the expansion of the construction sector and the burgeoning of services, led to a massive demand for unskilled labour in urban areas. This in turn triggered the crisis of traditional agriculture, which will be discussed in Chapter 3. Between 1960 and 1975, almost 5 million Spaniards (15 per cent of the entire population) abandoned the countryside – the largest movement of people in Spain’s demographic history. The majority of these migrants were born after Civil War, a period of declining birth rates. As such, this generation was less subject to demographic pressures than previous ones (Cabré, Moreno and Pujadas 1985, 50). Young rural dwellers were increasingly drawn to the cities by a host of ‘pull’ factors, including higher wages, improved job prospects and more attractive lifestyles. On average, net earnings in manufacturing industry were 40 per cent higher than agricultural wages (Romero González and Albertos Puebla 1996, 178). The majority of migrants settled in the large conurbations. As a direct

44

SPAIN: A MODERN EUROPEAN ECONOMY

result, cities with over 100,000 inhabitants comprised 38 per cent of the Spanish population in 1970 compared with only 24 per cent two decades earlier. Medium-sized cities (50,000–100,000 inhabitants), including a number of provincial capitals, also expanded due to inmigration. So too did cities with between 20,000 and 50,000 inhabitants (Cabré et al. 1985, 44; Tezanos 1993, 85). A key feature of internal migration at this stage was the predominance of long-distance migration, as millions of Spaniards criss-crossed the Peninsula in search of a better conditions. According to Ignacio Santillana (1984, 24), between 1960 and 1973, three-fifths of all internal migration was interprovincial. The main direction of population movement during the Development era was from the most backward regions of rural Spain, in particular Extremadura, the two Castiles, Andalucía and, to a lesser extent, Galicia and Aragón. In terms of attraction, the main destination of migrants was the province of Madrid, followed by Barcelona, the Basque Country, the Comunidad Valenciana and the Balearic Islands (García Barbancho and Delgado Cabeza, 1988, 251–53). The drift from the countryside to the urban–industrial centres, moreover, did not occur in a purely haphazard fashion. It was dominated by two quite distinct currents. The first was from Andalucía and Extremadura to Barcelona and its surrounding metropolitan area. The second ran from the two Castiles and Extremadura towards Greater Madrid. In addition, the Basque Country and the Comunidad Valenciana attracted a large proportion of their incomers from provinces within their immediate spheres of influence (García Barbancho and Delgado Cabeza 1988, 251; Romero González and Albertos Puebla 1996, 178). Between the mid-1970s and the mid-1980s, Spain witnessed a remarkable transformation in its long-standing patterns of internal migration. These changes reflected the country’s deteriorating economic situation. Most significantly, the sharp increase in unemployment in manufacturing and construction led to a dramatic decline in the movement of Spaniards from rural areas to the main urban centres (Serrano Martínez 1987, 73). According to the official statistics, the total number of internal migrants shrank from 498,000 in 1964, at the height of the industrial boom, to 168,000 in 1981, at the nadir of the industrial depression (see Table 2.6). In common with similar developments throughout Western Europe, the decline in the mobility of the Spanish population was felt most profoundly in the traditional centres of in-migration (Blanco Gutiérrez 1993, 51). Apart from Madrid and Valencia, all of Spain’s large conurbations lost some of their appeal to prospective migrants. Conversely, after a spate of redundancies and early retirements in the secondary sector, the period 1975–85 was

DEMOGRAPHY

45

marked by the return of older migrants to the countryside (Romero González and Albertos Puebla 1996, 182; García Coll and Puyol 1997, 203, 209–12). Such changes resulted in a decline in the relative importance of interprovincial migration by comparison with intraprovincial migration (Blanco Gutiérrez 1993, 54). At this stage, the main currents of migration were towards those regions which demonstrated the greatest capacity to adapt to the economic crisis, above all regions with a dynamic service sector, especially tourism. Typical of this new pattern of migration was the movement of population to the Mediterranean littoral, including the Balearic Islands (Ródenas 1994, 159; Romero González and Albertos Puebla 1996, 184). Arlinda García Coll and Rafael Puyol (1997, 189) divide up this second stage into two sub-periods: from 1976 to 1980 and from 1981 to 1985. During the second half of the 1970s, they argue, as the transition in population mobility gathered pace, there was a big fall in migration to Spain’s older manufacturing centres. In particular, the Basque provinces of Vizcaya and Guipúzocoa and, to a lesser extent Asturias – previously net importers of people – began to lose population as a result of massive job destruction, particularly in iron and steel and shipbuilding. After 1981, the impact of harsh government measures aimed at industrial restructuring imposed a further brake on internal migration (see Chapter 4). Even Barcelona, with its highly developed service sector, was transformed into a net exporter of population (Serrano Martínez 1987, 76–81; García Barbancho and Delgado Cabeza 1988, 253; García Coll and Puyol 1997, 185–86). The third phase – after 1986 – coincided with Spain’s delayed economic recovery. It followed the conclusion of the Socialist government’s painful reconversion process. Thereafter, internal migration in Spain displayed a renewed dynamism. Official data show a higher level of internal migration at this stage than during the 1960s (see Table 2.6). However, new methods of collecting population data introduced after 1987 exaggerate the extent of this increase (García Coll and Puyol 1997, 190; Puyol 1999, 72). More significant, perhaps, is the detail which the 1991 population census provides on the social structure of internal migrants. With the demise of the agricultural sector, the rural exodus lost much of its importance. Internal migration was now characterized by the movement of highly qualified professionals, including large numbers of university graduates. Spain’s ‘new middle classes’ in general moved shorter distances than a previous generation of unskilled migrants. Most changes of residence took place within the same province. At the same time, tourism replaced manufacturing as the determining factor behind the career moves of the migrant population

46

SPAIN: A MODERN EUROPEAN ECONOMY

(García Barbancho and Delgado Cabeza 1988, 247; Romero González and Albertos Puebla 1996, 180–84). As for the phenomenon of population deconcentration discussed earlier, the period after 1986 witnessed a strong out-migration from the main urban centres, including Madrid, Barcelona, Valencia and Saragossa, and the simultaneous rise of dormitory towns. Thanks to the notable improvement of the country’s urban transport infrastructure, many of the baby boomers of the 1960 fled the big cities – where there was a shortage of affordable housing – for the less congested countryside. Much of this movement consisted of couples with low-tomiddle incomes – many of them recently married – who chose to live less than an hour’s commuting distance from their place of work (Romero González and Albertos Puebla 1996, 186). The most rapidly expanding parts of Spain were cities with a population of 50,000–100,000 inhabitants, while small towns with fewer than 10,000 people also figured among the new destinations (INE 1994, 37–38; García Sanz 1997, 280).

CHAPTER 3

Agriculture According to Spain’s labour force survey (Encuesta de Población Activa), shortly before the end of the twentieth century, the total number of people employed on the land dropped below one million for the first time. Official data for 2002show that agriculture (including fisheries) accounted for only 5.7 per cent of the total active population, while it contributed a mere 4 per cent to the country’s gross domestic product (GDP). The relative decline of Spanish agriculture sector was, as we have seen, the product of long-term developments outside the primary sector, above all the rapid expansion of manufacturing industry during the Development era and the inexorable rise of the service sector. In less than two generations, over 3 million small farmers and agricultural labourers quit the land. Leandro Prados and Jorge Sanz (1996, 368) estimate that 30.7 per cent of Spain’s GDP was attributable to agriculture in 1950, dropping to 23.6 per cent in 1960 and 10.1 per cent in 1975. During the final decade of the millennium, farming’s contribution to GDP fluctuated between 2 and 5 per cent – depending on climatic conditions (Colino 1997, 183). Viewed from a wider European perspective, however, the overall picture of Spanish agriculture differs slightly. Among the member states of the European Union, Spain has one of the largest farming populations. Data collected by the European Commission for 2000 showed that only Greece (with 17.0 per cent of its active labour force on the land), Portugal (12.5 per cent) and Ireland (7.9 per cent) had larger agricultural populations. In the Spanish case, the figure of 6.9 per cent was significantly above the EU average of 4.3 per cent, while the Iberian nation also accounted for roughly 12 per cent of the total farm output of the European Union in that year (Eurostat 2001; García ÁlvarezCoque and Rivera Vilas 1997, 337). The relative decline of Spain’s agricultural sector, in terms of both employment and its contribution to national income – not least since the 1960s – was more than compensated for by a substantial increase in overall productivity. José Luis García Delgado and María Josefa García Grande (1999, 101) calculate that between 1964 and 1995 the total final value of agricultural production doubled in real terms. The bulk of this increase occurred in livestock farming, whose final output trebled. By comparison, arable farming increased its total production by no

48

SPAIN: A MODERN EUROPEAN ECONOMY

more than 50 per cent. According to their calculations, in the mid1960s, the average Spanish farmer produced enough food to satisfy the dietary needs of 7.5 people. Three decades later, the average farmer produced enough to feed 27 inhabitants. Over the same period, the volume of agricultural exports also expanded rapidly, comprising roughly one-sixth of all Spain’s exports by value in the mid-1990s (García Álvarez-Coque and Rivera Vilas 1997, 325–26). The spectacular transformation of the countryside was not only fast but also mainly spontaneous. Above all, it owed much to the hard work and application of the nation’s farmers, who were responding to changing market conditions. In contrast, most Spanish agronomists tend to play down the contribution of government intervention on the land, especially during the Franco era (Sumpsi 1997, 156–57). After Spain joined the European Union in 1986, the most dynamic sectors of Spanish agriculture had little difficulty in meeting the twin challenges provided by an expanded EU market of more than 300 million consumers together with fierce global competition from third countries. Nowadays, approximately half of the country’s agricultural production is concentrated in the most dynamic sectors, where demand is increasing most rapidly of all (Colino 1997, 195).

Patterns of Spanish agriculture Put bluntly, Spain is a land with two distinct types of agriculture, largely determined by rainfall levels: 1 There is ‘wet’ Spain, which includes the Mediterranean littoral. Thanks to higher-than-average rainfall or irrigation, farmers here are able to produce a wide variety of crops – especially fruit and horticultural products – much of which is exported. Such areas are either competitive or at least potentially competitive. Progress, moreover, has been achieved without a great deal of public support. 2 More significant in terms of size is Spain’s semi-arid interior, comprising about 85 per cent of the land surface. Here agriculture is generally uncompetitive. Farmers can only survive with the aid of massive subsidies or by diversifying their activities into such areas as tourism or rural industry (Sumpsi 1996b, 219–20). Among the most advanced areas of peninsular agriculture today are the orange groves (huertas) of Valencia, the large cereal-producing estates of Andalucía and the greenhouses of the southern Mediterranean seaboard. All along the Mediterranean coastline, between Almería and

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49

Huelva, farmers have obtained enormous increases in agricultural productivity by cultivating such plants as tomatoes, peppers and strawberries under plastic. In some cases, this practice entails the construction of greenhouses known as invernaderos, while elsewhere the landscape is covered with plastic tunnels or sheeting (acolchados) spread over the parched soil. As Keith Salmon (1995b, 66–67) points out, the greenhouses and tunnels conserve moisture and protect the plants against frost damage in winter, while covering the ground with plastic helps keep down weeds. As a result of these methods, thousands of hectares of hitherto unproductive land have been converted to intense cultivation yielding up to three or four crops annually, often at premium prices. Even so, the economic and social costs of these activities are enormous in terms of the damage caused to the local ecology, not least the exhaustion of the soil and the contamination of subterranean water (Vera and Romero 1994, 155–56). In stark contrast, the great mass of the nation’s small farmers, especially those on dry land (secano), struggle to make ends meet. Many producers are burdened with anxieties due to falling incomes, debt and the ever-present threat of bankruptcy (Camilleri 1994; Sumpsi 1995b, 172). Moreover, Spain’s farmers constitute an ageing population, although there is some evidence of a recent trend towards the rejuvenation of the sector. Roughly two-fifths of landowners are over 50 years old, while less than one-fifth are under 45. Moreover, on family farms, fewer and fewer young men and women – especially those with good qualifications – show the least inclination to follow their parents into what they see as a decaying and unrewarding profession. Among Spain’s diminishing army of landless labourers, the problems of unemployment and underemployment are rife. Two-thirds of rural unemployment is to be found in Andalucía and Extremadura (Genovés 1994, 176; García Delgado and García Grande 1999, 89, 92). In common with their rural counterparts across the continent of Europe, Spanish farmers are frequently portrayed as a bunch of ‘subsidy hunters’ living off official handouts. Why, their critics complain, should Madrid, Brussels, or the autonomous communities be obliged to bail them out constantly when earlier more than a million manufacturing jobs were sacrificed on the altar of economic modernization? In what ways are the cereal growers of Castilla y León or the dairy farmers of Cantabria more deserving of official protection than a lost generation of Basque shipbuilders or Asturian coal miners? Their defenders, among them the architects of the new Common Agricultural Policy, emphasize the vital role that farmers play in the management of the environment and preserving Europe’s fast-disappearing rural heritage (González Castillo 1993, 165; Sumpsi 1994b).

50

SPAIN: A MODERN EUROPEAN ECONOMY

Traditional agriculture During the first third of the twentieth century, Spanish agriculture experienced a lengthy period of moderate growth which was brought to a sudden halt by the inter-war depression and the outbreak of civil war (Simpson 1995b, 243). Rural Spain even witnessed the first stirrings of a population exodus, as the number of adult males on the land fell steadily from 5.2 million in 1900 – when they constituted as many as two-thirds of the country’s active labour force – to 4.1 million in 1930. Apart from the availability of an unlimited supply of farm labour, the apparent stability of traditional agriculture south of the Pyrenees was determined by such factors as low wages, high protective duties following the Cánovas tariff of 1891 – mainly in defence of cereal growers – and the ability of Spain’s farmers to satisfy the unexacting demands of a poorly diversified domestic market with low per capita incomes. These conditions provided for a comfortable existence for large landowners, while at the same time safeguarding the livelihoods of the nation’s small farmers. The most disturbing problems which Spanish agriculture faced before the Civil War were related to the country’s extremely unequal property structure. After the outbreak of anarchist disturbances in 1903–05, governments were forced to pay special attention to the latifundio belt of southern and central Spain, characterized by its huge unproductive estates, absentee landowners and half-starved agricultural labourers. At the opposite end of the scale, the north and north-west of the Peninsula were littered with a multitude of tiny farms (minifundios) capable of little more than basic subsistence farming. Both of these systems were archaic, dating back to the Reconquest during the Middle Ages. Yet neither was entirely stagnant and both remained profitable. While the minifundio lacked capital and technology, it nevertheless benefited from surplus labour in the shape of the extended family. In addition, emigrant remittances permitted a minimum amount of modernization of farms and equipment. For their part, the large estates of the south offered their exploiters the availability of cheap labour as well as a repressive rural police force (the guardia civil) founded in the 1840s to quell peasant rebellion. The use of farm machinery remained largely a threat in order to dissuade farm labourers from making wage claims. In addition, agricultural prices were maintained artificially high, due to the state’s policy of reserving the Spanish market for domestic producers, while a depreciating peseta kept down the level of food imports. Both systems regulated the supply of labour, which was always well in excess of demand. Hence profits were maintained. However, the weakness of the modernization process and the under-performance of agriculture – with

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its intermittent crises – convinced many observers of the urgent need for agrarian reform. The social costs of latifundismo and minifundismo were peasant unrest, violence and repression which reached a violent climax in the Spanish Civil War (Bernal 1985, 257–63). Despite the absence of a fully fledged agricultural policy – other than by raising protective tariffs still further in 1906 and 1922 – according to one calculation, the period 1900–31 witnessed a 55 per cent increase in agricultural output in real terms, which represented an annual growth rate of 1.4 per cent. If this figure is to be believed, it constituted a rate of growth more than double that of neighbouring France. Since the Spanish population expanded by roughly 0.8 per cent per year over this period, agricultural incomes would have risen of 0.6 per cent. Within the sector, livestock farming grew by an estimated 123 per cent, thanks to rising living standards, while horticulture and citrus fruits also prospered, mainly due to expanding exports (Grupo de Estudios de Historia Rural 1983; Jiménez Blanco 1986, 45–47, 138). Even so, this modest progress has to be set against a background of the immobilism of Spanish agriculture as a whole. Above all, Spain’s so-called Mediterranean trilogy of cereals, vines and olives – grown mostly by extensive cultivation on dry lands – still made up almost one-half of final agricultural output in the early 1930s. Moreover, these three crops recorded some of the lowest yields in Europe (Tortella 1985, 84–85; Simpson 1995a, 183). By comparison with Spanish agriculture’s respectable performance during the first third of the twentieth century, the period 1935–50 witnessed a pronounced decline, even though numbers employed on the land increased by more than one-fifth. Roser Nicolau (1989, 78) calculates that as late as 1950, the agricultural labour force totalled 5.35 million – its highest ever total. Even so, notwithstanding this increase of rural workers, for the great mass of Spaniards the 1940s was an era of falling living standards and worsening diets. At the same time, exports of such staple items as wine, oranges, fresh vegetables and olive oil plummeted (Simpson 1995b, 244–48). After the Spanish Civil War, the triumphalist Franco dictatorship sought to impose its will on the defeated agricultural labour force by banning representative organizations and forcing down agricultural wages to 1936 levels. One result of this vindictive policy was a period of remarkable prosperity for many of the regime’s rural supporters. This was especially true in the case of those large landowners who exploited their lands directly and who possessed the means to dispose of a sizeable proportion of their crop on the lucrative black market, known as the estraperlo (Leal et al. 1975, 41). On the big estates of the south, profits from clandestine operations, above all the sale of wheat and olive oil,

52

SPAIN: A MODERN EUROPEAN ECONOMY

went towards the purchase of more land as well as the acquisition of luxury apartments. According to the pioneering investigations of José Manuel Naredo (1974, 36; 1981, 110–15), windfall profits from blackmarketeering in the countryside also constituted a major source of capital for industrial investment in the 1940s and early 1950s. Unfortunately, they made little contribution to the modernization of the agricultural sector, not least because of the difficulty which farmers encountered in obtaining such scarce items as draught animals, farm machinery and artificial fertilizers. How do we explain the stagnation of Spanish agriculture after the ending of the Civil War? On this vexed question, scholars have long been divided. The leading expert on Spanish agriculture during early Francoism, Carlos Barciela (1986, 388–98), condemns the misguided interventionist policies of the New Order aimed at bringing about economic self-sufficiency. To the ill-prepared Francoist bureaucracy, he contends, such matters as production levels, wages and prices could be determined merely by the promulgation of decrees. The inevitable consequences of their actions were perennial food shortages as farmers diverted large parts of their production to the black market where prices were much higher – up to three or four times what they would have obtained by selling their produce at the official rates. In contrast, other scholars stress Spain’s international isolation in the 1940s – a phenomenon not unentirely of its own making – and the difficulties which farmers encountered in securing imports of vital off-farm inputs. José Manuel Naredo (1974, 35–36) and James Simpson (1995b, 245) argue that agricultural production was seriously affected by a shortage of mules and oxen, due to the ravages of the Civil War, as well as by restrictions placed by the authorities on the purchase of tractors and artificial fertilizers. Both of these items had to be imported owing to shortages in domestic production. Elsewhere, there is grudging support for the official ‘excuse’ that agricultural recovery in the 1940s was held back by the ‘persistent drought’ (la pertinaz sequía), not least in 1945 (Robles Teigeiro 1992, 191; Sumpsi 1997, 151). Thanks in no small measure to the liberalization of foreign trade by Commerce Minister Manuel Arburúa – and aided by the bumper harvests of 1951 and 1952 – Spanish agriculture staged a remarkable recovery in the early 1950s (Clavera et al. 1978, 140–41). Over the decade, mainly due to the spread of mechanization, agricultural productivity rose by an annual rate of 3.9 per cent (Simpson 1995b, 28). Despite rising real wages and terms of trade which moved sharply against cereal growers, the 1950s acquired the reputation of being a ‘golden age of traditional agriculture’ (Camilleri 1974). As before, no single group benefited more from this situation than the southern

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latifundistas, who took full advantage of elastic supplies of surplus labour, estimated at around 2 million people in 1957 (Simpson 1995b, 250; Barciela 1986, 435). Rafael Cavestany, who was Franco’s Agriculture Minister from 1951 to 1957, permitted agricultural prices to rise in a deliberate attempt to return Spain to market conditions. Deservedly, he receives the plaudits of economic historians for his championing of a series of initiatives to boost the rural economy, including the restructuring of small farms, the provision of cheap credit to peasant farmers and the encouragement of rural industry. Yet, both Cavestany and his successor, Cirilo Cánovas, paid insufficient attention to underlying trends within the primary sector. Despite the eradication of food shortages at the beginning of the decade, the authorities persisted with the short-sighted policy of subsidizing the cultivation of wheat, rice and wine, leading to the accumulation of a series of unsold surpluses. Meanwhile, livestock and dairy farming – where consumer demand was rising rapidly – were practically ignored by the policy-makers (Gómez Ayau 1978, 120; Barciela 1986, 416–34).

The crisis of traditional agriculture It was the dramatic resumption of out-migration from the countryside after the late 1950s – interrupted by the Spanish Civil War and the ‘return to the land’ of the 1940s – that triggered what Arturo Camilleri (1974) famously dubbed the ‘crisis of traditional agriculture’ and which was to act as the engine of change in the countryside. Initially, the vast majority of those leaving the land were wage labourers (jornaleros), many of whom came from the latifundio zone. José Manuel Naredo (1974, 38) calculates that the number of jornaleros on the large estates of the south tumbled from 3 million in 1930 to 1 million in 1969. By the early 1960s, this group of landless labourers was joined by a steadier flow of peasant farmers from the minifundio region of the northern Meseta (Leal et al. 1975, 183). The drift of population from the countryside occurred in three main stages. It was at its height during the Development era, when on average around 100,000 Spaniards per year abandoned the land. Between 1975 and 1985, the pace of out-migration slackened, largely due to the collapse of emigration to Western Europe together with declining opportunities for employment in Spanish manufacturing. During the third stage, from the mid-1980s onwards, the return of economic prosperity led to a resumption of the earlier ‘flight from the land’ (see Table 3.1).

54 Table 3.1 Year

1964 1975 1985 2000

SPAIN: A MODERN EUROPEAN ECONOMY

The decline of the agricultural sector, 1964–2000 Active rural population as a percentage of total active population 34.0 20.9 15.3 6.8

Contribution of agriculture to GDP (%) 15.0 8.3 5.5 4.0

Source: J.L. García Delgado and J. García Grande, ‘La agricultura: una profunda transformación estructural’, in J.L. García Delgado (ed.), España, economía: ante el siglo XXI (Madrid: Espasa, 1999), p. 86; Instituto Nacional de Estadística.

There were many reasons for the rural exodus after the late 1950s. James Simpson (1995b, 250) provides four main explanations: 1 The annihilation of the anarchist movement of the south by the Franco regime and the weakening of the jornaleros’ ambitions of becoming property owners following the destruction of the Second Republic led to a change of attitudes towards land. 2 The trend towards direct cultivation practised by landowners discouraged the leasing of land, thereby limiting the possibility of agricultural labourers from progressing up the farm ladder as a result of rental agreements. 3 The serious erosion of rural real wages in the 1940s meant that labour was more willing to consider the alternatives which arose in the 1950s. 4 The growing demand for unskilled labour north of the Pyrenees was a more attractive option to the jornaleros than Latin America. As agricultural wages started to climb in the 1960s due to the growing inelasticity of labour supply, those farmers who remained on the land – usually the better-off – began to substitute machinery for both labour and draught animals. This process set in motion the long-overdue mechanization of Spanish agriculture. As a result of technical advances made abroad, the costs of tractors and other farm machinery were already falling in real terms (Simpson 1995b, 253). According to one calculation, between 1964 and 1976, rural wages rocketed by 450 per cent, while the cost of off-farm inputs – agricultural machinery, fuel, fertilizers, pesticides, animal feed, artificial insemination, and so on – rose by no more than 108 per cent, thus providing a considerable

AGRICULTURE

55

incentive to farmers to update their production methods. From 1976 to 1985, however, the gap narrowed as agricultural wages rose by 242 per cent while the cost of off-farm inputs went up by 212 per cent (García Delgado and García Grande 1999, 90). In situations where economies of scale were feasible, the mechanization of agricultural production could be an extremely profitable business for Spanish farmers. A reduction in labour costs, due to the introduction of agricultural machinery, was soon achieved in the case of small grain cereals (with the exception of rice) since it was here that the mechanization of harvesting and threshing was easiest to bring about. In his celebrated study on the evolution of Spanish agriculture, Naredo (1974, 42–46) demonstrated that, in the case of winter-sown cereals, using a self-propelled combine harvester on dry land of average quality a single agricultural worker could reduce the amount of time spent harvesting the crop from 100–130 hours per hectare to 3 to 3.5 hours. In such circumstances, the wage bill could be slashed from 1,800 pesetas per hectare to somewhere between 60 and 70 pesetas. In addition, it was (theoretically) possible to reduce the time spent sowing winter cereals from 18 hours per hectare using an ox-drawn plough to just over one hour with a 40–HP tractor. However, for a variety of reasons, the cultivation and harvesting of Spain’s two other basic staples – olives and vines – proved more difficult to mechanize. The spread of mechanization from the beginning of the 1960s was, without doubt, the most outstanding achievement of modern Spanish agriculture (see Table 3.2). Data from the Agriculture Ministry show that the stock of tractors increased more than sixfold between 1964 and 1996, from 130,000 to 824,000. Over the same period, the number of combine harvesters expanded from 8,800 to 49,400. During the early stages of mechanization, however, not all farmers were able to participate in this process. This was partly because of the high cost of acquiring the new machinery, but also because of the small size and fragmentation of holdings. For every farm worker equipped with a tractor in 1964 there were more than 30 without one. The comparable figure for combine harvesters was one to 500 (García Delgado and García Grande 1999, 91). Even so, Naredo (1974, 76–77) calculated that the minimum size of holding that would justify the mechanization of winter-sown wheat on secano land fell from 75.5 hectares in 1953 to 11.5 hectares in 1967, since rising real wages reduced the threshold at which labour-saving machinery was financially viable. For the cultivation of fodder crops on similar terrain, the same author estimated that the threshold for substituting capital for labour and animal traction dropped even more dramatically, from 94.1 hectares in 1953 to 19.0 hectares in 1967. Using the Agricultural Censuses of 1962, 1972 and

56 Table 3.2

SPAIN: A MODERN EUROPEAN ECONOMY

The mechanization of farms by size of holding, 1962–82

Year

Percentage of all tractors on holdings of under/over 100 ha

Percentage of the surface area farmed on holdings of under/over 100 ha

Number of ha worked per tractor on holdings of under/over 100 ha

1962 1972 1982

63.3 80.0 87.4

73.2 67.0 67.7

270 56 26

36.7 19.8 12.6

26.8 33.0 32.3

186 112 86

Source: J.M. Naredo, ‘Diez años de agricultura española’, Agricultura y Sociedad, 46 (1988), 20.

1982, Naredo (1988, 20–21) calculated that over these two crucial decades, the proportion of the nation’s tractors in use on farms of less than 100 hectares went up from 63 per cent to 87 per cent. Yet, as Table 3.2 shows, over the same period, large landowners utilized their agricultural machinery much more efficiently than did small farmers. Lacking the financial resources to modernize and re-equip their farms, thousands of rural households dispatched one or more of their members to work abroad or in the big conurbations so as to supplement farm incomes. Before long, part-time farming – where agriculture no longer constituted the principal form of family employment – became a distinctive feature of village life in the minifundio zone (Naredo 1974, 93–94; Castillo Quero 1994, 47). At the same time, thousands of marginal and unprofitable farms were either sold off or simply abandoned, especially in the more remote and mountainous zones. According to census data, between 1962 and 1989, 3.2 million hectares of land were lost to agricultural production, while over 600,000 farms out of a total of 2.85 million disappeared altogether – more than onefifth of all holdings (García Delgado and García Grande 1999, 96). In the period 1962–72, when the abandoning of farms was at its height, 335,000 holdings disappeared, roughly one in a hundred every year. By contrast, from 1972 to 1982, around 200,000 farms were lost, while between 1982 and 1989 – as the rate of consolidation slowed down even further – the total number of holdings fell by 80,000 (Barceló 1994b, 173; Abad Balboa, García Delgado and Muñoz Cidad 1994, 104). What impact did the consolidation of agricultural land have on the average size of Spanish farms? Notwithstanding the massive outmigration from the countryside, the average dimensions of holdings increased only marginally, from 15.4 hectares in 1962 to 17.7 hectares

57

AGRICULTURE

in 1972, 18.5 hectares in 1982 and 18.9 hectares in 1989 (Barceló 1994b, 192). However, by comparison with the average size of farms in the rest of the European Union, Spain fared much better, depending on the type of measurement used. Data from the European Commission in 2000, which took into account only so-called utilized agricultural land – that is, excluding scrubland, forests and mountains – found that the average size of farms in Spain had risen to 21.2 hectares. This compared with 4.3 hectares in Greece, 6.4 hectares in Italy, 9.2 hectares in Portugal and an EU average of 18.1 hectares. Overall, this modest rationalization constituted what agronomists term a ‘partial’ rather than a ‘classical’ adjustment. Unfortunately, many holdings in the minifundio zone were still below the threshold which permitted farmers to switch from traditional methods of cultivation to mechanized production (Barceló, Compés and Avellá 1991, 95). As Table 3.3 shows, the most significant changes with regard to the size of farms in the period 1962–89 were at the extremes. Small farms (between 5 and 20 hectares) decreased as a proportion of all holdings from 25.1 to 22.9 per cent, while large holdings (over 50 hectares) increased from 3.7 to 5.3 per cent. Luis Vicente Barceló (1994b, 174) contends that the hated southern latifundio acquired a degree of legitimacy at this stage, while the public’s perception of it changed from feudal relic to large-scale agribusiness. However, Spain’s farm structure was still largely characterized by the existence of large numbers of small farms along with a small number of large farms. According to the 1989 Table 3.3

Distribution of total land surface by size of holding, 1962–89(%)

Size of holding (in ha) Less than 1 1–5 6–20 21–50 51–200 Over 200 Total

Farms

Surface area

1962

1989

1962

1989

28.2 36.1 25.1 6.9 2.7 1.0

28.0 37.0 22.9 6.8 3.9 1.4

0.7 5.7 16.0 13.2 15.4 49.0

0.7 4.7 11.8 11.0 18.9 52.9

100.0

100.0

100.0

100.0

Source: J. Colino. ‘Sector agrario’, in J.L. García Delgado, R. Myro and J.A. Martínez Serrano (eds), Lecciones de economía española, third edition (Madrid: Civitas, 1997), p. 199.

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census, farms under 5 hectares accounted for as much as 65 per cent of holdings, yet occupied only 5.3 per cent of agricultural land. Conversely, farms over 100 hectares accounted for only 2.7 per cent of holdings, while occupying 62.3 per cent of all agricultural land. This huge disparity is slightly diminished if we take into account only ‘utilized agricultural land’. By this criterion, farms under 5 hectares accounted for 7 per cent of utilized agricultural land in 1989, whilst those over 100 hectares made up 48.6 per cent (see Table 3.4). Although, in general, increasing the size of land holdings leads to the introduction of important economies of scale, for example in the use of fertilizers and machinery, this factor alone does not automatically imply the existence of a strong correlation between farm size and profitability. Other variables – including the quality of the soil, methods of cultivation, transport costs and management skills – must also be considered. Barceló (1994b, 173–75) argues that present-day Andalusian latifundistas are no less risk averse than their predecessors were. Many of them continue to display strong resistance to the introduction of new crops or the implementation of modern farming methods. Conversely, at the opposite end of the scale, on the fertile irrigated lands of the Levante, small family farms employing contract labour from outside the region have long been among the most profitable and efficient in the Peninsula. Indeed, to many agronomists, the Valencian huerta constitutes a paradigm case. A study of 1985, cited by Barceló, concluded that the minimum size of holding necessary for

Table 3.4

Number of farms by size, according to the 1989 Agricultural Census (%)

Size of farm (in ha)

Number of farms

Less than 5 5–20 20–50 50–100 100–300 over 300

65.0 22.9 6.8 2.6 1.8 0.9

5.3 11.9 11.0 9.5 15.1 47.2

7.0 15.8 15.4 13.2 17.5 31.1

100.0

100.0

100.0

Total

Total agricultural area

Utilized agricultural land

Source: J.L. García Delgado and M.J. García Grande, ‘La agricultura: una profunda transformación estructural’, in J.L. García Delgado (ed.), España, economía: ante el siglo XXI (Madrid: Espasa, 1999), p. 97.

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farmers to make a reasonable profit was 4 hectares for horticulture, 6–9 hectares for citrus fruit and 15–20 hectares in the case of viticulture.

Government intervention on the land The Franco dictatorship could justifiably claim at least two partial successes on the land. The first was its attempt to provide a legal framework for the consolidation of tiny scattered plots of land in the minifundio zone – a major factor holding back mechanization. The second was its loudly proclaimed attempt to raise agricultural productivity by extending the area under irrigation. Other government initiatives, however, achieved precious little. This was the case with the ideologically inspired policy of colonization which the New Order inherited from the like-minded Primo de Rivera dictatorship. Colonization endeavoured to slow down the movement of population from the countryside by resettling thousands of peasant families on uncultivated land. Extravagant claims by the Francoist authorities to have acquired 576,891 hectares of irrigable lands for the purposes of colonization between 1939 and 1951 have been exposed by Carlos Barciela as meaningless. Between 1939 and 1950, he argues, the National Colonization Institute (Instituto Nacional de Colonización), resettled a mere 1,759 peasants (135 per year) on irrigated lands, out of a grand total of 25,212 ‘colonists’ (Barciela 1990, 98–120; Barciela and López Ortiz 2000, 323–63). A similar fate awaited the regime’s spurious efforts to tackle the inequalities of land distribution in the latifundio belt, introduced largely as a sop to Falangist militants. In 1953, the authorities brought in an Act concerning ‘clearly improvable farms’. This piece of legislation applied only to properties composed entirely or in part of uncultivated land deemed suitable for either forestry or cattle rearing. Owners of land that was so designated by the Agriculture Ministry were to be provided with a plan spelling out the amount of state aid to which they were entitled in order to undertake specific improvements. Failure to implement the plan over a stipulated period of time could result in their property being placed on a so-called List of Expropriable Properties. If this happened, the Ministry was entitled to sell off the land to any individual who was prepared to carry out the plan. In the absence of such an eventuality, the land would be either transferred to the National Colonization Institute or form part of the public forestry domain. As Sima Lieberman (1982, 76–77) contends, although this legislation might have been used by the authorities to compel large landowners to produce more efficiently, in practice it remained a dead letter.

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In order to persuade the owners of tiny parcels of land in the minifundio zone to reconstitute their scattered holdings into fewer more rational units, the policy-makers passed two Acts in 1952 and 1955. This legislation applied to any municipality where its application was requested by at least three-fifths of farmers who between them owned a similar proportion of land. In each municipality which sought to benefit from this legislation, the local authorities were obliged to establish a ‘minimum unit of cultivation’ below which no additional plot of land could be created. All newly constituted plots were then declared to be ‘indivisible’. The main justification of this policy, known as concentración parcelaria, was that it permitted important economies of scale, including the greater use of machinery, fertilizers, herbicides and pesticides. It was also intended to stimulate energy savings, as well as reduce the amount of time spent travelling from one corner of a particular farm to another. Yet, as critics rightly pointed out, what the policy-makers dismissed as the illogical subdivision of holdings was frequently based on good farming practice. Above all, the dispersal of plots on an individual holding encouraged a greater diversification of production, thereby alleviating the risk of climatic disasters such as torrential rain, hailstorms or heavy snow, as well as acting as a barrier to the spread of contagious diseases. As to the legislation itself, the consolidation of holdings was rarely preceded by a detailed study of future profitability, while its implementation could be extremely costly for impoverished small farmers. In addition, the redistribution of the land was often a bone of contention between neighbours, especially on such issues as the drawing up of boundaries and rights of way. Moreover, in those municipalities where concentración parcelaria was popular among farmers, its very success sometimes made it harder to carry out associated irrigation schemes, not least since the latter usually required the expropriation of reconstituted plots which the legislation deemed ‘indivisible’ (Barceló 1994b, 183–84). During the 1950s, the dictatorship’s attempts to eradicate the fragmentation of land holdings made little headway. By 1962, when the legislation was modified, just over half a million hectares had been consolidated. None the less, over the next two decades this figure had increased to 5.5 million hectares. In the opinion of Barceló (1994b, 187), the 1960s were the golden age of concentración parcelaria, reaching a high point in 1967, when 403,869 hectares of land were consolidated. According to census data, between 1962 and 1989, the average number of plots per farm fell from fourteen to eight, while the average size of farms increased from 1.1 hectares to 2.33 hectares (see Table 3.5). Disappointingly, most of the newly reconstituted holdings were still well below the threshold for the introduction of farm

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Table 3.5

The effects of concentración parcelaria, 1962–89

Census year Average number of plots per farm Average size of farms (ha)

1962

1972

1982

1989

13.7

10.6

8.74

8.14

1.1

1.7

2.16

2.33

Source: L.V. Barceló, ‘Políticas de modernización de la agricultura española’, in J.M. Sumpsi (ed.), Modernización y cambio estructural en la agricultura española (Madrid: Ministerio de Agricultura, Pesca y Alimentación, 1994), p. 190.

machinery. Even so, a World Bank report of 1966 concluded that ‘the principal obstacle to the efficient use of mechanized equipment does not lie with the size of farms but with the number of parcels’. This, the report concluded, was because the owners of small properties could hire machinery or set up cooperative organizations in order to share costs (Barceló 1994b, 186). Another weakness of this legislation was its lack of application in large parts of the Peninsula. Three-fifths of all land consolidations before the mid-1980s occurred in a single region – Castilla y León – where wine and olive producers saw its advantages. By contrast, in many other regions, including Galicia, where property was most subdivided, little was achieved. In an attempt to extend the geographical impact of the Act, the legislation was further modified in 1973, when the active participation of only one-half of all proprietors was required. Later in the 1980s, with the devolving of decision-making away from Madrid, responsibility for implementing such legislation was transferred to the autonomous communities, among whom only Galicia and Aragón showed enthusiasm for taking action (Barceló 1994b, 189–91; Sumpsi 1997, 155). The potential gains to Spanish farmers from watering the land surface – higher yields, multiple crops, greater diversification, and so on – were appreciated before Roman times. Irrigation schemes were extended during the Muslim occupation of the Iberian Peninsula when new crops such as oranges, sugar cane, rice and cotton, were brought in from North Africa. Owing to high outlay costs and long payback periods, the Aragonese reformer Joaquín Costa argued at the end of the nineteenth century that it should be the function of the state to undertake the construction of dams, reservoirs and canal systems. Alas, Spain’s impecunious finances meant that, notwithstanding the ambitious infrastructural projects of the Primo de Rivera dictatorship and the

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Second Republic associated with the name of Lorenzo Pardo, by 1936 only 5 per cent of agricultural land benefited from irrigation (Ortega 1979, 354, 360–73; Monclús and Oyón 1986, 362–71; Simpson 1995b, 126–47). After the Spanish Civil War, the Peña Plan of 1939 – named after Franco’s Minister of Public Works Alfonso Peña Boeuf – initiated a massive construction programme of dams, reservoirs and irrigation canals whose prime objective was to increase the supply of hydroelectric power to manufacturing industry. Yet the countryside also reaped the benefits of the Peña Plan. By 1965, two-fifths of agricultural output originated from irrigated lands, compared with 29 per cent in 1932. During the 1940s and early 1950s, the main goal of the New Order’s irrigation policy was agricultural self-sufficiency. With the jettisoning of autarkic principles in the 1960s, this ill-judged priority was radically altered to the diversification of agricultural production and securing a balance-of-trade equilibrium in farm products. In particular, improvements in the water supply to farmers, along with the introduction of better strains of seeds, greatly facilitated the cultivation of intensively grown crops such as alfalfa, maize, sugar beet, oranges, peaches and pears (Simpson 1995b, 261). The adoption of indicative planning in 1964 brought the announcement by the policy-makers of the long-term objective of nearly trebling the area under irrigation, from roughly 1.2 million to 3 million hectares. This benchmark figure – finally achieved by the new democracy in 1984 – included around 1 million hectares of public works already under construction. As Joaquín Melgarejo (2000, 303–08) argues, the Francoist planners erred on the side of optimism in order to win official approval for their extravagant proposals. Even so, owing to inflationary pressures, only the Second Development Plan (1968–71) came close to meeting its target. During the period 1964–77, fewer than two-fifths of the projected dams came into operation. Moreover, after the death of the Caudillo in 1975, the total capacity of Spain’s reservoirs remained fairly static, until new spending on public works in the early 1980s bore fruit later in the decade. Between 1985 and 1989, an average of 40,000 hectares per year were added to the area of irrigated land (Bandrés 1993, 1066–67). Although by the early 1990s Spain possessed more irrigated land per square kilometre than any other EU country, its water supplies were still totally inadequate for future needs. The annual consumption of water per inhabitant – over four-fifths of which was destined for agriculture – was one of the highest in Europe, on a par with Italy, Greece and Portugal. The chief difficulty concerned the enormous distances between the main sources of water supply in the north of the Peninsula and the

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leading areas of consumption along the Mediterranean coast. Here, the demand for additional water supplies came not only from intensive agriculture but also from mass tourism projects, including golf courses. In addition, spatial disparities were exacerbated by irregularities in the amount of rainfall, both seasonally and from one year to another. In an audacious attempt to solve this problem, the Socialist administration introduced a National Water Plan (Plan Hidrológico Nacional) in 1993, which will not be completed until 2012. This controversial infrastructural programme, which required eight years to win parliamentary approval, sought to bring about the annual transfer of 1,050 cubic hectometres of water. When it is fully operational, water will be pumped along a 900–kilometre canal over Spain’s uneven land surface, from the basins of the rivers Ebro and Duero to the main deficit areas – the basins of the eastern Pyrenees, Sur, Guadiana, Guadalaquivir, Segura and Júcar. The plan involves the construction of 100 dams over a ten–year period. It also includes provision for improvements to city water supplies, a reduction in water charges, the modernization of irrigation methods and the implementation of a quality control and monitoring system of water supply (Vázquez 1999, 42–46).

Changing patterns of demand and supply One of the key challenges confronting Spanish farmers from the late 1950s was the urgent need to match the supply of foodstuffs with the nation’s changing eating habits. According to Engel’s Law, as real wages rise consumers tend to switch their demand away from traditional cereals and legumes to more income-elastic items such as meat, fish, dairy products and fresh vegetables. Second, they spend proportionally less of their total income on food. In the case of Spain, between 1955 and 1965, real per capita incomes rose by roughly two-fifths, while the demand for foodstuffs was significantly affected by the arrival of tens of millions of foreign tourists every year (Barceló 1987a, 20; Simpson 1995b, 256–57). According to the long-running series of household budget surveys (Encuestas de Presupuestos Familiares) published by the Instituto Nacional de Estadística, the proportion of the family budget spent on food fell by roughly a half between 1958 and 1990–91, from 55 per cent to 27 per cent. Within the average family’s food budget, the proportion of its combined income spent on inferior goods such as bread, rice and potatoes fell significantly, while expenditure on superior goods – meat, milk, eggs and fruit, and fresh vegetables – remained buoyant. After 1981, the data show a further change in the pattern of demand, as spending on meat fell marginally vis-à-vis fish, olive oil, fruit

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and fresh vegetables. Even before Spain joined the European Union in 1986, dietary habits were converging with the rest of the continent, although the average Spaniard consumed less meat and animal fats and more citrus fruit, vegetable oils and fresh vegetables than their EU counterparts. Finally, official statistics reveal that by the end of the twentieth century, a typical Spanish family spent 5 per cent more of its budget on food than an average EU family (Pérez Blanco 1983, 6; Lamo de Espinosa, Sumpsi and Tió 1992, 87–89; Abad Balboa, García Delgado and Muñoz Cidad 1994, 82; García Delgado and García Grande 1999, 87). As Table 3.6 shows, adapting agricultural production to changing dietary habits was to be a long-drawn-out process. How do we account for this? Was it the fault of Spain’s farmers, with their much commented upon aversion to risk taking, or can we ascribe it to bureaucratic inertia in the Agriculture Ministry? For their part, most agronomists place the blame on the policy-makers, not least for squandering vast quantities of taxpayers’ money unnecessarily in subsidizing cereal production – above all wheat and rice – when Spain’s import bill for livestock and dairy products was fast reaching giddy heights (Bardají et al. 1982, 304; Pérez Blanco 1983, 12; Barceló 1987a, 17–18). As a result, the country’s trade deficit in agricultural products shot up from 6.4 billion pesetas in 1970 to 76.8 billion in 1975, before dropping to 50.8 billion pesetas in 1980 (Naredo 1988, 13, 30). Most disturbingly, between 1964 and 1985, imports of animal feed – barley, maize and soya – easily outstripped Spain’s leading agricultural exports, wine and olive oil. Not until the mid-1980s, when Spain was on the verge of joining the EU, did exports of agricultural products finally overtake imports. On the supply side, Gabriel Tortella (1995, 245) points out that, in

Table 3.6

The level of cover of foreign trade in agricultural products, 1964–85

Year

Exports/imports

1964 1970 1975 1980 1985

105.2 90.3 57.7 85.6 108.6

Source: J.L. García Delgado and M.J. García Grande, ‘La agricultura: una profunda transformación estructural’, in J.L. García Delgado (ed.), España, economía: ante el siglo XXI (Madrid: Espasa, 1999), p. 95.

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general, as agriculture becomes increasingly commercialized and technically more sophisticated, farmers will grow more produce for the market and less for their own consumption. In response to market conditions, farmers cease growing subsistence items and adapt their production to market conditions as well as to their own natural comparative advantages of production. In the Spanish case, we can distinguish two distinct periods in this process: before and after the country joined the European Union (Sumpsi 1994a, 2; Simpson 1995b, 249). 1 Between the early 1960s and 1985, the pattern of agricultural production altered significantly, from one characterized by the extensive cultivation on dry land of traditional cereals, legumes, vine and olives towards a greater concentration on livestock farming along with the intensive production of a number of alternative crops, including sunflowers, barley, fruit and horticultural products. 2 After 1986, Spanish agriculture was again transformed, as farmers produced relatively smaller quantities of cereals, industrial crops and dairy products in favour of wine, olive oil, fruit and fresh vegetables. In many cases, this new direction was due not so much to improved dietary habits as to changes in the allocation of farm subsidies by the European Union. One of the most important developments from the 1960s onwards concerned livestock farming. Data for 1964 show that the livestock sector as a whole was responsible for 32 per cent of total final agricultural production. By 1985, it accounted for as much as 39 per cent (García Delgado and García Grande 1999, 93). The expansion of livestock farming took place despite Spain’s overwhelmingly unfavourable factor endowment. Apart from the northern littoral – Galicia, Asturias and Cantabria – livestock farming was hindered by a combination of poor-quality pastures and summer drought. For this reason, before the Civil War the supply of livestock products was generally unresponsive to rising living standards (Simpson 1995b, 195). During the 1950s, however, the problem was resolved by a greater willingness on the part of the Francoist authorities to sanction a massive increase in imports of animal feed – in descending order, barley, maize and soya. By the mid-1960s, moreover, Spain had built up an animal feed industry of its own (Fernández Navarrete 1989, 30: Simpson 1995b, 258). Finally, this period witnessed significant changes in the make-up of the livestock sector, above all an extension of pork and poultry production at the expense of less favoured red meats (Salmon 1995b, 72–73).

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Arable farming, meanwhile, experienced mixed fortunes. The total area under cereals – mainly concentrated on the secano lands of central and southern Spain – remained more or less static after 1960. However, in common with developments in livestock farming, there were important changes in the types of crops cultivated, largely due to demand factors. Between 1960 and 1991, for example, the area under wheat – mostly soft wheat for bread making – fell by a half, while land sown to barley – cultivated mainly for animal feed – quadrupled. The surface area under olives altered very little. Even so, large tracts of olive groves in Andalucía and Extremadura were replanted, while unproductive trees were uprooted and frequently replaced by the ubiquitous sunflower. With regard to the third component of the Mediterranean trilogy – the vine – the late twentieth century witnessed a modest contraction in the total area under cultivation, especially on low-yielding soils. At the same time, wine-growing regions such as La Rioja, the Penedés, south of Barcelona, and the up-and-coming Ribera del Duero, on the high plains near Valladolid, enhanced their reputations for quality wines. In 1982, Spain adopted the term denominación de origen – regulating grape variety and region of origin – for its better vintages, partly in an attempt to boost exports. Elsewhere, the area under industrial crops expanded most rapidly of all, trebling in size between 1960 and 1991. In particular, the area under sunflowers – which are particularly drought-resistant – increased sevenfold during the 1970s and 1980s. Finally, horticulture, although accounting for only a small proportion of the cultivated land surface, made up between one-quarter and one-third of the total final value of agricultural production during the 1990s (Salmon 1995b, 69–71).

The ‘second’ crisis of Spanish agriculture? Spain’s entry into the European Community (later the European Union) in January 1986 was greeted with a mixture of optimism and euphoria by the majority of Spanish farmers. Many sought to derive maximum advantage from the generous support offered by the EU, in particular minimum guaranteed prices for individual products and financial aid for the modernization of the sector under the European Agricultural Guidance and Guarantee Fund (EAGGF). The first two years of Spain’s membership saw a large increase in investment spread over a wide range of projects, including the renewal of agricultural machinery and equipment, the construction of farm buildings, the planting of fruit trees, as well as the introduction of improved strains of seeds and breeds of livestock (Sumpsi 1996b, 217). Since it was widely held that both

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agriculture and food processing were ‘sectors of the future’, almost all this investment appeared justified. Spanish farmers, or so it seemed, had nothing to lose and everything to gain from the EU membership (Lamo de Espinosa 1994, 132–33). From 1988, however, the first signs of crisis in the agricultural sector appeared among the milk producers of northern Spain. This followed a relaxation by Brussels of import controls on dairy products when there was already a glut of milk production in the home market. Similar developments damaged the prospects of beef, pork and poultry farming, all subject to strong competition from European producers. As pressure mounted inside the European Union for a root-and-branch reform of the Common Agricultural Policy involving big cuts in budgetary expenditure, the crisis spread to other areas. Before long, vegetable oils, forage crops, sugar beet and cereals were all plunged into crisis. As mounting numbers of the nation’s farmers stared bankruptcy in the face, new investment dried up almost completely (Tió 1989, 158; Sumpsi 1994a, 6, 1996b, 217–18). One influential voice argued that Spain now entered what he termed a ‘second’ agricultural crisis, no less serious than the ‘crisis of traditional agriculture’ of the 1960s. Echoing the views of many, Jaime Lamo de Espinosa (1994, 134), a former UCD Agriculture Minister, likened the new situation – provoked by the impact of the CAP reform of 1992 – to involuntary euthanasia. The abandonment of agricultural production, he claimed, was becoming more important than production itself. Farmers were rewarded not for their achievements but for such actions as switching from intensive to extensive cultivation or uprooting plants. Other commentators spoke in less apocalyptic tones, refusing to blame the new CAP for the woes of Spanish agriculture. For example Jordi Sevilla (1993, 114), then head of cabinet (jefe de gabinete) in the Agriculture Ministry, contended that whatever ills had befallen the nation’s farmers none of them could be ascribed to EU membership. During the early 1990s, moreover, the predicament of many Spanish farmers was further complicated by a series of debilitating droughts which, above all, seriously diminished the cereal harvest on the secano lands of Aragón, Castilla y León, Castilla-La Mancha and Andalucía. Indeed, it could easily be argued that support from the CAP was a decisive factor in safeguarding the livelihoods of tens of thousands of small producers throughout ‘dry’ Spain, not least during the disastrous drought of 1992 which reduced farm incomes by approximately 300 billion pesetas (Sumpsi 1996b, 218). Any evaluation of the impact of EU membership on Spanish agriculture must begin with a discussion of the protracted negotiations which took place over the country’s terms of entry (Crespo MacLennan

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2000, 153–54). One reason why the country’s application for membership took so long to be resolved was the delaying tactics of a number of existing member states, prominent among them France and Italy (Abad Balboa 1997, 144). In particular, French president Valéry Giscard d’Estaing refused to sanction the enlargement of the Community to bring in both Spain and Portugal unless a raft of outstanding issues, including agricultural subsidies, was sorted out beforehand. In the opinion of the Socialist government’s chief negotiator on agriculture, Carlos Tió (1987, 184), Spain was deliberately held to ransom by the French in a diplomatic manoeuvre to secure a reform of the CAP. When negotiations finally started, Paris – fearful that Spanish agricultural exporters had a distinct competitive edge over other Mediterranean producers – adopted a decidedly belligerent stance towards Spain’s entry. François Mitterand, who replaced Giscard d’Estaing as French president in June 1981, appeared convinced that Spanish membership of the EU would have the direst consequences for the small farmers of the Midi – traditional supporters of his own Socialist Party. For their part, Spanish agricultural economists dismissed Gallic objections as a myth, while the authorities in Madrid countered that agricultural exports from south of the Pyrenees were by no means the threat that the French imagined (Barceló 1987b, 203; Fernández Navarrete 1989, 29; Lamo de Espinosa 1997, 33–37). The result of these negotiations was that Spain entered the EU on less than optimal terms for its farmers. In a move to placate Mediterranean producers, Brussels came up with a highly unsatisfactory two-pronged transitional arrangement for the dismantling of EU tariffs on Spanish agricultural exports. For the majority of Spain’s farm products a ‘classical’ transitional period of seven years was adopted. However, in those cases where Spain was thought to enjoy a competitive advantage, that is, fruit and horticulture, Spanish farmers had to accept a four–year standstill, followed by a six–year transitional period. In the specific case of vegetable oils, farmers were saddled with a five–year standstill, followed by a five–year transition period (Reig 1993, 227; Sumpsi 1994a, 5; Lamo de Espinosa 1997, 78–79). Notwithstanding the lengthy transitional period, the most advanced sectors of Spanish agriculture took advantage of the enlarged EU market. Agricultural exports rose from 574 million pesetas in 1986 to 883 million in 1991. By the later date, 76 per cent of Spain’s agricultural exports were destined for EU countries, compared with 67 per cent in 1986. The most impressive gains were made by citrus fruit, horticultural products and olive oil. One worrying sign for the policy-makers was that imports of agricultural products went up at a similar rate, from 552 million pesetas in 1986 to 869 million in 1991. In 1991, 57 per cent of

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Spain’s agricultural imports originated from the EU, as against only 39 per cent five years before. Meat and dairy products spearheaded the assault on the Spanish market, a reflection, no doubt, of the more sophisticated tastes of Spanish consumers. However, as Table 3.7 shows, successive devaluations of the peseta in 1992–93 heralded a new surge in agricultural exports while simultaneously applying the brakes to food imports (Reig 1993, 230; Sumpsi 1996b, 234–36; García Álvarez-Coque and Rivera Vilas 1997, 325–28). While the nation’s exporters profited from the expanded European markets, many uncompetitive sectors of Spanish agriculture became thoroughly dependent on subsidies in order to survive. To hundreds of thousands of small farmers on marginal land, EU support offered a vital cushion against fierce competition, not only from Spain’s new trading partners but also from more efficient producers in third countries. In particular, the United States and the Cairns Group of agricultural exporting countries led by Australia and Canada – who together account for one-third of agricultural exports – actively lobbied the GATT and its successor, the World Trade Organization (WTO) for fair trade in agricultural products and the elimination of all trade-distorting subsidies (Lamo de Espinosa 1994, 133–35; Gardner 1996; 101–23). The contribution of EU subsidies to total farm income in Spain escalated from 1.5 per cent in 1986 to 29.2 per cent in 1995 (Abad Balboa 1997, 153). In some dry farming regions, including Aragón, Castilla y León Table 3.7

Spain’s foreign trade in agricultural products, 1986–94 (millions of pesetas)

Year

Total imports

Total exports

1986 1987 1988 1989 1990 1991 1992 1993 1994

552 543 632 710 740 869 950 1,080 1,341

574 707 757 756 779 883 930 1,140 1,421

Imports from EU

Exports to EU

Balance with EU

215 238 278 348 400 497 565 670 815

390 488 529 520 570 672 692 850 1,064

175 250 251 172 170 175 127 180 249

Source: J.M. Sumpsi, ‘El sector agrario español ante los nuevos retos de la Unión Económica y Monetaria’, in J.R. Cuadrado Roura and T. Mancha Navarro (eds), España frente a la Unión Económica y Monetaria (Madrid: Civitas, 1996), p. 236.

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and Castilla-La Mancha, aid from the EAGGF reached 50 per cent (García Álvarez-Coque and Rivera Vilas 1997, 336). Here, the support that farmers received was often far more important in determining their selection of crops than the market prices (Tió 1991, 88–89; Bardají et al. 1995). By the late 1990s, as José María Sumpsi (1996b, 218) so aptly comments, Spanish farmers felt in their bones that the days of handouts were limited. This frightening realization of their vulnerability to circumstances beyond their control – not simply cuts in EU support but also the apparently unstoppable groundswell for the liberalization of global trade in agricultural products which began with the Uruguay Round of GATT (1994) – deepened the mood of anxiety and despair in many parts of the Spanish countryside (Barceló 1994a; Sumpsi 1996a). Pedro Solbes, who was appointed Minister of Agriculture in 1991, introduced a far-reaching bill for the Modernization of Agrarian Structures which was neither particularly interventionist nor liberal in tone. Among other matters, the bill, which became law in 1995, sought to establish ‘minimum units of exploitation’ in order to tackle the excessive fragmentation of land holdings. It also set out the main priorities for the allocation of public funds and stated its objective of attracting more young people back to the land. This important Act distinguished between two types of small farmer: professionals who obtained an important part of their income from agricultural activities – this could be as low as 25 per cent – and who dedicated more than onehalf of their time to farming, and part-time farmers who survived on official handouts. The future of large parts of Spanish agriculture depends to a considerable extent on the Act’s effectiveness and how satisfactorily the country’s dwindling band of farmers react to such issues (Barceló 1994a, 26–27; Barceló, Compés and García ÁlvarezCoque 1994, 116–18; Sumpsi 1995a, 279).

CHAPTER 4

Industry It was not until the mid-1960s that Spain became a predominantly industrial nation, as the number of people employed in the secondary sector finally overtook the country’s sizeable rural population. However, by the second half of the 1970s manufacturing industry was already declining in relative importance. In the wake of the oil-price shocks of 1973 and 1979, there was a great deal of soul-searching on the damaging effects of deindustrialization south of the Pyrenees, not least in terms of massive job destruction (Cabrera and Rey Reguillo 2002, 349). The contribution of industry and construction to Spain’s GDP – which jumped from 29.3 per cent in 1958 to 39.7 per cent in 1974 – had fallen back to 29.5 per cent in 2002. Therefore, despite the resumption of moderate economic growth after 1985 – briefly interrupted by the short-lived depression of 1992–93 – Spanish industry failed to recapture its earlier dynamism (Buesa and Molero 2000, 684–85).

A backward industrial nation On the eve of the First World War, Spain was among the least industrialized countries in Europe. Only the Balkans, Greece, Russia, Poland and Finland had a smaller percentage of industrial workers (Catalán 1995a, 8–9). Evidence of modern industrial development in the Peninsula was mainly confined to a few islands of progress on the periphery, the most prominent of which were Catalonia, the Basque Country and Asturias. Spain’s embryonic industrial structure was dominated by traditional consumer goods – textiles and foodstuffs – followed some distance behind by the mining sector (Carreras 1987, 297). For their part, Spanish economic historians put the blame for the nation’s comparative industrial backwardness at this stage on a variety of factors, among them pathetically low levels of aggregate demand, a dearth of cheap energy, low levels of human capital, a failure of entrepreneurship and mistaken government policies. Between 1913 and 1929, the Iberian latecomer began to narrow the gap on its more advanced neighbours. Albert Carreras’s index of industrial production shows an annual increase of 0.93 per cent for the period 1913–22, compared with a drop of 1.72 per cent in Europe as a

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whole (see Table 4.1). From 1922 to 1929, industrial growth in Spain was surprisingly similar to the European average of 5.5 per cent per year (Carreras 1987, 288). Among the principal causes of this progress were: 1 The modernization of Spanish agriculture, bringing with it an increase in the demand for manufactures. 2 Technological advances, above all in such sectors as metallurgy, shipbuilding, railway material and furniture. 3 The territorial expansion of electricity supply, thereby liberating much of Spanish industry from its dependence on expensive coal imports. 4 The boost to foreign trade that was provided by the official policy of neutrality during the First World War. 5 The Primo de Rivera dictatorship’s ambitious infrastructural programme. 6 A boom in residential construction, especially in the burgeoning conurbations of Madrid and Barcelona. Another distinctive feature of Spain’s industrial development during the first third of the twentieth century was that it took place against the restrictive background of escalating tariff protection and incipient economic nationalism (García Delgado 1984, 1–171). Unfortunately for Spain, over the next two decades this promising era of expansion was nipped in the bud by the 1930s Depression, the impact of the Spanish Civil War and later by the disastrous economic policies of the Francoist New Order. Carreras’s index of industrial production demonstrates widespread stagnation across the continent of Europe Table 4.1

Annual rates of industrial growth in Spain and Europe, 1913–50 (%)

Period

Spain

Europe*

1913–22 1922–29 1929–35 1935–50

0.93 5.52 –0.36 0.58

–1.72 5.53 –0.19 2.71

* Member states of the Organization for European Economic Co-operation (OEEC). Source: A. Carreras, ‘La producción española, 1842–1981: construcción de un índice anual’, in Industrialización española: estudios de historia cuantitativa (Madrid: Espasa Calpe, 1990), p. 83.

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between 1929 and 1935, Spain included. Yet, for the period 1935–50, Carreras (1987, 288; 1990, 83) calculates that Spanish industry grew at less than one-quarter of the European average. Moreover, pre-Civil War levels of industrial production per capita were not attained until 1952. There is disagreement among Spanish economic historians on the performance of manufacturing industry during the early years of the Franco dictatorship. A minority of scholars argue that it was at this stage that Spanish industry ‘took off’. Interviewed in 1969, Luis Ángel Rojo, one of the architects of the 1959 Stabilization Plan, claimed: ‘although it is irritating for many people, the fact is that this country basically industrialized between 1939 and 1959’ (Pániker 1969, 159). Taking their cue from Rojo, who was to become Governor of the Bank of Spain, an influential team of Madrid University economists maintain that state-sponsored initiatives after 1939 laid the foundations for Spain’s industrial boom of the 1960s (Braña et al. 1979, 152; 1983, 100). In contrast, most other commentators view the 1940s as a decade of missed opportunities, while the 1950s are generally considered a transitional period (García Delgado 1986, 170–91; 1987, 170–77; Prados and Sanz 1996, 357). For his part, Albert Carreras (1990, 88), memorably labels the years 1935–50 ‘the dark night of Spanish industrialization’ (la noche de la industrialización española). Due to the collapse of private consumption throughout the 1940s, the output of consumer goods in the Peninsula rose by less than 1 per cent per year. Enric Morellá’s revision of Carreras’s index indicates that textiles grew by an annual rate of 0.8 per cent between 1940 and 1950, while José Antonio Miranda’s pioneering investigations on the Spanish footwear industry reveal almost complete stagnation. By comparison, heavy industry, which benefited greatly from the regime’s costly interventionist policies, inevitably fared much better. Morellá’s index (see Table 4.2) shows that energy and chemicals witnessed spectacular expansion during the 1940s – especially after 1945 – averaging 7.5 and 10.4 per cent per annum respectively (Morellá 1992, 129–37; Catalán 1995a, 264–67; Miranda 1998, 228–37). The practical difficulties which Spanish manufacturers encountered after 1939 in their attempts to obtain both raw materials and technology from abroad confirmed the policy-makers in their firm resolve to strengthen existing measures aimed at import-substitution industrialization (ISI) (Braña et al. 1983, 90–91; Martín Aceña and Comín 1991, 69). In its forlorn quest for self-sufficiency, the Franco dictatorship embarked on a variety of measures which sought to stimulate Spanish industry, including the regulation of private investment, the creation of public enterprises, quotas on foreign trade and exchange rate manipulations (Donges 1976, 37–56; Myro 1993b, 626).

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Table 4.2

Rates of growth of industrial production by sector, 1935–50

Sector Energy Mining and mineral transformation Chemicals Metal transformation Consumer goods

1935–40

1940–45

1945–50

1940–50

–4.1

3.7

11.4

7.5

0.1 –7.3 1.4 –7.7

–2.7 3.2 –3.6 2.1

7.4 18.0 7.7 –0.5

2.2 10.4 1.9 0.8

Sources: E. Morellá, ‘El producto industrial de posguerra: una revisión (índices sectoriales, 1940–58)’, Revista de Historia Económica, 10 (1992), 129–37; C. Barciela et al., La España de Franco, 1939–75: economía (Madrid: Síntesis, 2001), p. 117.

Soon after seizing power, the New Order introduced a series of measures to encourage private investment in manufacturing industry. Two Acts of 1939 provided a number of incentives and guarantees to both new and established firms. In addition, plans were adopted for sectors judged to be of strategic importance, including nitrogen, artificial fibres and motor vehicles. Companies were required to obtain prior permission from the Ministry of Industry before the construction, extension or modification of installations. The same ministry was also given responsibility for fixing the price of basic inputs, not least iron and steel and cement. In line with the xenophobic regime’s increased emphasis on economic nationalism, foreign investors were prevented from holding more than 25 per cent of the social capital of Spanish companies, except with special permission of the Council of Ministers. Even so, despite their obsession with interventionism, the Spanish authorities manifestly failed to establish any coherent set of priorities. Nor did the policy-makers undertake a single study on industrial location or the optimum size of firms (Donges 1976, 45; Martín Aceña and Comín 1991, 75–76). The German economist Juergen Donges (1976, 45) maintains that, in an atmosphere of widespread favouritism and corruption those entrepreneurs who enjoyed the best relations with the administration got through the formalities with relative ease, even in cases where the social value of their production was less than that of other entrepreneurs who had worse relations with the administration.

The failure of Spanish manufacturers to respond to official prompting convinced the interventionist authorities of two points. First, the market

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was not an effective mechanism for allocating scarce resources. Second, Spanish industrialists lacked even the most elementary business acumen. Only through state interference, it was mistakenly believed, could the regime’s dual goals of autarky and forced industrialization be attained. To counter these alleged market imperfections, in 1941, Franco authorized the creation of a public holding company known as the Instituto Nacional de Industria (INI), presided over by his boyhood friend, the military engineer Juan Antonio Suanzes (Comín 2000, 226–29). The Institute – which was to become the main pillar of the dictatorship’s industrial strategy – was modelled on the Italian Istituto per la Ricostruzione Industriale (IRI) set up by Mussolini in 1933. It was charged with promoting and financing industrial development, above all in sectors concerned with the defence of the realm. Although INI’s original brief was to satisfy domestic demand, in the long run its component companies were also required to produce a series of products for export (Martín Aceña and Comín 1991, 25–31, 69; San Román 1999, 143–61). From the very beginning, INI’s managers demonstrated a clear preference for the promotion of heavy industry. In an attempt to eradicate production bottlenecks, no effort was spared to consolidate what Suanzes termed the ‘industrializing trilogy’ of iron, coal and electricity. Later, the Institute’s activities were widened to include transport, shipbuilding, oil refinery and motor vehicles. During the 1950s, INI accounted for approximately one-third of public investment (Martín Aceña and Comín 1991, 30, 42–45; San Román 1999, 17, 52). Opinions vary as to its contribution to Spanish economic development. While INI’s champions claim that, during the late 1940s and 1950s, it created Spain’s basic industrial infrastructure, its detractors contend that many of its projects were undertaken for reasons of national prestige with scant regard for their opportunity cost (Schwartz and González 1978, 21; Braña and Buesa 1981, 35–36: Gómez Mendoza 2000). In a recent history of INI, Elena San Román (1999, 51–53) argues that Francoist propaganda deliberately exaggerated the achievements of electricity, metals, chemical products, shipbuilding and vehicles – the regime’s most favoured sectors – while ignoring the lacklustre performance of consumer goods, the main victims of its strategy of unbalanced growth. Further evidence of the dictatorship’s shortcomings is furnished by official data showing the reduced dimension of industrial establishments. On the eve of the Stabilization Plan, Spain’s industrial structure was characterized by a host of undercapitalized small-scale units, which together accounted for 85 per cent of all enterprises. Even in such sectors as chemicals, basic ferrous metals, machinery and

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equipment, where the optimum size of companies was estimated at over 1,000 workers, small concerns predominated. The majority of Spanish companies, moreover, relied on obsolete technology. This was especially true of the Catalan textile industry where many establishments had hardly been modernized since their foundation. Everywhere, chronically low productivity levels, coupled with the poor quality of products, resulted in a fall in competitiveness. Exports of cotton textiles, for example, plummeted during the period 1952–58 (Donges 1971, 45; Catalán 1995b, 123, 134).

The industrial boom, 1961–74 Franco’s reluctant acceptance of the Stabilization Plan of 1959, drawn up by the technocrats, signalled a belated recognition that his regime was incapable of undertaking rapid industrialization under conditions of semi-autarky. The Plan’s results were undoubtedly impressive, heralding a period of unparalleled growth in the manufacturing sector, apart from the brief recession of 1967–68. Albert Carreras (1987, 288) calculates that industrial output increased by a staggering 11.13 per cent per year between 1960 and 1974, more than double the European average of 5.03 per cent. In the period 1965–74, Spain boasted the second highest rate of industrial growth amongst OECD countries, after Japan (Myro 1993a, 301). The industrial boom brought with it major technological advances and gains in productivity. Among the sectors which recorded the largest productivity increases were construction materials, transport, chemicals and rubber. As Table 4.3 demonstrates, during the period 1960–72, Spain underwent a profound modernization of its industrial structure. In particular, traditional sectors like textiles and foodstuffs were overshadowed by the rise of ‘new’ industries, above all intermediate and capital goods. Underpinning this remarkable transformation was a sustained increase in investment (Barciela et al. 2001, 415–17). One significant feature of Spanish industry following the adoption of the Stabilization Plan was the diminishing role of public-sector companies. After the departure of Juan Antonio Suanzes in 1963, INI was forced to take on the role of subsidiarity to the private sector. The activities of the holding company were increasingly focused on a number of unprofitable sectors. In consequence, its component firms expanded less rapidly than private-sector enterprises, averaging 4 per cent per annum between 1960 and 1975. Even so, INI continued to diversify its activities in such fields as electricity supply, petrol refining, aluminium, automobiles, shipbuilding and artificial fibres. At the end of the Franco

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Table 4.3

The composition of Spain’s gross industrial product, 1960–72

Sector

1960

1972

Index of production in 1972 (1960=100)

Mining coal other Manufacturing food, drinks, tobacco textiles shoes, apparel & leather wood, cork paper, printing chemicals, rubber construction materials metallurgy metal transformation means of transport other Construction Electricity, gas, water

6.8 3.0 3.8 70.2 14.7 6.9 9.2 4.3 3.3 7.1 3.0 4.8 9.8 5.3 1.8 17.8 5.2

3.0 1.2 1.8 75.9 11.0 4.6 9.5 3.8 3.9 8.6 4.7 6.1 10.4 10.2 3.1 15.9 5.2

120.7 102.3 137.2 312.5 216.5 193.3 297.3 259.1 334.8 352.6 445.6 369.3 309.5 553.3 489.7 264.5 292.3

Source: S. Lieberman, Growth and Crisis in the Spanish Economy, 1940–93 (London: Routledge, 1995), p. 100.

dictatorship, it was responsible for 228,892 jobs – roughly one in 20 of Spain’s active labour force (Martín Aceña and Comín 1991, 440–41). How can we explain Spain’s industrial boom of the 1960s? In a seminal article, Juergen Donges (1971, 50–55) attributed the take-off in Spanish manufacturing to three main factors: 1 The trade liberalization measures introduced by Commerce Minister Alberto Ullastres in 1959, which brought about a significant reduction in the effective rate of protection. This development stimulated imports of capital goods, which in turn contributed towards a renovation of Spain’s outdated capital stock. 2 The technocrat’s vigorous action plan to promote the export of manufactured goods. Among the main aspects of this policy were the provision of export subsidies to producers so as to offset indirect taxes and rebates of import duties on raw materials, spare parts and capital equipment going into production for export.

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3 The external financing of Spanish manufacturing, which was induced by a radical change in economic policy, hitherto profoundly hostile to private foreign capital. Subsequent interpretations, while acknowledging the liberalizing zeal of Ullastres, point out that his technocratic successors were resolutely interventionist. Indeed, their refusal to press on with dismantling the country’s high tariff barriers encouraged many manufacturers to settle for the easy pickings of the domestic market (Segura 1983, 306–7; Alonso 1993, 387–88). That said, by 1970 manufactures accounted for as much as 65 per cent of Spain’s visible exports (Myro 1993a, 301–3). As well as the opening up of the economy in 1959, economists cite a combination of factors as contributing to Spain’s industrial take-off, including cheap labour, the intensive use of imported energy and foreign direct investment (FDI) (Martínez Serrano et al. 1982, 81–119; Segura and González Romero 1992, 140–41). Spanish industry specialized overwhelmingly in activities that were most intensive in labour and least intensive in technology. Techniques of production were generally tried and tested ones, easily assimilated by an unskilled labour force (Segura and González Romero 1992, 140; Myro 1993a, 302). Foreign investment was therefore vital to Spain’s industrial modernization, not least because of Spanish manufacturers’ notorious neglect of research and development (R&D). According to Julio Segura (1983, 307), expenditure on R&D as a percentage of GDP was lower in Spain than in any other country at a similar stage of development. For its part, foreign investment was directed towards a handful of dynamic sectors, including chemicals, automobiles and electrical materials (see Table 4.4). The leading providers of foreign capital in the period 1960–74 were, in descending order, the USA, Switzerland (including American and Spanish funds held abroad), West Germany, the United Kingdom and France (Cuadrado Roura 1975, 44–50; Donges 1976, 108–15). In an attempt to tackle the reduced dimension of firms, the Spanish authorities supported the strategy of industrial concentration. A host of inducements were dangled in front of businesses aimed at promoting mergers and takeovers. Amalgamations were most common in foodstuffs, metal transformation, electronics, chemicals and construction. Even so, it is difficult to discern to what extent the merger process was a direct result of government policy or simply a response to market forces. As Table 4.5 shows, despite government initiatives, industrial minifundismo still thrived. The average size of industrial establishments nearly doubled, from six workers 1962 to eleven in 1975. In the latter year, a mere 0.2 per cent of the Spanish labour force

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Table 4.4

The distribution of majority holdings of foreign investment in Spain, 1960–74 (%)

Sector

1960–64

Agriculture and fisheries Mining Manufacturing industry foodstuffs textiles chemicals Iron and steel non-metallic minerals mechanical machinery others Construction Water, gas and electricity Transport and trade Others

0.84 0.19 45.89 6.78 1.01 22.68 2.28 2.41 8.76 1.97 2.79 4.19 13.10 33.00

1965–69 0.14 1.34 75.77 13.71 2.83 28.98 4.52 3.46 17.36 4.91 3.49 0.54 10.07 8.65

1970–74 0.63 1.54 78.62 4.31 1.33 17.58 2.66 0.67 48.22 3.85 1.19 0.01 10.60 7.41

Source: J. Donges, La industrialización en España: políticas, logros, perspectivas (Vilassar de Mar: Oikos Tau, 1976), p. 112.

was employed in factories with 500 workers and above (Martínez Serrano et al. 1982, 97–99; Fanjul and Maravall 1987, 173–76). Research on industrial concentration by Fernando Maravall (1976) reveals that, over the period 1964–68, medium-sized enterprises expanded marginally faster than large firms. By comparison, between 1968 and 1973, it was the biggest companies that recorded the fastest growth rates, probably due to their capacity to obtain finance on the most favourable terms. Maravall also discovered that there was little correlation between the size of firms and their ability to benefit from Table 4.5

The size of industrial establishments, 1962–75 (%)

Year

Up to 50 workers

1962 1970 1975

98.67 97.11 97.00

From 50 to 500 workers 1.25 2.71 2.80

Over 500 workers

Average size of establishment

0.08 0.16 0.20

5.85 10.66 10.97

Source: J.A. Martínez Serrano et al., Economía española, 1960–80: crecimiento y cambio estructural (Madrid: H. Blume Ediciones, 1982), p. 98.

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economies of scale, not least because many large firms preferred a multiplant structure. The majority of Spanish firms were significantly smaller than their European counterparts. Owing to limitations of size, few Spanish concerns were able to take full advantage of the latest technology. Another area where the policy-makers met with only limited success was regional development. Regional development policies, including industrial location, aimed to secure a redistribution of income in geographical terms. At the beginning of the planning process in 1964, two-fifths of the Spain’s industrial production was concentrated in only three provinces – Barcelona, Madrid and Vizcaya – all of them densely populated. By comparison, Extremadura and the two Castiles, with a similar combined population but covering twelve times the surface area, accounted for no more than one-tenth of national output (Barciela et al. 2001, 397). In order to tackle such spatial imbalances, the planners borrowed the strategy of growth poles first developed by the French economist François Perroux in the 1950s. Growth pole theory emphasized the multiplier effect of leading industries because of their advanced levels of technology and the possibility of transferring this directly or by example to other industries over a wider geographical area. Growth poles, it was argued, should be established in areas with a high growth potential – preferably a provincial capital with a population of 150,000–200,000 inhabitants – since such cities were normally equipped with an infrastructure of roads, housing and educational establishments, including universities, necessary for sustained growth (Richardson 1975, 29–33). Spain’s First Development Plan (1964–67) led to the creation of two types of growth pole: industrial development poles (polos de desarrollo), five in number – Seville, Saragossa, Valladolid, Corunna and Vigo – and two industrial promotion poles (polos de promoción) – Burgos and Huelva – located in regions which lacked a manufacturing tradition. During the Second Development Plan (1968–71), Seville, Saragossa and Valladolid were displaced by Oviedo, Granada and Córdoba, while Logroño and Villagarcía de Arosa (Galicia) were later added to the list. Yet, with few exceptions, including Huelva and Valladolid, regional development policy made little headway, failing almost completely to rid Spain of its glaring inequalities in the spatial distribution of industry. Any trend towards convergence was more than outweighed by the rapid growth of existing industrial zones, especially Madrid, Barcelona and Vizcaya (Llopis and Fernández Sánchez 1998, 118–25). Some critics blame a lack of state funding for the meagre results. According to one calculation, by 1975, 135,000 million pesetas had been distributed to the twelve growth poles, leading to the creation of a disappointing

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80,000 new jobs. The total number of firms established was 1,005, of which 694 were still in operation when the regional planning process was dismantled after the dictator’s death (Martín Rodríguez 1993, 918).

Crisis and restructuring, 1975–85 In common with developments in most other Western economies, the energy crises of the 1970s presaged a steep decline in the rate of growth of industrial production south of the Pyrenees. Partly due to Spanish industry’s heavy reliance on imported oil, this collapse was deeper and more prolonged than among its main competitors. During the second half of 1970s, Spain – whose fastest-growing industries were hugely energy intensive – tumbled from second place in the industrial growth table to next to bottom. A comparative study by the Bank of Spain shows that industrial output in Spain rose by 45 per cent in the period 1970–74, an annual increase of 9.7 per cent. This impressive performance represented twice the level of industrial growth in the USA, Japan, France and Italy, and four times that of the United Kingdom and the German Federal Republic. However, between 1974 and 1979, as the impact of the first oil shock was felt, Spain’s industrial growth slipped to 5.7 per cent for the period as a whole, compared with 10 per cent in France, West Germany, Italy and the United Kingdom, and 18 per cent in the USA and Japan. After a fleeting recovery in 1980, Spanish industry was devastated in the wake of the second oil shock (Albarracín and Yago 1986, 24). Over the four–year period 1981–84, the real added value of manufacturing industry in the Peninsula fell by approximately 15 per cent. Moreover, as Table 4.6 illustrates, Spain’s industrial recession lasted significantly longer than in almost all other advanced economies. Industrial recovery, which got under way in the USA during the second half of 1983, spreading to other Western economies early in 1984, did not reach Spain until the third quarter of 1985 (Segura et al. 1989, 390; Myro 1993a, 307). Spain’s decade-long industrial depression was largely the product of a sharp drop in domestic demand together with a general loss of competitiveness of Spanish manufactures. It triggered a spate of company bankruptcies and factory closures, above all in the Basque Country, Asturias and Catalonia, whose industrial structures were dominated by mature industries such as metallurgy, coal mining and textiles (Vázquez 1990, 84, 99). Many firms attempted to respond to the crisis by cutting their payrolls. However, in the tense social climate of Spain’s new democracy, this option was not always possible. While the newly emergent trade unions adopted a militant stance in defence of

82 Table 4.6

SPAIN: A MODERN EUROPEAN ECONOMY

Added value in European manufacturing industry, 1978–84 (in real terms) 1978

West Germany France United Kingdom Italy Spain EU average

0.5 2.6 0.7 1.0 0.0 1.1

1979 1980

1981

1982

1983 1984

4.3 2.6 0.1 6.7 –0.3 3.4

–1.0 –0.6 –5.6 –1.5 –5.8 –1.9

–1.4 0.5 0.1 –2.9 –4.0 –0.7

1.3 1.4 2.8 –2.9 0.4 1.0

–0.6 0.9 –8.4 6.5 1.6 –0.6

2.6 0.6 3.7 3.3 –4.9 2.4

Source: J. Segura and A. González Romero, ‘La industria española: evolución y perspectivas’, Papeles de Economía Española, 50 (1992), 144.

their members’ interests, employers’ organizations complained bitterly that companies were prevented from laying off workers due to paternalist social legislation inherited from the Franco regime. In the second half of the 1970s, the main threat to the livelihoods of factory workers was not so much escalating unemployment as a reduction in overtime (Myro 1993a, 318). However, after 1980, when companies managed to secure a reduction in unit labour costs, unemployment soared (Segura et al. 1989, 394–95). One reliable source puts the total number of manufacturing jobs lost between 1973 and 1984 at 1.33 million, equivalent to the disappearance of 3 per cent of the industrial labour force every single year (Pérez Simarro 1987, 26). Almost the only bright spot for Spanish manufacturers was a diversification of industrial exports and the capture of new markets. This welcome development took place despite fierce competition from both the advanced economies and the so-called newly industrializing countries (NICs), such as Taiwan, South Korea, Singapore, Hong Kong, Brazil and Mexico, which benefited from lower wage costs. Aboveaverage pay increases in the late 1970s wiped out almost completely any competitive advantages enjoyed by Spanish business (Segura and González Romero 1992, 145; Myro 1993a, 310–11). In the early stages of the industrial crisis, the most direct challenge to manufacturing was in labour-intensive products with weak demand, especially cotton textiles. Before long, however, Spain had to face up to strong competition in a wide range of sectors, including electrical appliances, plastics and shipbuilding (Vázquez 1990, 95; Buesa and Molero 1999, 161). As Table 4.7 shows, after the depreciation of the peseta in the first half of the 1980s, industrial exports performed remarkably well in a number of industries with average and weak demand, among them

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Table 4.7

Spain’s balance of industrial trade, 1970–85, in millions of pesetas

Sectors

1970

1975

1980

1985

Strong demand Average demand Weak demand

–170.4 –56.5 –46.8

–245.6 –120.1 22.2

–229.6 109.2 172.9

–259.1 192.8 397.9

Total

–273,8

–343.5

52.5

331.6

(exports minus imports at constant 1980 prices) Source: R. Myro, ‘La industria, de la autarquía a la integración en la CE’, in J. L. García Delgado (ed.), España: economía (Madrid: Espasa Calpe, 1993), p. 315.

automobiles, iron and steel, footwear and clothing (Vázquez 1990, 95–99; Myro 1993a, 310–16). While the majority of Western economies reacted quickly and decisively to the recession of the late 1970s, the Madrid authorities were accused of blatant inactivity. Their belated response to the dual crises of deindustrialization and mass unemployment was a policy known as industrial reconversion (Albentosa 1985, 176–78). In spite of plummeting global demand, many public-sector companies continued to pursue expansionist strategies (Fariñas et al. 1989, 199). This strategy was partly explained by the uncertain political environment. Without a parliamentary majority, Adolfo Suárez’s centre-right UCD government put off taking contentious decisions on such matters as industrial restructuring so as not to offend powerful lobbies. Among those vested interests which the policy-makers sought to placate were employers’ organizations, the banks – which had invested large sums of money in companies in distress – the trade unions, the political parties and the autonomous communities (Fanjul and Maravall, 1984, 317–20; Navarro Arancegui 1989a, 427–28). Before the Socialists took office in October 1982 with a clear mandate for radical change – and indeed for a short period thereafter – the public sector was utilized by the authorities as an instrument of counter-cyclical policy. In particular, INI was assigned the role of ‘company hospital’ for loss-making concerns that had been abandoned by the private sector. Despite widespread criticism, the holding company stepped up its activities in crisis-ridden sectors such as iron and steel, shipbuilding, textile and energy sectors – at enormous cost to the Spanish taxpayer (Comín et al. 1992, 233–38; Myro 1993b, 627–31; Barroeta and Castillo 1996, 256). The aims of Spain’s industrial reconversion policy tended to vary

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according to individual sectors, and often from firm to firm. Foremost among its objectives was the elimination of excess capacity. Other goals included the replacement of obsolescent equipment, improvements in the design, quality and range of products, the introduction of costsaving measures and encouraging specialization in products where Spain still enjoyed a competitive advantage (Albentosa 1985, 177–78; Navarro Arancegui 1989b, 46–49). The reconversion process began cautiously in 1978, when Economics Minister Fernando Abril entered into negotiations with a number of companies with a view to restructuring production. Later, between 1980 and 1982, Industry Minister Ignacio Bayón issued a series of ‘reconversion decrees’ which set out to resolve the deep-seated problems of a range of sectors (Segura 1983, 309; Navarro Arancegui 1989b, 50). These measures included tax incentives aimed at promoting company mergers. Although initially restricted to white goods and special steels, this legislation was extended to include a further nine sectors badly hit by the industrial crisis: iron and steel, carbon steels, common steels, semi-manufactured copper products, shipbuilding, textiles, footwear, motor vehicle parts and electronic components (Fanjul and Maravall 1984, 313–16; Albentosa 1985, 178). According to one estimate, by the end of 1982, 87,000 million pesetas had been spent strengthening the position of 169 companies in these eleven sectors, resulting in the destruction of 7,600 jobs (Vázquez 1990, 101–2). Critics, however, claimed that a substantial part of these funds went into soaking up losses rather than tackling fundamental imbalances (Salmon 1995b, 170). The greater sense of urgency shown by the first PSOE administration (1982–86) on the question of industrial reconversion was partly conditioned by the growing realization that if, as seemed likely, Spain were to join the European Community in the near future, further aid would be severely constrained by EC regulations, which imposed a limit on the level of industrial assistance. The 1984 Act of Reconversion and Re-industrialization, introduced by Industry Minister Carlos Solchaga, had two main goals: to improve the general competitiveness of Spanish industry; and to slow down the pace of deindustrialization. In the former case, the Socialists placed great emphasis on the need to restructure the finances of the loss-making companies, referred to as financial cleansing (saneamiento financiero). As to the latter, regions judged to be seriously affected by the industrial recession, including Asturias, Madrid, Cádiz, Galicia and Barcelona – initially dubbed Urgent Re-industrialization Zones (Zonas de Urgente Reindustrialización-ZUR) – were offered a range of subsidies and exemptions aimed at bringing a greater diversification of their industrial structures (Vázquez 1990, 109; Salmon 1995b, 170–73).

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The cost of the Socialists’ Reconversion Plan has been estimated at 640,000 million pesetas. However, if we take into account additional items such as subsidies to INI companies, writing off losses, and so on, the final sum was probably nearer 1.5 billion pesetas (Vázquez 1990, 103–6). Even so, despite lavish funding, industrial reconversion was far from painless for the participants. The 1984 Act envisaged the loss of more than 85,000 jobs over the next five years out of a total labour force of 280,000 in the sectors affected. Nine-tenths of job losses were concentrated in four sectors alone – iron and steel, shipbuilding, textiles and white goods – which together shed over one-half of their workforce (Segura and González Romero 1992, 154; Salmon 1995b, 171–72). Meanwhile, the legislation was far from an unqualified success. On the plus side, massive state intervention helped stave off the collapse of many unprofitable concerns. In a number of sectors, including special steels, shipbuilding and fertilizers, the extent of company losses was reduced. A few loss-making sectors even became profitable, among them textiles, electronic components, transport material and white goods. In addition, company amalgamations led to the securing of significant economies of scale. On the minus side, however, industrial reconversion proved something of a disappointment to its supporters in one key respect; its failure to create an internationally competitive base of Spanish-owned industrial companies. To many commentators, the whole strategy of industrial reconversion was an expensive irrelevance. Instead of subsidizing a group of ‘lame-duck’ industries, they contended, in the long run the policy-makers would have achieved much more by dedicating such funds to the promotion of new high-tech industries where demand was stronger (Segura et al. 1989, 411–12; Myro 1993b, 323; Salmon 1995b, 170–73). But, it should be added, at what social and political costs?

Industrial recovery The positive effects of the 1984 Reconversion Plan, which coincided with the upturn in the global economy, helped bring to an end Spain’s protracted industrial recession. After 1986, the policy-makers breathed a sigh of relief as the price of crude oil began to tumble on world markets. However, the decisive factor behind Spain’s industrial advance from the mid-1980s onwards was EU membership. Even before the country joined the Community in January 1986, business expectations had already risen dramatically, especially after Spain signed the treaty of accession on 12 June 1985. At the same time, the Madrid authorities viewed the progressive dismantling of tariffs and quotas on imports by

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the Brussels bureaucracy as necessary shock therapy for the country’s inward-looking business community (Ontiveros 1996, 451–53). Indeed, in order to meet the new challenge, large numbers of companies revised their investment plans in a frantic attempt to modernize their plant and equipment. In practice, this meant buying in the latest technology from abroad (Segura and González Romero 1992, 146–47; Martín 1995b, 188). After a decade of stagnation and decline, during the late 1980s Spanish industry expanded more rapidly than any of its principal European rivals. In addition, the fastest rates of growth were obtained in the most technology-intensive sectors, including mechanical machinery and transport material, as well as in medium technology sectors such as automobiles, rubber and plastics. By contrast, sectors with less technology content, among them footwear and clothing, performed less impressively. Overall, Spain’s rapid industrial growth was the consequence of surging domestic demand for both consumer and capital goods (Myro 1993a, 324; Buesa and Molero 1999, 157–58). As Table 4.8 shows, between 1985 and 1988, gross fixed capital formation in Spain was amongst the highest in the OECD. Industrial employment also recovered (González Romero and Myro 1989, 25; Segura and González Romero 1992, 150–51). The failure of manufacturing output to keep pace with the surge in domestic demand after 1985 was a constant preoccupation of the policy-makers. According to a recent calculation by Carmela Martín (2000, 74), import penetration of the Spanish market doubled between 1986 and 1997, from 17.4 to 35.9 per cent. In the early stages, this was largely because of a reduction in tariff protection, along with the Table 4.8

Gross fixed capital formation in manufacturing industry in Spain and other OECD countries, 1984–88 (in real terms)

Spain USA Japan West Germany France United Kingdom Italy

1984

1985

1986

1987

1988

–1.2 18.9 17.3 –1.1 12.7 14.7 –1.2

18.5 8.7 14.3 17.9 6.7 3.6 13.9

13.8 –5.0 6.2 10.7 4.4 –7.5 7.0

31.0 3.2 5.2 5.7 4.2 20.5 11.3

35.6 8.5 5.9 0.9 5.7 1.9 6.0

Source: J. Segura and A. González Romero, ‘La industria española: evolución y perspectivas’, Papeles de Economía Española, 1992, 151.

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inability of Spanish producers to satisfy the demand for high-tech capital goods. After 1988, the problem was further exacerbated by an overvalued peseta, thereby reducing the competitiveness of the country’s exports (Segura and González Romero 1992, 156; Fariñas and Jaumandreu 1999, 25–26). Unfortunately for Spain, its manufacturing industry enjoyed few niche markets. As Javier de Quinto (1994, 23–30) so perceptively argues, where were the Spanish equivalents of Benetton, Moët et Chandon and Mercedes? The vast majority of national brands were poorly differentiated. Nor, with rare exceptions, did Spanish products have a reputation for their high quality. In addition, sectors such as iron and steel, cement and construction material were still too energy intensive, while labour costs remained a determining factor in textiles, footwear, leather and furniture despite fierce competition from the NICs. For its part, membership of the European Union underlined Spain’s industrial weakness vis-à-vis its main competitors, not least the small scale of firms, low levels of technology and human capital and a failure of entrepreneurship. The global recession of the early 1990s had a profound impact on Spanish industry. Among the sectors most severely affected were metallurgy, machine building, textiles, leather and footwear, while others, including foodstuffs, paper, rubber and plastics, avoided its worst excesses. The main cause of this short, sharp recession was a slump in domestic demand. By contrast, exports of manufactured goods continued to rise, thanks largely to a series of devaluations of the peseta in 1992 and 1993. The clearest evidence of export-led growth was in companies employing 200 workers or more. Even so, industrial investment dried up in the period 1991–94 (Martín Marcos and Merino de Lucas 1999, 63–65; Moreno Martín and Rodríguez Rodríguez 1999, 99). The severity of the industrial recession south of the Pyrenees at this stage was generally attributed to the absence of wage moderation. However, workers paid a heavy price, as roughly half a million manufacturing jobs were lost in 1992–93 alone (Martín 1995b, 188–92: Scobie et al. 1998, 4). From 1994, however, Spanish manufacturing staged a strong recovery, sustained initially by a resurgence of domestic demand and later by a creditable export performance. As industrial investment took off again, Spanish companies increasingly specialized in products which enjoyed long-term competitive advantages, many of them with a high technology content (Scobie et al. 1998, 88–91, Fariñas and Jaumandreu 1999, 25).

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Foreign investment Perhaps the most important factor behind Spain’s industrial restructuring and technological modernization after 1985 was a massive increase in foreign direct investment (FDI). The country’s ratio of foreign investment to GDP during the second half of the 1980s was amongst the highest in the developed world. Indeed, between 1986 and 1992, Spain received nearly 7 per cent of all FDI in the OECD (Martín and Velázquez 1996, 161–62). Studies indicated that this new wave of inward investment was attracted to the Peninsula by a variety of factors, including the consolidation of democracy, the increasing openness of the Spanish economy, EU membership and higher-than-average economic growth (Bajo Rubio 1991, 59; Muñoz Guarasa 1999, 125–27). Research by José Antonio Martínez Serrano and Rafael Myro (1992, 152–55) shows that in 1981 foreign capital controlled 11 per cent of manufacturing production, playing an increasingly important role in medium- and high-technology industries. By 1988, the level of foreign penetration in Spanish industry had rocketed to 26.8 per cent, while foreign multinationals controlled more than one-half of production in sectors intensive in technology. Foreign multinationals also acquired important stakes in sectors which were less intensive in technology, including basic metals, foodstuffs and paper. Two years later, foreign penetration in Spanish manufacturing stood at 36.5 per cent. By this time, inward investment accounted for approximately three-fifths of all output in medium- and high-technology sectors. Over the period 1981–90, the total amount of foreign investment in Spanish manufacturing companies nearly doubled, from 9.2 billion pesetas to 17.2 billions (see Table 4.9). During the 1992–93 recession, Spanish industry experienced a modest fall in FDI, as many multinationals put their investment plans on hold. However, after 1994 foreign investment in the Spanish economy resumed its upward trend, helped by mounting evidence of a moderation of wage claims on the part of the trade unions (Bajo Rubio and López Pueyo 1996, 176; Muñoz Guarasa 1999, 127–29). Where did this foreign investment originate? A study of the period 1987–95 by Marta Muñoz Guarasa (1999, 158–59, 184), calculates that roughly three-fifths (60.3 per cent) came from other EU countries. Spain’s main providers of FDI were the Netherlands (22.8 per cent), followed by France (13.9 per cent), the United Kingdom (7.5 per cent) and Germany (6.8 per cent). These data, the author admits, must be treated with caution, not least because some of this investment was channelled to Spain via financial intermediaries – including the Netherlands – or through tax havens. By comparison with the

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Table 4.9

Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Foreign direct investment in Spanish manufacturing companies, 1981–90 (in millions of pesetas) Annual investment 59 126 970 141 177 246 383 312 523 640

Net assets 9,223 10,127 11,332 11,711 12,294 12,534 13,192 14,641 16,277 17,192

Source: J. A. Martínez Serrano and R. Myro, ‘La penetración del capital extranjero en la industria española’, Moneda y Crédito, 194 (1992), 155.

Development era, the USA made a much less significant contribution to Spanish economic development. As to the destination of these capital flows, more than seven-tenths of inward investment was absorbed by only two regions; Madrid (41.2 per cent) and Catalonia (29.6 per cent). Smaller amounts were directed toward Andalucía, the Comunidad Valenciana and the Basque Country. Interestingly, whereas before 1986 industry was by far the main recipient of foreign direct investment – accounting for as much as 70 per cent in the period 1960–85 – between 1987 and 1995, only 49.8 per cent of FDI went to manufacturing, compared with 48.3 per cent to the service sector, 1.1 per cent to construction, and 0.8 per cent to agriculture. After Spain’s membership of the European Union, foreign direct investment in the manufacturing sector was concentrated on a restricted number of high-tech sectors. Prominent among these were electronics, aerospace equipment, computers and office automation, and chemicals. By contrast, low-tech, labour-intensive sectors, such as textiles, leather, toys, ceramics, shipbuilding and footwear, held little attraction for foreign investors (Martínez Serrano and Myro 1992, 154; Durán Herrera 1992, 248; Muñoz Guarasa 1999, 190). As a rule of thumb, inward investment went to industries which were characterized by a high technological content, a skilled (that is, well-paid) labour force, strong demand and a range of markets (Egea Román and López Pueyo 1991; Martín and Velázquez 1996, 165–66).

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Privatization From the early 1980s, West European states gradually withdrew from direct involvement in economic activity. This change of direction reflected an increasing tendency towards liberalization, deregulation and greater economic flexibility. Throughout the continent of Europe, interest in privatization was awakened by the activities of the Thatcher government in the United Kingdom. In a remarkably short space of time, a string of leading European companies, including public utilities, were either sold off or floated on the stock market. In supporting the privatization process, governments of different persuasions were motivated by a range of policy objectives. Among their aims were the desire to subject public companies to the discipline of the market, improve management efficiency, eliminate subsidies, reduce public deficits, strengthen the stock market and swell the ranks of shareholders (Dehesa 1992, 55; Parker, 1998, 10–48; Comín and Díaz 2001). By European standards, Spain’s public sector was small. According to a 1991 survey, it accounted for 8 per cent of value added generated in the Spanish economy and 13 per cent of gross fixed capital formation, compared with 11 per cent and 16 per cent respectively in the EU (Montes Gan and Petitbò Juan 1998, 191). After throwing its weight behind further nationalization in the financial and energy sectors, Felipe González’s first Socialist government was ‘converted’ to the privatization process by the modernizing faction within the PSOE known as the renovadores. Leading members of this group included Carlos Solchaga (Minister of Industry, 1982–85 and Economy and Finance, 1985–93), Luis Carlos Croissier (Minister of Industry, 1986–88) and Claudio Aranzadi (Minister of Industry,1988–92) (Chari 1999, 164). The debate on state-owned companies in Spain, which split the socialist movement in the 1980s, focused on their lesser efficiency compared with the private sector, their poor earnings performance and weak management (Cuervo 1997, 55–79). Guillermo de la Dehesa (1992, 59) writes of an ‘identity crisis’ which afflicted Spain’s publicsector enterprises, controlled as they were by immovable bureaucracies. To their detractors, INI enterprises in particular were ‘dead-end’ companies, in urgent need of ‘cleansing’ through modernization and rationalization before being sold off to private-sector buyers – preferably Spanish – who alone could guarantee their long-term profitability (Dehesa 1992, 60–61; Chari 1999, 103; Gámir 1999, 98). Despite massive subsidies from the Exchequer, their critics contended, public-sector enterprises did little to alleviate mass unemployment. Indeed, between 1981 and 1994 the public-sector labour force fell by 58

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per cent in shipbuilding, 49 per cent in mining and 41 per cent in the defence sector (Gámir 1999, 73). The structure of INI underwent major changes, beginning in 1981 with the creation of the Instituto Nacional de Hidrocarburos (INH). This involved the spin-off from the holding company of firms engaged in the exploration, production, refining, distribution and retailing of petroleum products and natural gas (Fanjul 1989, 322–39; Martín Aceña and Comín 1991, 501–7; Montes Gan and Petitbò 1998, 199). At the bottom of the industrial recession in 1983, faced with losses of over 200 billion pesetas, the Socialist government again redefined INI’s goals. The beleaguered holding company was instructed to re-establish the competitiveness of its component firms, cut its losses and, as a result of these and other reforms, consolidate itself as a viable and efficient group. Loss-making enterprises were to be shut down while companies with no strategic role within the group would be disposed of to the private sector. For its part, the Institute adopted a policy of denationalizing uncompetitive concerns (Martín Aceña and Comín 1991, 523–34; Dehesa 1992, 63–65; Gámir 1999, 99). From the middle of the 1980s, a number of public companies in financial difficulties were sold off to foreign investors, often at bargainbasement prices. Only foreign multinationals, ministers argued, were in a sound enough position to ensure their survival, thereby safeguarding tens of thousands of manufacturing jobs. In particular, two of these sales – both involving ‘national champions’ – stood out. First, in 1986 the German firm Volkswagen acquired a majority 51 per cent holding in the loss-making car manufacturer Seat, while four years later VW gained full control of the new company. Second, in 1990 INI’s Council approved the sale of 60 per cent of its shares in the troubled bus and truck manufacturer Enasa (later renamed Iveco-Pegaso) to the Italian multinational Fiat, handing over the remainder three years afterwards (Myro 1993b, 638–39; Chari 1999, 165–71). Both transactions were mired in controversy. In a fascinating account of the main events, Raj S. Chari (1999, 177) contends that ‘the renovadores may have been allowed a certain autonomy to negotiate the sales [by the PSOE] because allowing capital the upper hand in the formulation of policy may have helped the party secure future funding’. In 1992, a new subholding company named Téneo came into operation with a long-term commitment to zero indebtedness. Its prime goal was to support firms judged to be capable of competing under normal market conditions, irrespective of their future ownership. INI, meanwhile, struggled on as a holding company with important stakes in steel, shipbuilding, defence and the mining sectors as well as in Téneo. However, by now its days were numbered. Following yet another

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restructuring of the industrial and energy sectors in 1995, both Institutos Nacionales (INI and INH) disappeared, the former after more than half a century of activity. They were replaced by two newly created holding companies. One of these new bodies, the Sociedad Estatal de Participaciones Industriales (SEPI) was given the task of reducing the debt of a select number of state-owned enterprises with a view to their full or partial privatization. The other, known as the Agencia Industrial del Estado (AIE), grouped together those loss-making concerns that were still eligible for state aid. In the following year, the incoming Partido Popular government wound up Téneo (Cuervo 1997, 34; Montes Gan and Petitbò 1998, 199–206).

Energy By comparison with more advanced economies, Spain consumed relatively small amounts of energy per inhabitant during the first half of the twentieth century. On the eve of the Spanish Civil War, coal accounted for slightly more than two-thirds of final energy consumption. Almost nine-tenths of this coal was produced domestically. Following the disruption of mining activity in Asturias – which regularly accounted for over three-fifths of domestic output – production returned to normal by 1939. Even so, in terms of its overall energy needs, Franco’s Spain did possess an Achilles’ heel, that is, its dependence on imported oil and oil derivatives. Throughout the threeyear conflict, nationalist diplomacy managed to secure important quantities of oil for military purposes from the Texas Oil Company (Texaco), the leading provider to the rebel zone. Even so, the political and economic support which the Franco regime gave to the Axis powers during the Second World War persuaded the Allies – above all the USA – to treat the supply of oil as a bargaining counter in their commercial dealings with Spain. The results of the wartime blockade were disastrous for the dictatorship. Spain, which consumed 1 million tonnes of oil products in 1940, was allotted only 350,000 tonnes in 1942 when oil shortages were at a peak. Moreover, it was 1946 before 1940 levels of consumption were restored. Afterwards, the United Nations’ diplomatic boycott of Franco’s pariah state, combined with the lack of foreign currency to pay for oil imports, exacerbated an already precarious situation. It was the improvement in Spain’s balance-of-payments situation in the early 1950s – coinciding with the arrival of US bilateral aid – which finally allowed the country to satisfy its growing appetite for oil. Meanwhile, oil shortages had a particularly damaging effect on the transport system, in spite of costly attempts by INI to produce an ersatz

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petroleum known as gasógeno from bituminous shales. Rising transport costs contributed to an increase in the price of foodstuffs and consumer goods and were a major factor in Spain’s runaway inflation of the late 1940s (Sudrià 1987, 324–32; Martín Aceña and Comín 1991, 204–6). From 1944, electricity power cuts were a common feature of everyday life. After dusk, large parts of both rural and urban Spain were frequently plunged into darkness, while manufacturing industry ground to a halt for long periods. This problem persisted well into the 1950s. Carles Sudrià (1987, 332–33) calculates that, during the period 1944–54, the demand for electricity in Spain exceeded supply by roughly 10 per cent, although successive troughs were experienced in 1945 and 1949, when shortfalls in the provision of electricity reached 33 per cent and 27 per cent respectively. Sudrià blames these shortfalls on a lack of productive capacity. In particular, the mistaken interventionist policies of the New Order, which prevented the power companies from raising their charges before 1951, delayed crucial investment in the sector. The notable contribution of hydro-electric power meant that consumers were the perennial victims of the ‘enduring drought’ of the 1940s, since generating plants in the Pyrenees were subject to inadequate and sporadic rainfall. The worst effects of the power cuts were felt in the industrial zones of Catalonia and the Basque Country where, as the Ministry of Industry admitted in a 1951 report, manufacturing production was paralysed for weeks and sometimes months on end (Ribas i Massana 1978, 181–215; Sudrià 1988, 257–63; Maluquer de Motes 1998, 154–57). Over the period 1960–73, Spain’s consumption of primary energy rose by 7.8 per cent per year, marginally higher than the annual rate of expansion of GDP. Between 1965 and 1973, it went up by 8.9 per cent annually, as against a 6.5 per cent increase in GDP. Industry and transport together accounted for more than four-fifths of final energy consumption at the end of the Development era. The biggest increase in demand took place in those industries which used up a disproportionately large share of energy, above all basic chemicals, iron and steel, shipbuilding and cement. Elsewhere, the widespread adoption of labour-saving techniques led to a significant increase in energy consumption per unit of production. After industry, transport was responsible for the second largest increase in energy demand. This owed a great deal to the spread of the petrol-guzzling heavy lorry at the expense of the country’s slow and inefficient railway network (Iranzo 1984, 274; Sudrià 1987, 340; 1993, 275–76; García Ruiz and Santos Redondo 2001, 43). As to the composition of Spain’s energy consumption, the most important development at this stage was the massive switch from

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domestically produced coal to imported oil. Between 1960 and 1973, the consumption of oil – 98 per cent of which had to be imported – rose by 13.1 per cent a year (Sudrià 1987, 341). Oil, which was cheaper and more abundant than coal, accounted for 66.7 per cent of Spain’s final energy consumption in 1973, compared with only 30.7 per cent in 1960. Over the same period, the contribution of coal to total energy requirements slumped from 50.2 to 17.3 per cent (García Alonso and Iranzo 1999, 143; Cuerdo Mir 1999, 165). According to one calculation, Spain’s level of external dependence in energy products jumped from 40 per cent in 1960 to 74 per cent in 1973 (Iranzo 1992, 173). Next to oil, energy consumption increased most rapidly in the electricity sector, which experienced an average yearly growth of 11 per cent between 1960 and 1973. Before the middle of the 1960s, the Spanish authorities gave priority to the generation of hydro-electric power, while they also encouraged the construction of coal-fired power stations. However, the escalating costs of extracting domestic coal due to geological problems favoured the construction of a second generation of oil-fired plants. Elsewhere, industry’s growing demand for energy stimulated a wave of investment in nuclear energy. Spain’s first generation of nuclear power stations comprised the Zorita (later the José Cabrera) in Guadalajara, which was connected to the grid in 1968, the Santa María de Garoña (Burgos), opened in 1971, and the Vandellòs 1 (Tarragona), which started production in 1972. Finally, beginning in 1969, natural gas was brought to the Peninsula by tanker from Algeria. The first regasification plant was constructed in Barcelona in 1971, where the pipelines conveying town gas were converted to natural gas (Sudrià 1993, 278; García Alonso and Iranzo 1999, 143–44). The sharp increase in oil prices introduced by the OPEC cartel after 1973 led to the appearance of a series of economic problems which threatened the stability of the capitalist world, including declining growth rates, rampant inflation and yawning trade gaps. With its excessive dependence on imported oil, Spain was not immune from the general trend. Even so, while most other Western economies were quick to adopt a series of counter-measures aimed at energy conservation and the diversification of supplies, the Madrid authorities dithered. In an illconsidered attempt to head off social unrest at home, ministers at first refused to carry out the necessary structural adjustments. Instead of being passed on to consumers, successive increases in the price of oil by the OPEC producers were partially absorbed by the Exchequer, which reduced the level of indirect tax paid on oil products. While the cost of crude oil acquired by Spanish refineries soared by a factor of 5.3 between 1973 and 1978, the domestic price of fuel oil – the main sub-

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product of oil – went up only 2.6 times. Thus, far from achieving energy savings or bringing about the substitution of domestically produced energy products for imported oil, the reverse occurred. Between 1973 and 1976, the contribution of oil to final energy consumption rose by more than four points, from 66.7 to 72.1 per cent (Cuerdo Mir 1999, 165; Sudrià 1993, 279–81). Before the appearance of the first oil crisis in 1973, energy forecasting in Spain was mainly limited to sectoral planning and collecting data for inclusion in the Development Plans. Throughout 1974, however, in an attempt to tackle the pressing issue of external dependence, Francoist policy-makers began work on the preparation of a long-term energy plan. Their main objectives were to diversify the country’s energy supplies and bring down the overall contribution of imported oil. Even so, Spain’s first national energy plan – dubbed PEN-75 (Plan Energético Nacional) seriously miscalculated future demand, based on overoptimistic assumptions of sustained economic growth. Hence it called for a strong impulse to be given to nuclear power, which was expected to play a major role in supplying the country’s electricity needs, as well as an increase in the consumption of natural gas. Yet, due to the low priority which was assigned to energy policy, none of the planners’ recommendations was acted upon in the short term. Not until July 1979 did the Cortes finally approve a second energy plan, known as PEN-78. Although the latter sensibly scaled down earlier forecasts of energy demand, it still forecast a substantial increase in consumption over the next decade plus a gradual reduction in the nation’s dependence on oil. In order to realize these goals, the authorities reckoned that at least onehalf of this additional demand would have to be met by increasing the supply of electricity. Therefore, despite vociferous criticism from both left-wing and regionalist groups, the nuclear option was kept open. At the same time, the planners projected a quadrupling in the consumption of natural gas between 1977 and 1987, from 1.9 million toe (tonnes of oil equivalent) to 7.7 millions. Chastened by recent experiences, they concluded that henceforth all increases in the price of crude should be passed on to consumers. None the less, PEN-78 was immediately blown off course by the second oil crisis of 1979–80, caused by the Iran–Iraq conflict, which led to a trebling of oil prices within the space of a few months. A mandatory revision of the second energy plan, approved by the Cortes in 1982, predicted a further drop in the demand for energy. It also called for the enhanced substitution of coal and nuclear-generated electricity for oil (Lancaster 1989, 66–73, Sudrià 1993, 280–84; Cuerdo Mir 1999, 165–68). Soon after the Socialists assumed power in 1982, they undertook a detailed review of energy policy. Spain’s third ten–year year energy plan

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– known unsurprisingly as PEN-83 – forecast even larger falls in demand, partly thanks to the achievement of energy savings but also due to the profound impact of the recession on heavy industry. The main objective of PEN-83, later reaffirmed in PEN-91, was to bring down the level of external dependence on energy products by reducing the contribution of oil to below 50 per cent of net domestic demand. More controversially, the Socialists bowed to political and financial pressures and imposed a moratorium on the construction of a number of thirdgeneration nuclear plants (Sudrià 1993, 284–86; Cuerdo Mir 1999, 168–73). In the long term, the Spanish authorities made great strides in reducing the country’s dependence on imported oil, only narrowly missing their target. As Table 4.10 shows, the contribution of oil to total energy consumption had fallen to 55 per cent by 1997. Even so, most commentators concur that this figure is unlikely to decline much further. This is largely because, during the 1980s, transport – where there are few opportunities for energy substitution – overtook industry as the main source of demand for oil. By 1990, transport accounted for 51.5 per cent of oil consumption, compared with 28.2 per cent in the case of industry (Iranzo 1992, 177; Cuerdo Mir 1999, 175). By 2002, 14 per cent of Spain’s primary energy requirements were satisfied by natural gas, while the demand for gas is expected to expand by around 10 per cent a year during the present decade. The rapid expansion of this cleaner and more efficient fuel was welcomed by the Table 4.10

Primary energy in Spain, 1997, in percentage terms (in toe)

Oil Coal Natural gas Electricity hydro-electricity nuclear Others Total

Net domestic consumption

Net domestic production

55.4 17.0 10.7 16.6

1.1 34.1 0.6

0.3

11.0 51.8 1.4

100.0

100.0

Source: J. A. García Alonso and J. E. Iranzo, ‘Sector energético: hacia una nueva ordenación’ in J. L. García Delgado (ed.), España, economía: ante el siglo XXI (Madrid: Espasa, 1999), p. 134.

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policy-makers since it entailed a greater diversification of energy supplies. However, as in the case of oil, nearly all of Spain’s natural gas (99 per cent) has to be imported. Since three-quarters of natural gas imports come from a single source – Algeria – the country’s energy supplies remain highly vulnerable to potentially destabilizing outside influences (García Alonso and Iranzo 1999, 133, 139). Elsewhere, Spain’s energy planners face a raft of problems. In the case of coal – Spain’s main source of indigenous energy – production continued to tumble in the late twentieth century, from 40.4 million tonnes in 1985 to 27 million tonnes in 1999. The predominantly state-owned coal mining industry is now enormously dependent on government subsidies in order to survive. In the meantime, coal is rapidly being displaced from the great majority its traditional uses, apart from electricity supply and metallurgy. Currently, 95 per cent of coal is used to generate electricity. The expansion of Spain’s third source of primary energy – hydro-electric power – is severely constrained by a shortage of potential sites capable of economic exploitation. The present-day contribution of hydroelectric power to final energy consumption ranges from 7 to 12 per cent – depending on levels of rainfall – compared with 15–20 per cent in the 1970s. Finally, nuclear power accounted for 34 per cent of electricity generation in 2002. Unlike the PSOE, which still favours a gradual shutdown of nuclear plants, the Partido Popular is generally more supportive of the industry. Spain has nine reactors in operation, although the decommissioning of Vandellòs-I began in 1998. Even so, nuclear power companies appear unlikely to invest in new plants, mainly owing to high costs and a lack of government incentives (Vázquez and Martínez 1992, 182; García Alonso and Iranzo 1999, 134–38; EIA 2003).

CHAPTER 5

The services sector Services have become a key component of the modern Spanish economy and are now the primary engine of growth. The rapid growth of Spanish industry during the 1960s and early 1970s tended to overshadow the expansion of the services or tertiary sector. In fact, in common with other advanced industrial countries, Spain’s tertiary sector has demonstrated a sustained growth pattern, consolidating its position as the most important contributor to GDP and employment (Sáez Fernández 1990, 123). It is, therefore, possible to trace the progressive tertiarization of the Spanish economy, a process that shows little sign of abating. Moreover, the growing weight of services in the economy has brought a subsequent blurring of the frontiers between industry and services as they have become progressively more integrated (Cuadrado Roura 1990, 119). In terms of employment, services have made a significant contribution to job creation and demonstrated greater stability and less susceptibility to economic downturns than the primary and secondary sectors (Harrison 1993, 56). Significantly, the sector helped shape the new employment patterns that have developed in Spain in recent decades, including the expansion of temporary and part-time work. The conventional wisdom is that the sector simply absorbed the labour displaced by the deindustrialization process. It was assumed that the lack of employment opportunities in the primary and secondary activities compelled existing employees and new labour market entrants to seek jobs in the tertiary sector, while female workers naturally gravitated towards such employment. For this reason, Spain’s services were regarded as possessing features normally associated with a peripheral economy, based upon the dominant role played by tourism, relatively low export volumes and a large contribution from construction and distribution (Salmon 1991, 165). Yet the pace of expansion has been such that this relationship no longer holds. Today, a clear distinction needs to be made between advanced and traditional services. An expanding service sector is, of course, a feature common to all modern economies. The factors that explain its prominent role are many and varied. As living standards rise, families spend a larger proportion of their income on consumer services, while as business and industry

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become more complex, their demand for services expands. Sub-sectors such as tourism, financial services, consultancy and so on experience substantial growth. Crucially, labour cannot easily be replaced by capital and technology in the service sector, thereby boosting its role as a job creator. Another contributory factor has been the burgeoning of public services, which have generated employment on a significant scale. In particular, the late development of Spain’s welfare services, following years of neglect under Franco, contributed to this transformation. Indeed, service-sector dynamism has been fuelled by the growth of noncommercial or official services, including central and regional administration, education and health and other public-sector social provision. According to La Caixa, Spain’s largest savings bank, public employment growth, driven by the expansion at the autonomous community level, has averaged 3 per cent annually between 1987 and 2001, which represents a rise of more than 800,000 posts. Nor was employment expansion at the regional level counterbalanced by equivalent reductions among central government employees, which fell by only 90,000 as responsibilities were gradually transferred to the regional authorities (Cinco Días 2002b). Services is a heterogeneous sector which comprises activities as varied as tourism, transport, commerce, retail and distribution, business and financial services (banking and insurance) and government activities, including education, health and social services. It has developed into a diversified residual sector. Tertiary activities subsume a range of subsectors, including hotels and catering, property, business services, and the ‘knowledge industries’, among them accountancy, computer services and advertising. In addition, the inter-sector element is important, such as the services performed for firms and transport. Unfortunately, the sector’s diversity and rapidly changing character mean that, until recently, it has been little studied and available data are poor. One aspect that commands much attention in the Spanish case is the speed of this transformation to a services-dominated economy. Processes that took decades to achieve elsewhere have been telescoped into a much shorter time-span. Rapid employment contraction as agriculture haemorrhaged jobs and industry was ravaged by restructuring have been partly compensated by employment generation in services. Servicesector growth began to gather pace from the mid-1950s, stimulated by such factors such as the expansion of tourism, urbanization and rising living standards (Cuadrado Roura 1990, 102–3). Tracing its long-term development is made all the more difficult by the absence of reliable data relating to a constantly mutating sector. However, it is known that by 1960 services accounted for 45 per cent of total GDP and a little under one-third of employment (31 per cent). In the following decades, its

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contribution to GDP expanded, while employment growth accelerated markedly, reaching 47.5 per cent by 1980 (see Table 5.1; Cuadrado Roura 1999, 177). According to the Encuesta de Población Activa (EPA), tertiary activities accounted for 66.2 per cent of GDP in 2001 and employed almost 7.7 million people (1999), around two-thirds of the total workforce (Cuadrado Roura 2001, 51). This figure represents an increase of 21 points in under a quarter of a century and growth is continuing. Notably, the allocation of labour within the sector has shifted. While distribution services remained the largest employer of labour (23 per cent in 1999), producer and social services have registered the highest growth rates. The importance of services varies regionally, carrying most weight in Madrid and along the Mediterranean seaboard (Salmon 1991, 146). It is important to remember that tertiary-sector employment is shaped by institutional factors, including the size of the public sector, especially education and health. The economic contribution made by services also varies according to a region’s industrial stability and the size and importance of tourism. Over time, services have played an important counter-cyclical role and helped to stabilize fluctuations in the economic cycle (Cuadrado Roura 1999, 179–80). Such was the case during the recession in the early 1980s when manufacturing industry suffered a major contraction. On average, services have grown faster than the economy as a whole. Interestingly, non-commercial services, particularly those provided by government agencies, grew faster than commercial services. Throughout the sector, several trends are discernible over the past two decades. These Table 5.1

Agriculture Industry Services

Distribution of GDP, at constant prices, and employment by sector (%) 1980

1990

1997

2002

6.8 39.1 54.1

5.4 38.4 56.2

4.5 37.1 58.4

4.0 29.5 66.2

Distribution of employment by sector Agriculture Industry Services

18.1 34.4 47.5

16.9 30.2 52.9

Source: Cuadrado Roura, 1999, 179; INE; EIU.

11.0 32.0 57.0

5.7 31.0 63.2

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can be identified as increased competition, technological change, growing concentration, internationalization and greater commercialization. In common with the primary and secondary sectors, services have been subject to restructuring and rationalization in response to the pressures noted above. They have also been affected by changes in labour contracts (temporary and part-time employment, piece-work and so on).

Tourism Since the early 1960s, tourism has become the principal engine of growth in the services sector. As Spain’s leading industry, it has played a key role both as an income generator and as a source of employment, growing at double the rate of increase of GDP. According to the Instituto Nacional de Estadística (INE), tourism accounted for 12.1 per cent of GDP in 2002 and employed around 10 per cent of the total workforce, providing direct employment for over 860,000 people, rising to roughly 1.5 million workers when those employed in related activities are included (El País 2002b). In global terms, Spain was second only to France in terms of foreign visitor numbers and behind only the USA in terms of tourism earnings. Tourist numbers rose impressively, from just under 35 million in 1995 to over 49 million in 2001, defined as those staying for one night or more, although total tourist visitor numbers (including day visitors) were considerably higher, exceeding 74 million (see Table 5.2; MECDE 2002, 18). Tourism is Spain’s leading activity with regard to income generation. Table 5.2

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Total visitor numbers, 1973–2001 (millions) (includes tourists and day visitors) 34.6 30.3 30.1 30.1 34.3 40.0 39.0 38.0 40.1 42.0

Source: MECDE 2002, 11.

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

41.3 43.0 43.2 47.4 50.5 54.2 54.1 53.0 53.5 55.3

1993 1994 1995 1996 1997 1998 1999 2000 2001

57.3 61.2 64.5 57.3 62.4 67.8 72.1 74.5 75.7

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Earnings from tourism have long been a critical element in the balance of payments and a vital foreign exchange earner (Figuerola Palomo 1978, 131). Tourism earnings covered 70 per cent of the visible trade deficit in 2001. Historically, tourism compensated for some of the structural deficiencies in the economy during the 1960s and 1970s (Valenzuela 1998, 44). Spain’s substantial foreign reserves built up before 1975 are, in large part, attributable to tourism earnings. Healthy returns continued, as income from foreign tourism more than trebled between 1975 and 1986. By the 1990s, it was estimated that the earnings from tourism were greater than those of the motor and petroleum industries combined. Spain ranked second only to the USA with regard to foreign tourism revenue in 2000, bringing in $31 billion (see Table 5.3). Tourism continued to generate record receipts in 2001, despite higher prices and the effects of 11 September. This achievement can be attributed to the success in attracting higher-spending tourists, thereby providing further indication that Spain retained its ability to outperform its main rivals. The multiplier effect generated by activities related to tourism has proved to be an important stimulant to the Spanish economy, particularly in construction, accommodation, transport, leisure and commerce. It is no coincidence that two leading tourism regions, the Balearics and Gerona, have consistently been the two wealthiest provinces in Spain, measured by per capita income. But it is in terms of employment generation that tourism has made its most impressive contribution. Two other trends are worthy of note. First, while the sector continues to be dominated by small and medium-sized enterprises (SMEs), employing fewer than 350 people, there are signs that concentration is under way. Much larger businesses have emerged, and Spain can now boast its first tourism multinational, Sol Meliá. By the late 1990s, the Sol Meliá group owned or rented over 300 hotels in 30 countries and was involved in a variety of leisure and recreational activities. Second, as much of the work is low skilled, increasing use has been made of foreign workers, chiefly from Latin America, Eastern Europe and Africa, to fill the growing number of vacancies. Table 5.3 USA Spain France Italy

World tourism earnings, 2000 ($ millions) 85,153 31,000 29,900 27,439

Source: MECDE 2002, 32.

UK Germany China Austria

19,518 17,812 16,231 11,440

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Tourism is Spain’s premier industry and its contribution to Spain’s economic development cannot be overestimated (Balaguer and Cantavella-Jordá 2002, 877). The official statistics provide ample evidence of the scale of expansion in the industry. Between 1950 and 1975 visitor numbers increased by an annual average rate of 15.9 per cent (MECDE 2002, 7). In response, the number of hotel beds grew from 162,000 in 1961 to 835,000 in 1984. Further expansion increased provision to almost 2.2 million tourist beds in 1996, although it tended to be heavily concentrated on the Mediterranean and Atlantic coasts and the Balearic and Canary Islands (Valenzuela 1998, 52). Alongside the registered accommodation, the informal sector provides a large quantity of unregistered beds. However, some developments have been less welcome to the industry. The popularity of time-share accommodation, largely controlled from abroad and unregulated, has caused particular concern among Spanish hoteliers. Following a long period of expansion during the 1960s and early 1970s, a slowdown occurred when the oil crisis of 1973 sparked an economic recession. Believing that the industry had reached saturation point, one economist predicted that it was ‘unlikely that the phenomenal rate of growth of tourism can be repeated’ (Wright 1977, 146). Yet within a few years, defying a raft of pessimistic predictions, tourism growth resumed and continued apace with only minor interruptions. Indeed, the tourist industry was elevated to the leading sector in the economy, despite the adverse international economic conditions prompted by the second energy crisis of 1979–80. Tourism has been one of the few sectors to have retained a competitive edge. Fundamental to its success have been the many advantages which Spain possesses as a holiday destination. Initially, the country gained a reputation as a provider of value-for-money ‘package’ holidays. Spain encapsulated the benefits and disadvantages that accrue when there is a boom in mass market tourism and appeared to have discovered a magic formula based on cheap prices and an excellent climate. Along Spain’s costas, specialist resort towns quickly sprang up from small fishing villages, the prime examples being Lloret de Mar, Benidorm and Torremolinos on the Costa Brava, Costa Blanca and Costa del Sol respectively. This growth was in response to largely exogenous developments. First, there was the economic prosperity enjoyed by the countries of Western and Northern Europe which made holidaying abroad a viable proposition. Second, technological factors such as the development of short-haul passenger aircraft provided the means of transport and sparked a boom in air travel. Third, Spain enjoyed great success in promoting itself as a tourist destination through large-scale publicity campaigns. The most widely disseminated focused

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on the concept that ‘Spain is different’, a phrase coined by Franco’s Information Minister, Manuel Fraga. Over time, the disadvantages inherent in the single product sol y playa (sun and beach) tourism model became all too apparent. Overdependence on what had become only a segment in the overall tourism market triggered alarm bells that the industry would run into trouble. Specialization in the mass tourism market meant that the typical tourist who opted for Spain tended to be a low spender. By the 1980s, new providers had emerged, sparking fierce competition from Greece, Turkey and North Africa at the cheaper end of the market. As for geographical origin, the tourism industry was heavily reliant on the European market, the principal supplier nations being Britain, Germany and France. In 1988, over 90 per cent of the tourists entering the country were Europeans. Although, in the long term a diversity in supplier markets is advantageous, this low dependence on the US market proved beneficial to Spain after the events of 11 September 2001, when there was a sharp fall in the number of American visitors to Europe. The United Kingdom retained its leading position, with just under 30 per cent of the total number of foreign tourists during 2000–2001. Germany held second place with 19.8 per cent and France came third with just over 16 per cent (MECDE 2002, 40). Moreover, the heavy concentration on a few markets for the supply of tourists ensured that an economic slowdown in Northern Europe proved detrimental to Spain. When Germany slid into recession during 2001–2002, tourist numbers in the Balearics slumped in particular. Further difficulties sprang from the industry’s high regional concentration of supply and demand (Martínez García 2002, 13). Traditionally, the eastern and southern coastlines attracted the vast majority of foreign tourists. In regions such as Andalucía, the Balearics and Catalonia, employment patterns became distorted by seasonality and a heavy concentration on the summer months (Wright 1977, 145). The Balearics retained their position as the most popular destination, with 26.6 per cent of the total in 2001, closely followed by Catalonia (23.2 per cent), the Canaries (14.2 per cent), Andalucía (13.3 per cent) and the Comunidad Valenciana (9 per cent). Madrid registered strong annual growth to reach 5.2 per cent of the total, signalling that the attractions in the major cities, with their museums, retailing, high quality hotels, and so on, had become a growth area in the tourism economy (MECDE 2002, 49). What explains the remarkably consistent performance by Spain’s tourism industry? When the ‘golden age’ expansionary phase ended in the mid-1970s, the fears were that Spain might suffer as a tourist destination when newer alternative holiday destinations challenged the

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long-established sol y playa formula. It was anticipated that greater competition would place Spain at a cost disadvantage because of its escalating wages, ageing infrastructure and poor facilities. Indeed, excessive specialization in this segment of the market was expected to rebound to Spain’s disadvantage. That this did not turn out to be the case is attributable to a combination of both internal and external factors. First, Spain’s geographical proximity to its major markets gave it a unique advantage over its rivals. Meanwhile, improved communications and expensive promotional campaigns ensured that, although Spain might be challenged by new competitors, it would prove difficult to dislodge from its primary position. How, apart from downturns during economic recessions, has the sector managed to bounce back with record year following record year? The explanation for this remarkable performance is to be found in successive peseta devaluations in 1992, 1993 and 1995 that ensured its competitiveness, the expanding market for tourism, rising prosperity in the sender countries, changing socio-economic trends (second holidays, purchases of homes abroad and so on), and innovation and variations in what the sector offered the foreign tourist. Nor should the contribution made by domestic demand for tourism be discounted, although it has been relatively small in comparison to external demand. Rising living standards among Spaniards have generated a domestic market for tourism, making a not insignificant contribution to combating seasonality, and stimulating the development of regional tourist markets. In 2000, over a third of the overnight hotel reservations were made by Spaniards (Martínez García 2002, 2).

Quality versus quantity One of the most important trends since the early 1990s has been the growing number of initiatives taken to counteract the perceived weaknesses and challenges outlined above. A concerted government effort has been made to respond to the changing patterns of international tourism. The main focus has been on improving what the industry has to offer in terms of quality and variety, developing and renewing obsolescent infrastructure, and exploiting new markets to avoid overdependence. A gradual shift was discernible from a competitiveness based on rockbottom prices to ‘quality tourism’ with higher value added. This trend was explicit in the government’s Integral Plan for Quality Tourism (Plan Integral de Calidad Turística, PICTE 2000–2006), which placed greater emphasis on environmental sustainability and high-quality tourism.

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Central to the new thinking was the attempt to diversify in order to differentiate Spain from its competitors and respond to both changing tastes and the growing competition at the low to middle-cost end of the market. One response has been to offset the geographic imbalance by promoting developments such as ski resorts, conference facilities and rural tourism. The changing face of the Spanish tourism industry reflects a recognition by tourism promoters that progressive market segmentation is taking place. In an attempt to persuade tourists that the country had much more to offer than beach holidays, an advertising campaign began in the 1990s to market the range of activities Spain had to offer under the slogan ‘everything under the sun’. An effort has been made by the General Secretariat for Tourism (Secretaría General de Turismo) to bring together the autonomous communities, local authorities and the private sector to produce a comprehensive plan to promote the industry over the medium and long term. Niche markets were identified and advertising campaigns launched to promote specific segments, including cultural tourism, sports holidays, health spas and eco-tourism. The underlying aim has been to promote diversification both regionally and in terms of the product offered, to attract higher-spending tourists and further counteract excessive seasonality. Central to this strategy has been the emphasis on professionalism through the introduction of training programmes for employees in the sector and improvements in the provision of statistical data. Evidence of a more professional approach was provided when the Economy Ministry established an Instituto de Estudios Turísticos (Tourism Studies Institute) in 2000 to collate information and publish reports and studies relating to the industry. The application of information technology to improve the management and delivery within the industry has been a key feature in the upgrading efforts. Investment in refurbishing the cultural infrastructure and heritage promotion has featured prominently in urban regeneration programmes. Founded in 1972, the Spanish Tourist Board (Turespaña) took on the role of developing and coordinating tourism policy. Its aim has been to increase the country’s share of the market, transmit a distinctive image that differentiates Spain from its rivals, improve profitability and diminish seasonality. Marketing Spain’s cultural assets is a key feature of Turespaña’s work. A cultural tourism development programme identified new heritage-based projects and began to promote them through specific events (Barcelona’s Year of Gaudí, Salamanca’s designation as European Capital of Culture in 2002), or themes/ancient trails (Camino de Santiago, Ruta de la Plata, España Verde). The promotion of historic cities such as Santiago de Compostela built upon

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the Galician capital’s elevation to the status of a UNESCO World Heritage City. Beneficially, cultural tourists are usually high-income earners, spending double the amount of an average tourist. Estimates put annual cultural tourist numbers at 5 million, with evidence that significant growth potential exists. Reflecting the trend towards diversification, Spain is now a leader in city tourism. Responding to a consumer trend towards shorter, but more frequent, holidays, city breaks have become a growing niche market. Madrid and Barcelona have benefited greatly from the growing popularity of city-based short holidays. Initially, the development in this sub-sector was hindered by accommodation shortages and, in particular, a dearth of 4- and 5-star hotels. However, a building programme to expand hotel capacity enabled Spain to exploit the potential afforded by its museums and art galleries, and buildings of historic and architectural interest. Major events such as the Barcelona Olympic Games, Madrid’s stint as European Capital of Culture, and Seville’s hosting of the 1992 Expo served as the springboard for the promotion of Spain’s urban centres, encapsulated in the publicity slogan ‘a view with a room’. Cities such as Granada and Córdoba developed a local micro-economy in order to exploit the attractions of a common historic and Islamic heritage. Even more strikingly, Spain has provided an example of how urban regeneration can boost tourism. Opened in 1997, the Guggenheim Museum in Bilbao, designed by the Canadian architect Frank Gehry and built on a former industrial site, has become an ‘urban flagship’ for a major redevelopment programme. It has been successful in attracting high-spending cultural tourists to the city and transforming its image as a declining industrial centre, although the long-term impact of the ‘Guggenheim effect’ on the economy of the Basque country is disputed (Gómez and González 2001, 898). In terms of market segments, Spain is the world leader in ‘sun and sand’ holidays and occupies second place with regard to conferences and meetings. In an effort to develop the latter, a ‘city circuit’ pilot project based in Madrid was launched in 1994 with the goal of attracting a larger slice of the growing international conference and congress trade (Priestley 1996, 117). Complementing these initiatives to nurture ‘quality tourism’, conference and convention bureaux have been set up in association with public and private companies to promote trade fairs and exhibitions in Spain’s major cities. Developing this particular market has been the responsibility of the Tourism Development Plans (Planes de Dinamización Turística). ‘Business tourism’ is particularly attractive to the policy-makers because it is has the potential to be more lucrative and profitable than the leisure variety. Investments have been made in restoring historic sites and buildings and in the supporting

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infrastructure, including visitor centres, access (roads, trails and viewing platforms), signing and transport. Another feature of Spain’s evolving tourist trade has been specialization, not only to boost tourist numbers but also to utilize capacity during the mid-to-low season. To meet recent trends, developments have taken place in recreational tourism, particularly sailing, golf, riding and tennis. The construction of marinas and sports complexes, such as golf resorts, have added to the improved infrastructure. Meanwhile, theme parks, at the Port Aventura complex (Salou), Isla Mágica, and Terra Mítica (Benidorm), are value-added projects that have proved commercially successful, not least at attracting families (Antón Clavé 1997, 257). Spain boasts no fewer than 85 of these centres (including zoos, aquaria and funfairs), able to attract 22 million visitors in 2001. Mention should also be made of the retirement market among foreign expatriates, a trend boosted following Spanish membership of the EU. For many years a strong demand for second homes has existed among German and British buyers. Indeed, Majorca proved so attractive to Germans that fears were expressed by local residents that the island was in danger of being transformed into a German ‘colony’. Foreign investment in property across Spain has shown few signs of abating, running at 50,000 units a year. The Costa del Sol, the Balearics and the Canaries were the preferred destinations for the bulk of the foreign property investments in the 1980s and 1990s (Valenzuela 1998, 55). Meanwhile, ‘third-age’ tourism has attracted pensioners to empty costa hotels for low-cost winter breaks. Away from the coasts, the interior regions remained largely untouched by the dynamic growth. More recently, efforts have been made, particularly by the Autonomous Communities, to move away from the traditional models and take the pressure off coastal resorts through rural tourism developments associated with outdoor leisure activities together with visits of cultural, gastronomic and historical interest. As a potential new source of income and employment, it is seen as a key component in efforts to revitalize declining rural areas and stem the rate of depopulation. Modern rural tourism differs from the ‘homecoming’ variety, which involves city dwellers returning to their village for a holiday (Yagüe Perales 2002, 1101). Seeking to attract new clients, rural tourism has received support in the form of promotional campaigns launched by both national and regional authorities, refurbishing and development of accommodation stock and government subsidies. Funds from the EU-funded LEADER programme have been utilized to expand the accommodation on offer in rural areas (Maiztegui-Oñate and Berlolín 1996, 277). According to figures provided by the Instituto Nacional de Estadística, there were

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5,728 rural houses offering an estimated 46,000 places in a sub-sector that provided employment for over 9,000 people in 2001 (MECDE 2002, 30). Occupancy rates vary according to the time of year, ranging from almost 60 per cent in August to a low of 10 per cent in January. In order to stimulate demand for rural tourism, the España Verde campaign was launched by a consortium of Autonomous Communities comprising Asturias, Cantabria, Galicia and the Basque Country. It is interesting to note that, in contrast to sol y playa holidays, the demand for ‘green tourism’ comes predominantly from neighbouring countries. Almost one-third of foreign tourists visiting the north of Spain originate in France, while 10 per cent come from Portugal (MECDE 2002, 27). The most recent trend has been internal tourism (turismo interno) as domestic demand grows at more than 10 per cent annually. Although under-promoted, this new feature of Spanish tourism built upon the successful example provided by the high-quality paradores network (state-run luxury hotels), first established in the 1920s and extended significantly in the 1960s, to promote such attractions as regional gastronomy, history and culture. Marketing Spain’s interior regions is a relatively new phenomenon, but it chimes well with the country’s rising standards of living. In common with other Europeans, many Spaniards now have second homes and take more than one holiday per year. The traditional destinations still hold sway for holidaying Spaniards: the Mediterranean coast, especially Andalucía, the Comunidad Valenciana and Catalonia. However, in an indication that trends may be changing, Castilla y León was the preferred destination of 10 per cent of Spanish holidaymakers (MECDE 2002, 36).

Challenges to the tourist industry It is something of a paradox that, despite dire warnings that the traditional tourism model was nearly exhausted, foreign visitor numbers continue to rise. This fact might convey the impression that the sector can adapt to and overcome any challenge. However, there can be no cast-iron guarantee that tourism will retain its position as Spain’s leading industry. Certain factors have begun to erode the advantages that have stood the industry in such good stead. Any slowing down of economic growth in the OECD area inevitably has an impact upon the numbers of tourists entering Spain. Rising costs threaten to wipe out Spain’s competitive edge as prices have risen particularly strongly in the hotel and rented accommodation sector. Meanwhile, notable growth has occurred during the 1990s in the numbers of Spaniards going on holiday abroad, especially to Europe. Spanish tourism is unusually dependent on

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how sterling, a non-euro currency, performs. The industry benefited from the strength of sterling during the period following the launch of the euro, when the new currency lost value on the financial markets, as an influx of UK tourists took advantage of cheaper European holidays. The medium- and longer-term expectation is that the euro will provide a platform for future expansion, based on price stability and transparency. Savings on exchange rate costs are expected to facilitate pan-European tourism, allowing Spain to retain its position among the leading EU tourism providers. More worryingly for the industry, joining the euro zone involved abandoning the possibility of currency devaluations–a policy instrument that some rivals such as Turkey still retain– in order to make Spain more attractive. This factor places a premium on controlling costs to ensure that the price advantage is not eroded, thereby shifting the emphasis to non-cost advantages. But the greatest threat emanates from Spain’s escalating wage costs. Efforts have been made by hoteliers to restrain wage inflation, for instance by filling low-rated jobs with immigrants from poorer parts of Spain or from abroad.

Sustainable tourism? Although the development of tourism has brought enormous economic benefits, there are well-known negative features, particularly at a local level. In many cases, the sector has displaced established economic activities and exposed the economy to periodic fluctuations. Along the Mediterranean coast, agriculture and fisheries are among those industries that were badly affected by the growth of tourism. Such developments often distort the local economy, making it dangerously overdependent on a single industry, thereby creating shortages elsewhere in the labour market and, particularly in the Canaries, increasing the propensity to import. One of the side-effects of tourism development is the build-up of inflationary pressures. The knock-on effect is that the people not directly involved in the industry suffer as land, commodity and food prices rise. Bitter conflicts have arisen over whether agriculture or tourism should be given priority with regard to water supplies (McFall 2002, 48). This is hardly surprising as tourism competes directly with hothouse and year-round cultivation for scarce water resources. Elsewhere, the social and cultural benefits of tourism should be recognized. There are many cases where tourism has revived local crafts and customs, notably artisan activities, folklore, gastronomy and fiestas. Often the high standards demanded by foreign tourists act as an incentive to improve infrastructure and services, in particular better sanitation, cleaner beaches, more frequent transport, and so on.

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While foreign capital has often powered tourism development, it has also resulted in the loss of local control. A particular bone of contention is that European tour operators have exercised a vice-like grip over the fortunes of the industry. Spanish hoteliers frequently complain that foreign travel companies make huge profits from their Spanish operations by insisting upon a low-price policy. Potential economic gains are lost, as profits are repatriated rather than reinvested in the region. Moreover, a negative aspect exists with regard to tourism’s role as a generator of employment. Many of the jobs created are both temporary and seasonal. The industry therefore creates a labour market characterized by job instability and low-skilled, poor-productivity labour. These factors combine to produce a dampening effect on regional economic growth. As we saw earlier, the rapid and unregulated expansion of tourism has proved detrimental to the environment. In 1988, the Coastal Law (Ley de Costas) came into force in an attempt to prevent the further degradation of coastal landscapes. Sensitive environments inland were given protection when the Preservation of Open Spaces and Woodland Flora and Fauna Law (Ley de Conservación de los Espacios Naturales y de la Flora y la Fauna Silvestre) was passed a year later. The Act created four types of protected spaces: parks, nature reserves, monuments and the countryside. During the early 1990s, an EU tourism competitiveness programme known as FUTURES was launched to alleviate the negative effects of mass tourism on the environment. During the last decade, European funding has been utilized to promote sustainable tourism through more coordinated planning. These initiatives were complemented by actions taken by the authorities at regional and local level charged with responsibility for tourism promotion and regulation. Significantly, the coastal regions received special attention. Since they were first developed during the 1960s and 1970s, the seaside resorts in particular have suffered from saturation, poor services and infrastructure, among other problems, leading to a decline in standards. After certain responsibilities relating to tourism policy were devolved to a regional level in the 1980s, autonomous community governments began to bring in plans and tourism laws. In some cases, stricter planning controls were put in place to prevent the loss of fertile agricultural land to unwanted tourism developments. At the same time, the decision to concentrate on luxury tourism prompted the regions to take environmental protection more seriously. Conservation was uppermost in the minds of the regional government of the Balearics when a controversial eco-tax was introduced in 2002 for all holidaymakers visiting the islands. Presented as a measure to ensure sustainability and reduce seasonal pressures, the one-euro-per-tourist-

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per-day tax provoked widespread controversy. Behind the move lay a desire to generate additional funds for environment and national heritage protection measures. In Madrid, the governing Popular Party criticized this piece of legislation as a threat to the economy, while hoteliers and tour operators feared that tourists would be deterred from visiting the islands. In response, the tax’s advocates argued that 60 million euros would be collected annually to be allocated to environmental improvements. In practice, hotel chains tried to mitigate the eco-tax’s impact by compensating holidaymakers with vouchers of comparable value. Much to the dismay of the other autonomous communities, the danger existed that similar measures might persuade tourists that the tax was universal throughout Spain.

Financial services: banking and insurance Far-reaching changes to Europe’s fragmented banking system have long been predicted, but are taking time to emerge. Leading analysts confidently forecast that the advent of economic and monetary union in 1999 would lead to consolidation in pan-European financial services (White 1998, 20; Shearlock 1999, 16). At the same time, cutting-edge technologies were expected to promote innovation, generating new products and customer relationships. In this positive scenario, the bigger banks, previously constrained by limits imposed by their domestic markets, looked set to adopt expansion strategies involving cross-border mergers. Yet a pan-European banking system has been slow to materialize. Eschewing cross-border mergers, the larger banks have favoured alliances with banks in other countries and crossshareholdings. Contrary to expectations, it is the banks in the smaller countries that have pioneered such developments, rather than the larger banks in the EU. For this reason, an examination of Spain’s banking system offers a useful insight into the evolution of Europe’s banking structures and financial markets. Spain’s financial services have evolved from a tightly regulated and restrictive system into a more liberalized and open one. The legacy bequeathed from the Franco era was a sector that suffered from isolation, a strong domestic market orientation, government regulation and over-protection from foreign competition. The large banks, which controlled significant portions of Spanish industry, dominated the sector (Tortella 2000, 394). They provided credit at below-market rates for agriculture, shipbuilding and construction and were responsible for lending to firms that belonged to the same group. Regulators, rather than bank managers, took many of the important decisions (Gallego et

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al. 2002, 13). Even today, the leading banks retain their interest in strategic industries. As a result, financial services remained an inefficient industry comprising many small, overstaffed, unresponsive businesses with a reputation for poor service. One particular legacy was that Spain has remained one of the most overbanked countries in the EU. This can be seen in the density of the branch networks: Spain has 900 branches per 1 million inhabitants, well above the EU average (Chislett 2002, 169). With their headquarters in either Madrid or Bilbao, the six largest banks (Banco Hispano-Americano, Banco de Bilbao, Banco Urquijo, Banco Central, Banco de Vizcaya and Banco Español de Crédito) were effectively a cartel, with extensive branch networks (Tortella 1994, 868). In the late 1950s, they held over half of total deposits (Baklanoff 1978, 18). Operating within a strict regulatory framework, they mixed commercial and investment functions and promoted the development of industry. As such, they became holding companies, controlling businesses in areas as diverse as transport, public utilities and mining. The absence of a developed capital market ensured that firms became highly dependent on the banks, particularly for short-term credit and purchasing equity (Baklanoff 1978, 19). A close relationship with government developed, reducing the Bank of Spain’s role to little more than ‘a banknote factory’ (Tortella 1994, 871). In the 1960s, somewhat tepid efforts were made to reform the banking system in line with the requirements of the IMF’s Stabilization Plan aimed at liberalizing trade and capital flows and stimulating foreign investment. There is a variety of explanations for the transformation that has occurred since Franco’s death. In many ways, Spain mirrored the general trends in European banking, encompassing declining numbers of banks and branches, intensified competition, greater diversification and a shift to non-interest income streams. None the less, Spain deviates from its European partners in some significant ways. Initially, the origins of the impetus to reform and deregulation ran parallel to the increasing openness and interdependence of the Spanish economy. Specifically, EU directives were adopted by the Spanish as the single market in financial services came into existence. As a result, financial business in Spain underwent a period of liberalization as European standards were applied in preparation for participation in economic and monetary union. The prelude to reform was an unparalleled banking crisis from 1978 to 1985, when around sixty mostly small and newly established, banks collapsed (Tortella 2000, 397). Many smaller banks disappeared or were absorbed by their larger competitors as their operating costs and bad debts increased and profits dipped. The RUMASA group, comprising

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some twenty banking institutions, collapsed and was nationalized in 1983 (Salmon 1991, 149). The crisis applied a temporary brake to deregulation efforts and the restructuring process. In general terms, Spanish banks were noticeably smaller than their international counterparts, less open to trade in banking services and offered fewer financial products than banks elsewhere in Europe. Liberalization occurred gradually, beginning cautiously after 1975, and accelerated only when ceilings on interest rates and short-term deposits were scrapped in 1987. Spain’s banking sector comprises state banks, commercial banks, savings banks and foreign banks. In 2000, there were over 158 registered private banks, 105 domestic banks and 53 foreign banks, doing business through a network comprising over 17,500 branch offices. They employed over 240,000 people, a 5 per cent reduction over the previous decade. However, while the commercial banks have been shedding staff and closing branches, the savings banks increased the size of their workforce and branch network (La Caixa 2001, 88). The two market leaders, BBVA and SCH, cut nearly 38,000 jobs between 1991 and 2001, mainly through early retirement programmes. As already indicated, the imminence of the single market acted as a catalyst for much-needed changes within Spain’s outmoded banking industry. In order to prepare Spanish banks for the next stage of European integration, the Socialist government encouraged competition for market share and favoured consolidation on the grounds that size would ensure future competitiveness. An additional advantage was that larger national banks were deemed to be more capable of fending off unwanted attentions by foreign predators. The process of concentration was initiated with mergers in the late 1980s that produced Spain’s two leading banks: Banco Bilbao Vizcaya (BBV) and in the Banco Central Hispano (BCH). The BBV was created following a merger of the two largest banks in the Basque Country, the Banco de Bilbao and the Banco de Vizcaya, in 1988. It became the leading Spanish bank in terms of assets and capital based on its strengths in wholesale banking, corporate finance and stockbroking. Once established, the BBV launched into a growth strategy based on competitive products, electronic banking services, closer links with and greater capital investment in non-financial firms, and an internationalization drive (Chislett 2001, 168–69). In 2000, the bank strengthened its domestic position by merging with Banco Argentaria to create Spain’s largest financial services group. The newly created BBVA owned assets worth $281 billion and had 108,000 employees in Spain and Latin America. In 1999, the merger between BCH and Banco Santander to form the Banco Santander Central Hispano (BSCH) made it the largest

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commercial bank in the Iberian Peninsula, boasting a strong industrial portfolio in insurance, oil companies, construction and power. In terms of market capitalization, BBVA ranks second only to Deutsche Bank on a European scale. Since the 1980s, a key feature of the Spanish banking scene has been the competition between the big two across a range of financial services covering pension fund management, corporate lending, consumer finance and retail banking. It remains an open question as to whether the merger process can be deemed a success. According to some analysts, the two largest banks have outgrown their optimal size (see Table 5.4). On the one hand, the mergers can be interpreted as a defensive reaction in the hope that they can compete more effectively with their more efficient competitors. On the other, it could well be argued that by entering so many different areas at home and abroad, the big banks may find it difficult to compete effectively in all of them (Caminal et al. 1993, 306). Following significant restructuring, a smaller number of institutions now provide a wider range of services. One of the aims of this consolidation has been to overcome the banks’ reputation for insularity and poor service and to develop an internationally competitive sector able to challenge the leading European financial services providers. Spanish banks have enthusiastically embraced technological innovation, especially in internet banking and web usage to allow interaction with their customers. In 2000, BBVA created the country’s first independent internet bank, Uno-e, in partnership with Terra Lycos, owned by Spain’s leading telecommunications provider, Telefónica. This venture into ebusiness aimed to make the new bank the largest financial supermarket Table 5.4

Spain’s big two: BBVA and BSCH compared BBVA

Total assets $280 billion European cross-holdings BNL (Italy) 10% Finaxa 4.7% Credit Lyonnais 3.8% Latin American assets Share of Latin American market Market share in Spain Industrial holdings value

BSCH

$95 billion

$324 billion RBS (UK) 9.6% Société Générale 5.9% São Paolo IMI 6.5% Commerzbank 4.8% $116 billion

9% 20% $11.4 billion

10% 20% $10.1 billion

Source: Business Week, 23 April 2001.

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in the Spanish-speaking world, including the USA (OECD 2001, 89–90). By 2001, some 800,000 people had accounts with the six on-line banks (ING Direct, Patagón, Uno-e, Popular-e, Activo Bank and Cortal). This new sub-sector captured over 16 per cent of new deposits in the banking sector (BBVA 2002, 26). The much-discussed activities of Spain’s two biggest banks tend to deflect attention from the rest of the sector. It is worth noting that the trend towards concentration was partly balanced by the growth of medium-sized institutions and foreign banks as well as the strong performance by the savings institutions (Caminal et al. 1993, 286–87). Medium-sized banks have thrived by specializing in specific areas, or by operating as a universal bank in their home region. Foreign banks first made an appearance south of the Pyrenees in 1978, although restrictions on the number of branches and the acquisition of stakes in non-financial Spanish firms remained, and by the mid-1990s there were 75 operating in Spain. In general, foreign banks have not found it easy to operate in the retail banking sector because of legal restrictions, strong competition and low profitability. A further obstacle was provided by the existence of the country’s already extensive branch network. While their overall market share has remained modest, foreign banks such as Barclays and Citibank have specialized successfully in international transactions and operations in now prosperous areas. In fact, the main competition to the big retail banks comes from the well-established network of cajas de ahorro, or savings banks. These regionally based banks were originally set up by Catholic charities in the nineteenth century. A notable trend is this sub-sector has been the rapid expansion of two largest mutual savings banks, the Barcelona-based La Caixa and the Caja de Madrid. Mergers were a feature in the 1990s, often promoted by regional governments seeking to ensure their survival. The merger between La Caixa and Caixa de Barcelona in 1991 created Spain’s largest financial institution and Europe’s second largest savings bank as measured by deposits (Salmon 1991, 155). Its extensive network of branches and large portfolio of industrial and commercial interests, including motorway concessions, gas and other investments, made it a formidable challenger to the commercial banks. The cajas de ahorro were founded originally to serve the needs of the poor, giving a proportion of their profits to health, education and other good causes. As a group, the savings banks hold one-half of Spain’s consumer deposits and two-fifths of all loans (The Economist, 2002a). The larger banks have gradually lost overall market share in terms of deposits and loans to the savings banks, which have gained a reputation for the high calibre of their staff and the services they provide. Legislation protects the savings banks from takeover, but they can

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expand outside their region, buy up other banks and poach business from competitors. Indeed, the cajas are among the few banks to be expanding their branches and staff base in an era of widespread contraction and cost-cutting (OECD 2001, 89). Strong identities and regional rivalries erect barriers to consolidation among the cajas, whether or not any proposed merger makes commercial sense. As indicated, a prominent feature of Spain’s commercial banks is their wide holdings in commercial and industrial enterprises. An important question is whether the relationship will change as the capital market develops. To compensate for more restricted lending opportunities, many banks expanded their industrial investments through increased shareholdings in non-financial companies. Central Hispano, now part of SCH, targeted telecommunications and energy and other sectors offering strong potential growth. The Socialist government regarded these developments in a positive light as part of its privatization programme. As large stakeholders, the banks were expected to act as ‘friendly shareholders’ (Chislett 1997, 101). Traditionally, Spanish banks had shown little interest in extending their activities outside the Peninsula. They had few overseas branches and concentrated on their national networks. Attitudes began to change in the late 1980s when the larger banks adopted internationalization strategies as a prelude to external expansion. In geographical terms, the first strategic shift was towards neighbouring Portugal, which was regarded as a natural extension of the domestic market. SCH led the way by extending its branch network and acquiring the Portuguese banks, Banco Totta e Açores and Crédito Prédial Português in 1999. In so doing, it acquired around a 10 per cent market share. Spanish banks sought to reap benefits from their well-established products and brand names. BBVA expanded its network in Portugal to one hundred branches and Banco Popular established itself across the border in the expectation that it would profit from the business generated by the growing trade relations and between the two countries. In Latin America, Spanish banks followed a strategy based on establishing a presence in the region. BSCH and BBVA became the largest foreign retail banks in Latin America, having invested over $4 billion to acquire stakes in the banking sectors in ten different countries (Guillén and Tschoegel 1999, 5). The next logical step was to make acquisitions in Europe, prompted in part by the introduction of the single currency throughout the euro zone. Expansion into the rest of Europe proved more problematic than the earlier drive into Latin America for a number of reasons. First, the Latin American crisis undermined further expansion plans. Retrenchment proved necessary, involving selling off some assets, as it became clear that Spanish banks had overpaid for certain

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acquisitions. Second, cross-border bank mergers generally had a poor record in the EU, and were invariably thwarted by national governments eager to retain the larger banks in national ownership. Over the past two decades, Spain has developed a modern financial system and can boast two of Europe’s largest and most competitive banks. In addition, there is growing competition to the big two banks from their medium-sized rivals and the savings banks. A wider range of products and services is now available, including pension fund management, and diversification is likely to continue. But there has been a negative side to the rapid modernization and growth. The debilitating effect of scandal has begun to taint the industry. In this regard, BBVA faced accusations concerning secret offshore accounts and investigations into payments allegedly made to Venezuela’s controversial President Hugo Chávez during the 1998 Venezuelan election campaign. Meanwhile Argentaria was alleged to have made payments to the disgraced President Alberto Fujimori to secure the purchase of Peru’s Banco Continental in 1995. In part, Spanish banking is the victim of its own success and aggressive strategies. Rapid expansion under swashbuckling managers, such as SCH’s Emilio Botín, inevitably involved deals that skated close to the boundaries of ethics and good practice (Corkill 1999b, 180). A list of Europe’s top ten banks is given in Table 5.5.

Retailing The retail sector has been a major growth area in recent times. Up until the 1970s Spanish retailing was dominated by small, family-run Table 5.5

Europe’s top ten banks by market capitalization (€ billions)

HSBC Lloyds TSB ING Group UBS Credit Suisse BSCH Deutsche Bank BBVA RBS Barclays

UK UK Netherlands Switzerland Switzerland Spain Germany Spain UK UK

Source: Financial Times, 26 May 2000.

103.2 59.0 58.1 58.1 54.4 47.0 45.4 44.0 43.3 41.8

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enterprises, usually isolated from one another, and with a high staff-tosales volume ratio (Verbeek 1995–96, 33). Since then, consumer preferences have changed and Spaniards now do most of their shopping in supermarkets and out-of-town hypermarkets. Rising prosperity, the increase in car ownership, larger numbers of women in the workforce and suburban expansion underpin these changes. As for the sector itself, a number of general trends have been identified. The first is that the structure of retailing has become more concentrated, as smaller outlets are forced to close down. The second is the dominance of the large groups and the growing presence of foreign retailers, especially Frenchbased. With the notable exception of the clothing sector, Spanish retailers have been slow to respond to competition in the home market. Belatedly, some larger retailers have penetrated external markets. In this regard, neighbouring countries in Southern Europe have been identified by them as ripe for expansion. Buoyant consumer confidence boosted retail sales during the late 1990s, which grew at an annual average rate of 6.2 per cent between 1998 and 2000 (EIU 2001, 54). There has been a high level of investment in hypermarkets and out-of-town shopping centres that have replaced the old pattern of a sector dominated by small outlets. In 1998, there were just under 600,000 retail outlets, employing 1.7 million people and with sales in excess of 15,600 billion pesetas (La Caixa 1999, 88). Under the provisions of the Law for the Regulation of Retail Trade (1996), autonomous communities were entitled to limit opening hours and restrict new developments through licensing arrangements. As a result, regional governments frequently denied prospective retailers permission to construct new hypermarkets. The opening of new pharmacies is restricted by rules governing the number of pharmacies allowed to serve a given neighbourhood and the distance between them (OECD 2000, 74). In 2000, the Trade Law (Ley del Comercio) increased weekly opening hours and holiday openings. Small retailers sought legal protection from the large chains by lobbying for legislative protection. They had some success, as in cases where municipal authorities have refused to allow new hypermarket developments. Nevertheless, the Aznar government once again liberalized the trading laws in 2002. The number of Sundays that the large retail chains and shopping malls are entitled to open in Madrid was increased to 21 Sundays or holidays each year (Levitt 2003). Since the first large-scale supermarket was opened in Spain in 1973, the number of non-specialized retail outlets has risen steadily. During the 1990s, the retail trading structure has been transformed by the significant growth in the number of shopping centres. In 1998, the

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number of shopping centres had grown to 364, having doubled in eight years (La Caixa 1999, 86). Nevertheless, some regions of the country are still relatively underdeveloped as regards shopping centres, hypermarkets and supermarkets. That said, there is a problem of overconcentration in Catalonia and Madrid, where danger exists that market saturation has been reached. Compared to other EU countries, the proportion of the Spanish population living in close proximity to a shopping centre has remained relatively low. The first hypermarkets (defined as a self-service store retailing a range of food and non-food goods with more than 2,500 square metres of trading space) were started by French distribution groups. The leading operators were Alcampo (Auchan), Continente (Promodès), Hipercor (El Corte Inglés), Pryca (Carrefour) and Eroski. In 2000, Pryca and Continente merged to form the leading retailer, Carrefour España. Hypermarkets account for almost 30 per cent share of food retailing (González Benito 2001, 65). Indeed, by the turn of the century hypermarkets had become a common feature of the Spanish shopping scene. By then, rather than focusing on market coverage, the emphasis had switched to reaffirming a distinctive identity and securing customer loyalty. In pursuance of this aim, the emphasis switched to image building, clubs and customer cards, publicity-seeking price cuts, own brand promotion and customer service programmes (González Benito 2002, 100). Investment in the retail sector is dominated by Spanish groups, although foreign investors have begun to make their mark. Almost $900 million were invested in retail ventures between 1994 and 1998, chiefly in shopping centres where high returns were expected, although fierce competition later began to squeeze profit margins. Specialist retail outlets, many foreign-owned, have entered the Spanish market, among them Ikea, Toys ‘R’ Us, and so on. Since the mid-1990s, factory outlets, franchising operations and catalogue selling, buoyed up by electronic shopping, have extended the range of shopping facilities. Significantly, Valencia has the largest factory outlet south of the Pyrenees within the Parque Bonaire commercial park. However, so far e-commerce has made less impact than expected on consumer habits (Insa Ciriza 2001, 25). Spain has been no exception to the general trend towards fewer and larger companies, not least in food retailing. The move towards concentration was typified by the merger between the Promodès and Carrefour groups to form the largest retail distribution group on the continent and the second largest retailer after Walmart in global terms. As for Spain, the merger, motivated to some extent by fears over competition from the USA, generated a market share of 22 per cent of total grocery retail sales and ensured national coverage across Spain’s

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autonomous communities. The case for high levels of concentration is that they lead to lower distribution costs that can be passed on to consumers. The counter-argument is that a near-monopoly position reduces competition (Insa Ciriza 2000, 40–41). In response to the Promodès–Carrefour link-up, a Spanish retail chain, Caprabo, made acquisitions with a view to challenging the market leader. The dominance of the large retailers is confirmed by the fact that only 4 per cent of establishments accounted for 28 per cent of sales and 14 per cent of employment (La Caixa 1999, 88). The Corte Inglés is Spain’s largest retailer. In 2000 it generated an income in excess of 1 trillion pesetas with a workforce of over 50,000 employees. It owes its pre-eminent position to a strategy based on building market share by opening large out-of-town stores and units in the new suburbs, diversifying into new areas (travel agency, greetings cards, books, music, and so on) and important acquisitions. Originally established in Madrid as a tailor’s shop by its founder Ramón Areces Rodríguez, El Corte Inglés expanded rapidly during the 1960s and 1970s to become Spain’s leading department store chain (Bueno Campos 2000, 26). In 1995, El Corte Inglés acquired its main rival, the ailing Galerías Preciados, adding another fifty stores to its portfolio, before taking over a further five from Marks & Spencer. In another new venture, El Corte Inglés arranged with the oil company Repsol in 1997 to have a presence in petrol stations. It is one of the few retail businesses to have internationalized and spread its wings to China and Hong Kong, the USA, Italy and Portugal. The search for new business formulas has spawned schemes that combine retail and leisure activities. Examples include the redevelopment of railway stations and harbour areas. In particular, Renfe, the national train operator, recognized the commercial and hotel potential of stations and property. Its Plan Viala seeks private partners to exploit this potential and sixteen station projects are planned. The typical shopping centre complex offers a gymnasium, cinemas, restaurants and family entertainment areas. The latest idea to take root involves leisure parks such as Maremagnum and Equinoccio in Barcelona and Madrid respectively opening their doors in the late 1990s. More developments are planned for other large cities (Knight Frank 2000, 11). Port areas have also been earmarked for development in order to exploit the property potential. Projects are planned for Barcelona, Valencia, Castellón, Alicante and Málaga, among other cities. Spanish investors have taken advantage of Portugal’s lax laws to expand into Portugal and Latin America. Portugal proved an attractive investment opportunity because it has relatively few shopping centres, mostly in Lisbon, while the rest are unevenly spread outside the capital.

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Telecommunications Spain’s telecommunications sector accounts for over 10 per cent of Spain’s GDP, ranking ninth in global terms. The industry includes components and equipment, e-commerce and the internet. Telecommunications provides an interesting example of the type of problems that can arise in attempting to introduce competition into a sector hitherto dominated by a monopoly provider. Following privatizing legislation in 1996, the telecommunications industry became fully deregulated within two years. In the biggest change, Telefónica, Spain’s largest telecommunications company, lost the monopoly status it had enjoyed since the 1950s. The government’s intention had been to generate competition in the telecommunications market in order to drive down the prices charged to customers. A regulatory body, the Comisión del Mercado de las Telecomunicaciones (CMT), was established in 1997 in order to bring down Telefónica’s connection charges to amongst the lowest in the EU, thereby reducing long-distance charges through stiffer competition (OECD 2000, 70). Competition would be assured by allowing new providers to enter the telecommunications market, while the industry was expected to benefit from new technologies through link-ups with international leaders in the field. In 1998, Retevisión, owned by a consortium comprising Telecom Italia, Endesa and UEF, became Spain’s second telephone company, introducing competition in the fixed-telephone market. By 1999, its share of the market was 13 per cent. Shortly afterwards, Lince, owned by France Telecom and a consortium of Spanish companies, entered the market, soon to be followed by British Telecom, in a joint venture with Banco Santander and Jazztel. It is undeniable that the shape of the telecommunications industry has been transformed by liberalization measures, privatization of the old telephone monopolies and a new regulatory framework for the sector. However, fears have been expressed that old patterns have reasserted themselves and the model established to ensure competition in the industry is not working. In practice, Telefónica has gradually won back its market share, creating a ‘private monopoly’ and calling into question the very survival of the operators who were supposed to end the monopoly. There have been increasingly strident calls from Telefónica’s rivals for an upper limit to be imposed on its share of the market on the basis that they required at least a 15 per cent share of the market in order to remain viable. Faced with competition in the domestic market, Telefónica looked to expand overseas. By 2000, the company had more fixed-telephone, mobile and pay-TV clients in Latin America than it had in Spain (Schenker 2000, 2).

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Recent growth trends and internationalization Spain today can be described as a services economy. In recent years another dimension has been added as services have become increasingly international in scope. Not that the trade in services is new, as shipping and trade have a long history. Nevertheless, progressive liberalization helped the switch from domestic to international horizons. As we shall see in Chapter 6, service-sector foreign investment has followed an upward trend and replaced trade as a mechanism for internationalization. The favoured vehicle for international expansion was through the process of mergers and acquisitions. The growth in traded services has been a notable feature of the modern globalized economy. Spain ranked twelfth as an importer of commercial services in 1998, registering $27.3 billion, or 2.1 per cent of the global total. However, Spain came eighth in the table of exporters of commercial services, valued at $48.0 billion, or 3.7 per cent of the total, reflecting the internationalization of Spanish banking and other services (Roberts 2001, 5). The sub-sectors recording the strongest growth were transport, storage, trade, finance, property and business services. The privatization programme and deregulation measures attracted inflows into the utilities sector (gas, electricity, telecommunications and water), as state provision gave way to the private supply of services. Closer European regional integration created larger, international service markets and technological change spawned new services, such as internet services and on-line shopping. Franchising and licensing agreements have delivered services across frontiers (fast-food chains and retailing, for instance).

CHAPTER 6

The external sector: trade and foreign investment This chapter focuses on the growing openness of the Spanish economy, as shown by changes in both international trade and capital flows. In the case of the former, both the geographical distribution of foreign trade as well as its composition have been transformed. Furthermore, a progressive liberalization and reorientation of trade has occurred. Under autarky, a panoply of quotas, tariffs and multiple exchange rates conspired to discourage export growth. Initially, the adoption of a socalled modelo abierto (open model), which removed some of the barriers to freer trade, gave a boost mainly to imports (Lieberman 1995, 54; Velarde 1995, 391; Wright 1977, 138). Efforts to stimulate exports only began to bear fruit in the late 1960s. A mix of incentives, subsidies and fiscal advantages combined with high levels of demand in external markets to trigger an export boom led by an increasingly dynamic and diversified manufacturing sector. Whatever the efforts made, it became increasingly clear to the policy-makers that access to the European market held the key to continued expansion. Pre-accession trade agreements with the European Economic Community had been limited to tariff reductions on industrial goods and it was not until EC entry in 1986 that a further round of trade liberalization was undertaken. This process involved dismantling protectionist barriers, reducing customs duties to Community levels, removing tax and financial incentives for exporters and bringing monetary policy in line with the requirements of economic and monetary union. Although integration into the Community provided a catalyst for reform, it should be noted that a process of gradual liberalization had been under way for nearly three decades, allowing the economic structures to adapt as Spain’s political economy underwent the process of change from an import-substitution industrialization model to a more export-oriented one (Harrison 1993, 22). Spain’s overall trade position has been plagued by prolonged current account deficits with intermittent periods of surplus. During the 1970s, the Spanish economy proved to be highly vulnerable to energy-price rises and higher costs of raw materials and intermediate goods required by its manufacturing industries, in part due to a heavy reliance on technology imports. For once, Spain found that the revenue inflows

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derived from foreign tourism and emigrant remittances did not fully cover the balance-of-payments deficit. The oil-induced deficit continued into the next decade which, along with a growing propensity to import, produced a negative balance in merchandise trade that reached more than 4 per cent of GDP at market prices between 1986 and 1997 (Martín 2000, 118). In seeking to explain this trend, it has been suggested that firms with a high content of foreign capital may have a greater propensity to import. Unlike Ireland, where multinational firms have established an export platform, many of those located in Spain concentrated on supplying the domestic market. Consequently, their contribution towards correcting the trade imbalance has been small. If this is indeed the case, the low levels of Spanish foreign direct investment may have, until recently, inhibited Spain’s export potential and inflated its trade deficit, rather than consolidating its export markets (Martín 2000, 85; 120–21). As for trade performance, Spain’s export shares in European and world markets have grown significantly. The Spanish economy was already well integrated into Community markets before accession in 1986. The European Community countries absorbed 36.1 per cent of Spain’s exports in 1970 and furnished 32.9 per cent of its imports. Twenty years later, these percentages had risen to 69.4 and 59.2 respectively, reflecting a trade performance that was characterized by a growing dependence on Europe (Velarde 1995, 396). By 2000, the EU accounted for 70.6 per cent of the total value of exports and 63.1 per cent of imports. Conversely, the value of trade with the rest of the world has declined relatively over the last three decades, most notably trade with the USA, which nowadays absorbs under 5 per cent of Spanish exports and accounts for only a slightly higher percentage of Spain’s total imports. Recently, the country’s principal trading partners have been France, Germany, Portugal, Italy and the United Kingdom. In 2000, France retained its position as Spain’s leading supplier, with 17.1 per cent of the total import bill by value, closely followed by Germany (14.9 per cent). France and Germany also headed the list of export markets, taking 19.4 per cent and 14.9 per cent respectively of the total value of Spain’s exports (EIU 2001, 57). Historically, Spain had run a trade surplus with the European Community countries. After 1986, negative trade balances were recorded following the dismantling of customs barriers, the removal of export incentives and rising consumer spending. On the other hand, the current account imbalance was mitigated somewhat by large EU transfers. As we shall see in Chapter 8, Spain retained its position as largest recipient of EU funds, which took the form of agricultural subsidies and regional, social and cohesion funds.

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Accession might have been much worse for the balance of payments had it not been for a confluence of fortuitous factors, including falling oil prices, strong foreign investment inflows, the dollar’s weakness and a series of good harvests in the agricultural sector. Export activity was the driving force behind recovery in the early 1990s, fuelled by buoyant external demand and an expanding market share. Growth among Spain’s European partners, stimulated by the single market, accounted for much of the progress. A measure of foreign trade’s growing importance to the Spanish economy is demonstrated by its contribution to GDP, which rose from an average of 18 per cent between 1970 and 1979 to 43 per cent in 1997 (Alonso and Donoso 1999, 219). In the early 1990s, Spain’s competitiveness levels were boosted by a depreciating peseta (OECD 1998, 30). The three peseta devaluations between 1992 and 1993 produced a 20 per cent improvement in Spain’s international competitiveness, while another devaluation in 1995 brought further gains in export market share. In particular, non-EU exports recorded improvements, notably to markets in Latin America, North America and Asia (OECD 1998, 31). A key factor in the recovery was the enhanced competitiveness of Spanish industry, resulting from the extensive restructuring efforts of the early 1980s and the privatization programme. Although exports grew impressively during the 1990s, it is worth noting that Spain’s export/GDP rate still remained below the EU average. That said, the composition of Spain’s exports underwent a marked change. In the early 1960s, traditional items headed the list of what Spain sold abroad, chiefly agricultural produce, minerals and light industrial output. Thereafter, agricultural exports, comprising chiefly citrus fruits, olive oils, vegetables and wine, declined from representing over half the country’s exports to around 10 per cent by 2000. Overall, traditional items have declined to less than a third of total exports, having been overtaken by chemicals, metallurgical goods, machinery and transport materials. Measured by value, motor vehicles, machinery and horticultural produce made up the leading export items by the turn of the century. In addition, some traditional industries that had undergone modernization and restructuring were still performing strongly in world markets, notably footwear, textiles, clothing, ceramics and glassware, and drinks. In summary, when Spain joined Europe, it held a position of advantage in sectors reliant on unskilled labour, whereas it lagged behind its European partners with regard to technology-intensive sectors. By 2000, that situation had been largely reversed. As already noted, motor vehicle exports featured among Spain’s leading export items. The industry’s contribution was even more marked

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at a regional level. Autonomous communities where the motor industry was well established invariably recorded the highest export growth. According to ICEX (Spanish Foreign Trade Institute) figures for 1999, the motor industry accounted for over 57 per cent of the total exports from Castilla y León and 20 per cent from the Comunidad Valenciana and Galicia. Madrid became one of the leading exporting regions due to its specialization in high-tech equipment (telecommunications, aeronautics, and so on). However, Catalonia maintained its position as the leading exporting region, accounting for over a quarter of the national total (Cinco Días 2000). Integration into the global marketplace exposed deep-rooted longterm problems affecting the efficiency of Spanish industry, particularly with regard to output and quality. Worryingly for manufacturers, the advent of European Monetary Union (EMU) put an end to exchangerate manipulation as a palliative to maintaining price competitiveness. With that option foreclosed, the government turned its attention to wage moderation and relied on improvements in areas such as quality, design, brand recognition, guarantees and after-sales technical assistance. One notable feature of the trade configuration has been a growing propensity to import. Previously, a strong peseta policy generated rising demand among Spanish consumers for foreign goods. As a result, the level of import penetration doubled from 17.4 per cent in 1986 to 35.9 per cent in 1997 (Martín 2000, 74). The increase would have been greater but for the dampening effect brought about by the peseta depreciations. The composition of imports by value in 1999 bore a remarkable similarity to Spain’s export profile. The leading items were motor vehicles, machinery and chemicals, followed by fuels, iron and steel manufactures and scientific instruments (EIU 2001, 58). During the late 1980s and early 1990s, income from tourism suffered a decline, leading to widening current account deficits, registering over 3 per cent of GDP between 1989 and 1992. The sector regained its international competitiveness later in the 1990s and began to prosper again, pushing Spain into second position in terms of tourism revenues. Traditionally, the services balance has played a compensatory role in covering the current account trade deficit. However, this capacity has begun to diminish, due to fluctuating tourism receipts and problems afflicting the banking sector, the two most important elements in the services balance. The consolidation of the common currency is likely to strengthen the closer trading links between Spain and its EU partners. Already, changing trade patterns have had a pronounced effect on economic relations with Portugal. Until the mid-1980s, intra-Iberian trade was marginal and slow growing. Spain furnished around 5 per cent of total

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Portuguese imports in the period 1970 and 1985, while in return Portugal provided less than 3 per cent of Spain’s imports. Their importance as trading partners was transformed following EU accession. By the mid-1990s, Spanish exports to Portugal were seven times greater than a decade earlier. Spain became the leading source for Portugal’s imports, leading to a growing trade imbalance in its favour, reflecting in part the superiority of Spanish agriculture, thus bringing accusations of ‘dumping’ in the Portuguese market. Tensions appeared because a growing number of multinationals preferred to locate their production facilities in Spain, as when Philips, the Dutch electronics multinational, relocated its storage operations from Portugal to Madrid (Corkill 1999a, 109–13).

Foreign investment One of the key features of the Spanish economy over the last four decades has been an increase in capital flows. From its position as one of Europe’s major recipients of inward foreign investment, Spain has been transformed since the mid-1990s into a leading capital exporter. At the national level, the liberalizing legislation that benefited inbound foreign investment after 1959 was not applied to Spanish external investment until the late 1970s. Gradually, a few Spanish firms underwent a metamorphosis from national to international players, with a particular focus on the Latin American economies. It will also be argued here that foreign direct investment (FDI) played an important role in assisting Spain’s integration into Europe and in enhancing national competitiveness during the post-European integration phase. Spain as a target for FDI Spain has continued to receive substantial capital inflows in the form of foreign direct investment since the early 1960s. After 1959 the technocrats loosened existing protectionist ties and began Spain’s gradual integration into the international economy (Jiménez Latorre and Guindos Jurado 1985, 39). This process involved opening up the semiautarkic economy to foreign capital and imported technology. As we have seen, during the period from 1959 to 1973 Spain moved from a closed, backward economy towards a more open, liberalizing market economy and from a largely agrarian into an industrialized economic structure. Spain was able to provide foreign investors with political stability and the growth potential offered by an expanding, but poorly supplied, domestic market. An important contributory factor in this

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process was that foreign capital imports comfortably covered the accumulated trade deficit in goods and services, allowing the import of capital goods required for the modernization effort. The main source countries from the 1960s onwards were the USA, Switzerland, West Germany, France and the United Kingdom. By the early 1970s, foreign multinationals accounted for more than half the turnover in industries such as chemicals, oil refining, ‘white technology’ goods, transport equipment and motor vehicles (Kleinman and Sington 1989, 90). These inflows were concentrated in a limited number of locations, benefiting principally Madrid, Catalonia and the Basque Country, leaving other regions relatively starved of outside funds. In sectoral terms, the bulk of foreign investment in the 1960s and 1970s flowed into manufacturing industry. As a result, Spain acquired an internationally competitive motor manufacturing industry following investments by US, French and Japanese companies. By the early 1980s, Renault, Peugeot, Citröen, Ford, General Motors and Nissan controlled almost three-quarters of the automobile sector in Spain. Although foreign investment stimulated outward capital flows via profits, royalties and so on, the overall impact was positive, especially with regard to exports (Jiménez Latorre and Guindos Jurado 1985, 50). The capital inflows injected a new dynamism into the economy, transferred the latest technology, improved business efficiency and productivity, and developed new sectors, amongst other benefits (Harrison 1992, 202). For the purpose of analysis, foreign direct investment flows into Spain can be divided into two periods: 1960–86 and post-1986. Apart from dips in the mid-1970s and the early 1990s, caused by a world recession and uncertainty over Spain’s political direction, foreign investment levels have risen steeply. Between 1977 and 1988, total investment rose twenty-fold in real terms (García Delgado 1990, 377). The inflows totalled over $2.6 billion in 1987, having grown from around $1 billion at the start of the decade (Hudson and Rudcenko 1988, 35–36). The origin of FDI has become progressively more concentrated. Before 1979, 55 per cent of the total inflows originated outside the European Community. During the late 1970s and early 1980s, the EEC accounted for 45 per cent of the total (Germany having the leading share with over 16 per cent). By the mid-1990s, over 63 per cent originated in the EU (Broder 2000, 272; García Delgado 1990, 379). Spain’s imminent full membership of one of the world’s core trading blocks on the verge of implementing a single European market (SEM) injected further impetus to inward foreign investment during the early 1980s. By 1990, FDI totalled 1.4 trillion pesetas and, although then falling back to average 860 billion pesetas annually in mid-decade,

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resumed its upward climb to over 1.6 trillion pesetas in 1999. These impressive figures must, of course, be put into the context of greatly intensified international capital flows. On a per capita basis, Spain received $200 in 1994, less than half the $500 per capita registered by France and Germany, and well behind the UK, which was ten times greater (Broder 2000, 273). Why did Spain prove so attractive to foreign investors? In the first place, they were lured to Spain by the low wage costs, the incentives on offer, the lack of regulations, the ability to repatriate profits and political stability (Jiménez Latorre and Guindos Jurado 1985, 40–41). The expectation was that low wage and production costs coupled with the size and growth potential of the domestic market gave Spain an advantage over other European locations. This may have been the case, but became less important once the strategies pursued by foreign firms underwent modification, as they looked beyond national markets to wider regional ones. Although retaining both domestic sales and a leading position in the local market continued to be an important consideration, Spain increasingly came to be regarded by corporate managers as an entry point to the European Community with its far larger market comprising 350 million consumers. Moreover, since the 1980s, Spain has been regarded by foreign multinationals as an export platform both to the wider European market and to Latin America. A long list of second-rank factors can be identified that acted positively on the decision to invest. Among them was Spain’s geographical location, offering proximity and convenient access to a large regional market, the country’s macroeconomic stability, the stimulus provided by EU accession, human capital resources, and liberalized trade and investment policies. In tune with a more liberal foreign investment regime, central and regional governments offered a plethora of incentives to prospective investors, including lower taxes, assistance in acquiring suitable sites, subsidies and so on (Molero 2001, 31). Foreign investors were attracted by the sale of small and mediumsized firms, often family-owned, that lacked a competitive edge, the ready availability of cheap land for industrial sites, and the country’s reputation for offering an enviable quality of life (Heard 1999, 8–9). Spain’s appearance among the ranks of the world’s leading exporters of capital in the 1990s did not stem the capital inflows into the country. Between 1997 and 2001, Spain received almost $18 billion, or 2 per cent of the global total of foreign investment. Significantly, the bulk of the FDI is accounted for by mergers and acquisitions. Unwilling or unable to adjust to a more competitive environment, many Spanish firms, including banks and winemakers, simply sold out to foreign buyers (Chislett 2002, 151). Western Europe has been the main source of

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foreign investment in this phase of the investment boom, contributing 70 per cent of the total invested in 2001, followed at some distance by the USA with only 5 per cent (Cinco Días 2001). Pre- and post-accession FDI In its drive to prepare for EU entry and to boost its economic competitiveness, Spain dismantled many of the remaining barriers to foreign investment inflows, impressively ahead of schedule (Youngs 1999, 49). An important feature in the liberalization of capital movements was marked by a 1986 package of measures intended to make Spain more attractive to foreign investors. Bureaucratic controls over investment decisions were eased and foreigners were finally allowed to invest Spanish treasury bills. Restrictions were eased on establishing companies, on tax liabilities and by allowing medium-sized companies to be listed on the Madrid Stock Exchange. Despite the progress made, strict limits meant that foreign investors were still excluded from key areas, including defence, the media and air transport. In terms of sectoral destination, a significant shift took place as foreign capital began to focus on services in preference to industry. As already mentioned, foreign penetration had been strong in motor vehicles, chemicals and pharmaceuticals. The break-up of state monopolies in areas like telecommunications and other utilities under the privatization programme created new opportunities for foreign investors. Coupled with EC member-state status, the sale of state assets proved to be a spur to foreign investors. The start of the new boom was signalled when total inward investment reached $5.5 billion in 1986, a 75 per cent increase over the previous year, and continued its surge to over $10 billion three years later. Spain established itself in fourth place in the list of destinations for foreign investment and the Madrid stock market proved to be a magnet for inbound funds, at least until the 1987 crash. The Spanish government continued its efforts to lure inward investment during the 1990s. The Maastricht Treaty provisions on the free movement of investment capital were incorporated into Spanish law in 1999, the only exception being a few ‘strategic’ industries, such as national defence. Reflecting global trends, investment flows did subside during the early 1990s. The growing opportunities available in Eastern Europe, a competitor region for foreign investment, began to be felt from the late 1990s. The decision taken in 2002 by the Lear Corporation to close its plant in Lérida and transfer its production of electrical components for the motor industry to Poland underlined the challenge posed to Spain. The US-based manufacturer cited lower labour costs in Eastern Europe as the principal reason for the decision.

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Although industry continued to attract foreign capital, a sea-change in sectoral distribution patterns occurred during the late 1980s. By 1988, services accounted for over 60 per cent of FDI, with financial services demonstrating particular dynamism. There was also a property market boom, as commercial, office residence, and hotel markets responded to rapid urban growth. Between 1990 and 1994, manufacturing industry still absorbed just over half the total FDI inflows, while agriculture received a miserly 0.6 per cent (Barrios 2000, 8). Investments were spread across the manufacturing sector but, in terms of its composition, the largest share of FDI went into the motor industry, a sector almost totally dominated by foreign firms. New and top-up investments by Ford, GM, Nissan and the French motor manufacturers, Renault, Peugeot and Citröen, transformed Spain into the third largest producer in the EU. In fact, Spain exported and imported a higher volume of cars than did its two main rivals, Germany and France. The chemical industry continued to attract investment, albeit on a reduced scale, while food and drinks, electrical goods and transport equipment received a substantial proportion. Newer, high-tech sectors were established thanks to investments by multinationals such as AT&T (semiconductors), and General Electric (plastics). There are a number of reasons why Spain benefited greatly from the inward investment flows. They compensated for the lack of domestic technology by satisfying the economy’s growing capacity to absorb imported foreign technology. This was important because Spain’s comparative advantages have been in steep decline during the 1990s, particularly in vital sectors such as motor manufacturing. Foreign multinationals did create jobs, although, when the mode of entry involved mergers and acquisitions, the reverse occurred. Above all, foreign investment can act as a catalyst to change the management culture, enhance competitiveness and promote research (Ferreiro et al. 1999, 5). According to Eurostat figures, Spain invested 0.9 per cent of its GDP on R&D in 1999 (compared to an average of 1.9 per cent among its European partners), ahead only of Greece and Portugal. The Aznar government’s response to the problem was to set up a Ministerio de Ciencia y Tecnología (Ministry of Science and Technology) in 2000 to coordinate policy on scientific and technical research and oversee a national R&D plan. Indeed, foreign mulltinationals had a major impact on Spanish R&D, representing more than one-third of total expenditures in 1997, according to OECD figures. The determining factors that explain the different technological efforts appeared to be sector and size. Foreign firms had a long experience of innovation and were larger and better represented in the high- and mid-tech sectors. However, where Spanish firms did

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compete in the high-tech sectors, they demonstrated an ability to match their competitors in terms of technological innovation (Molero 2001, 35–36). One of the principal reasons governments try to attract foreign investment is that the host economy benefits from ‘positive spillover’. Foreign affiliates can boost domestic firms’ productivity levels because they employ modern technology, hire and train skilled workers and purchase local inputs. Of course, in order to benefit from their presence, domestic firms must be willing and able to adapt to technological change and innovation. Those companies best able to do so need to demonstrate a technological capacity which is in turn linked to R&D and exposure to the competitiveness of international markets. In his study, Salvador Barrios (Barrios 2000, 1) demonstrates that competitiveness has improved in the traditional sectors of the Spanish economy (textiles, food, leather goods), but finds little evidence that the modern sector has reaped any benefits. Evidence from the activities of German MNCs (multinational corporations) in the United Kingdom confirms these findings with regard to the creation of additional jobs and the development of high-skilled employment (McDonald et al. 2002, 48). Despite the perceived advantages that accrued to the host economy, foreign investment continued to pose challenges for the policy-makers. Economists pointed to a worrying dependence on such volatile inflows. In some cases, local firms were forced out of business because they found it impossible to compete in the domestic market with more powerful foreign rivals. Nor did privatization or sales to multinationals necessarily guarantee improved efficiency and competitiveness. A public oligopoly could just as easily be replaced by a private one. Together with the transfer of policy powers to Brussels, these developments pointed to a general loss of national-level control over the direction of the domestic economy (Holman 1996, 186–87). However, there was no across-theboard reduction in state sovereignty. As Laura Chaqués (1998, 40–41) demonstrates, the Spanish state retains its role as regulator and promoter in pharmaceuticals and other key industries. In spatial terms, foreign direct investment has become highly concentrated. As far as regional destinations are concerned, Madrid absorbed over 70 per cent of the investment made by foreign firms in 2001. The Spanish capital was well ahead of Catalonia, Andalucía and Valencia as the hosts for FDI. Incentive schemes, offering grants of up to 75 per cent of capital costs, were launched in an attempt to attract foreign investors to areas of high unemployment. There is little evidence that the measures have reversed, or even slowed down, the trend. Little success has been achieved in redirecting foreign investment to blighted

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regions suffering from industrial decline and high unemployment, leading to further demands from the regions that public investment should be deliberately steered away from Madrid. Efforts by the autonomous communities to attract new investment projects have raised sensitive and often contentious issues. Providing incentives and competitive tax rates to lure foreign investment has caused resentment among various regional authorities. In fact, there was often fierce rivalry among the autonomous communities to secure inward foreign investment (Tiempo 1999). This factor was highlighted by a controversial case involving a lower rate of corporate taxation offered by the regional government to potential investors in the Basque Country, a region suffering from the destruction of its traditional industrial base. The Basque authorities justified their decision by invoking their ancient fueros (foral rights – that is, ancient privileges) that granted the region the right to levy their own taxes, and its own special agreement (concierto económico) negotiated with the central government. Similar to Navarre’s convenio económico, this economic agreement was first established by law in 1981 and conceded the right to levy and administer taxes. In consequence, the regional government lowered the standard rate levied on 1996 profits, from 35 per cent to 32.5 per cent (Financial Times 1997a). Doubtless, the local tax regime played a part in Mercedes Benz’s choice of Vitoria to construct a new factory, the largest investment ever by a company in Euskadi, and the decision by Korean group Daewoo to locate its refrigerator plant in Alava province. Apart from the outcry from other autonomous communities, the tax regime operated by the Basques prompted the European Commission to intervene. Brussels expressed particular concern about tax breaks for new companies setting up in the region, while the Basques countered by claiming that the reductions were no different to those offered by other European regions. What is indisputable is that other autonomous communities looked with envy at the way the Basque government was able to manipulate tax levels as part of its incentive package. Future prospects for inward investment may well be determined by the extent of the challenge posed by the 2004 enlargement of the EU. Although there is some evidence that investors have been disappointed by Eastern Europe’s poor infrastructure, political instability, legal environment and currency conversion, this has not always affected investment decisions. Spain lost some FDI to the candidate countries, especially labour-intensive investments because of its rising wage and production costs and the strong currency. However, Spain’s car plants still remain among the most productive in Europe. Moreover, investment has remained buoyant in the service sector, indicating that

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Spain’s attractiveness may have shifted, rather than diminished. As a result, Spain is likely to remain a net investor country (Martín et al. 2001; Sebastian 1996b, 7). Spanish investment abroad In recent years, Spain has become one of the leading international investors, despite its status as a relative latecomer to FDI abroad (see Table 6.1). Before the 1990s, there had been a notable imbalance between inward foreign investment and Spanish investment abroad. Net inflows were roughly six times larger than Spanish net external investment between 1975 and 1992 (Salmon 1995b, 79). During the late 1980s, the ratio of FDI to inward investment by Spanish companies was approximately 1 to 5 (Heard 1999, 11). When capital did flow beyond Spain’s borders during the 1980s, the USA was the most favoured destination (16 per cent of the total), followed by Panama and Puerto Rico (both 6 per cent), Portugal (6 per cent), the United Kingdom (5 per cent) and France (4 per cent). Over half the total capital exported was destined for financial services, while manufacturing, commerce and hotels constituted the other main recipients. Official restrictions on capital outflows and high domestic interest rates go some way to explaining the low capital outflows (Martín 2000, 127). An additional inhibiting factor was that the majority of Spanish firms remained inward-looking and boasted few global brands. Consequently, Spain’s direct investment abroad remained meagre in EU terms and was far from commensurate with its level of economic development. During the 1990s, many Spanish businesses prioritized the internationalization of their operations. The driving force behind the change was the industrial restructuring in the 1980s which led to Table 6.1

1975 1976 1977 1978 1979 1980 1981 1982

Total Spanish FDI abroad, 1975–96 (thousands of pesetas millardos) 24.1 30.8 19.7 18.4 53.9 57.2 67.4 145.6

Source: El País (2002g)

1983 1984 1985 1986 1987 1988 1989 1990

76.9 108.9 97.3 120.6 93.4 157.6 189.4 488.0

1991 1992 1993 1994 1995 1996

707.0 501.0 1,207.0 775.0 511.0 1,496.0

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consolidation through mergers and reorganization. Business concentration produced ‘national champions’, as the government encouraged larger, more competitive firms to be formed from a traditionally atomized business sector in order to cope with the prospect of much fiercer competition within the EU (Salmon 2001b, 23). This allowed them to diversify from their core interests and become large enough to embark on a significant investment programme. Among the leading Spanish companies, Telefónica moved into the media and information technology business, while Repsol extended its energy portfolio to include gas and power generation. Despite these developments Spain could boast only a handful of multinational enterprises. In 1999, just eight companies appeared in Forbes list of the 500 world leaders (Telefónica stood at 105 on the list, followed at 113 by BSCH, while Repsol appeared at 136, BBV 145, Endesa 322, Cepsa 339, Argentaria 433 and Iberdrola 499 (El País 1999a). The remaining factors that explain the dearth of multinational enterprises were the relatively small and static size of Spain’s internal market that restricted growth possibilities, the technological and product changes taking place and the removal of restrictions on capital movements. What Spain’s few internationally competitive multinational enterprises did have in common was a sound financial position which enabled them to fund their investment plans and to defend themselves more ably against predators (Salmon 2001b, 141). Above all, following the advent of the single currency, they gained access to financial markets in the euro zone and could borrow at low interest rates without the usual exchange rate risks. Stiffer competition and sluggish domestic growth prompted them to seek markets and investment opportunities abroad (Salmon 2001a, 34). They were assisted by the liberalization of Spain’s investment laws, allowing outflows of capital, and government reforms of the tax system in 1995 that, in some cases, boosted corporate profitability. As for investment opportunities, Spain was particularly well positioned to exploit its recent experience of democratic transition by supporting the emerging democracies in Latin America, encouraging the peace process in Central America, and funding economic development programmes. The growing links were formalized in 1991 when Spain was a prime mover in establishing regular Ibero-American summits bringing together the leaders of the Spanish-speaking world. Apparently sound commercial reasons lay behind the frantic rush by the leading Spanish businesses to establish themselves abroad and to take leading positions in Latin America. The Spanish market was fast becoming saturated and no longer offered undiminished prospects for growth or profit. Meanwhile, the privatization of state-owned enterprises throughout Latin America created opportunities for Spanish

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firms to invest in the region. The mode of entry varied according to circumstances and might involve the purchase of a controlling interest, the establishment of joint ventures or new investment projects (Toral 2001, 1). In undertaking such investments, Spanish firms took a calculated gamble that they would pay off in terms of profits in the medium to long term. This represented a high level of risk in a region noted for its macroeconomic instability and economic uncertainty. Indeed, many international investors had pulled out of Latin American markets during the 1980s on the grounds that returns were low, internal demand sluggish, operating costs persistently high, and bad debts a widespread problem. Undeterred, some Spanish firms became addicted to Latin America, building up a strong asset base there. Unfortunately, projected earnings growth proved illusory, especially after the Argentina crisis started to bite in 2001, as we shall see later. Once the banks blazed the trail abroad, other businesses followed suit. This appeared logical because there were close links between the commercial banks and their industrial holdings based on their common histories as public-sector companies. In the 1970s, the big six commercial banks owned or controlled over 40 per cent of the largest private industrial companies in Spain (Baklanoff 1996, 109–10). Two decades later, BBVA had holdings in Iberdrola, Gas Natural, Repsol and Telefónica, while BSCH held stakes in Endesa, Unión Fenosa, Agua de Valencia and the construction company Dragados. Common backgrounds and received wisdom prompted the replication of strategies in external markets. Less happily, investment tended to continue even when conditions were less propitious and the more wary might have exercised greater caution (Salmon 2001b, 105).

Telecommunications The economic boom during the late 1980s generated a demand for improved telecommunications. Encouraged by the policy-makers, Telefónica, a state monopoly since 1944, embarked on a programme to develop Spain’s telephone infrastructure and extend the lines to groups previously outside the network. This experience put the company in an ideal position to offer its expertise and technological knowledge to other modernizing and liberalizing economies. When negotiating with Latin American governments, the symmetry between the Latin American economies and the recent Spanish experience of privatization combined to give Telefónica a competitive edge over their rivals. Moreover, Latin American governments often welcomed Spanish investment as a counterweight to the dominance of US capital (Toral 2001, 187).

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Initially, Telefónica faced a number of obstacles in its efforts to establish itself as a leading operator in both the European and American markets. One of the smaller European telecommunications operators, it was not well known outside Spain. In addition, it had to overcome the poor image of European state-owned companies when bidding against private US firms. Despite the disadvantages, there appeared to be sound commercial reasons for the launch of Telefónica’s investment strategy in Latin America. The company had lost its monopoly in Spain’s telecommunications when the internal market was opened to competition. Foreign markets were seen as a means to compensate for lower revenues at home. A further motivation was provided by the auctioning off of state telecommunications monopolies by Latin American governments to the highest bidders. To make the privatizations attractive to prospective foreign purchasers, governments were prepared to allow them to raise prices and turned a blind eye to cuts in the size of the workforce and the writing off of existing debts. Following the completion of its long-drawn-out privatization in 1997, Telefónica wanted to bolster its financial position in order to compete effectively. Spurred on by technological advances and globalization, the telecommunications sector underwent a process of merger and internationalization (Toral 2001, 119). It was apparent that Spanish firms could exploit their comparative advantage, just as Latin America’s telecommunications industry appeared to offer great potential and optimal conditions for unrestricted growth during the 1990s. Telefónica therefore seized the opportunity to expand into new markets, become more efficient, launch new products, upgrade outdated technology and introduce new mobile networks. Telefónica’s preferred route to internationalization was to form consortia involving local partners. The company began its overseas expansion in 1987 with the purchase of Chile’s state telephone company, soon followed by acquisitions in Argentina during 1988 and Mexico in 1990 (Toral 2001, 123). In each case, Telefónica was granted a monopoly position for a set period. Further investments were made in Chile (a share in Entel Chile) and Peru’s state telephone company in 1994. Portuguese-speaking Brazil became a target in 1996, when a bid was accepted for a regional company, CRT. This proved to be a stepping-stone to the much larger acquisition in 1998 of Telebras, the state telephone company ($4.9 billion), which added a number of regionally based cellular companies. During the late 1990s, Telefónica turned its attention to Central America, purchasing telephone operators in Guatemala and El Salvador. Telefónica was no exception to the accelerating trend among domestic companies to invest abroad. The company formed alliances

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with rival firms to participate in the privatization of telephone companies and compete in the bidding for licence concessions. In 1997, Telefónica formed an alliance with British Telecom, the US-based MCIWorld Com and Portugal Telecom to launch a joint expansion drive in Brazil and parts of North Africa after purchasing small bundles of each other’s shares. The collaborative experience in Latin America acted as a springboard for further penetration into other previously untapped global markets.

The foreign investment roller-coaster By 2000, foreign direct investment by Spanish firms totalled over 7.5 billion pesetas, a 47 per cent increase over the previous year. According to UNCTAD, Spain occupied sixth place among the leading global investors that year, with 4 per cent of total cross-border investment. Latin America retained its position as the most favoured destination, accounting for 61 per cent of all Spanish FDI, followed by Western Europe with 23.5 per cent. The principal target sectors were telecommunications, banking and insurance, and energy (Cinco Días 2001). It is interesting to note the diversity and spread of the investments, involving Telefónica in Brazil, Argentina, Peru, Mexico and Holland; SCH in Portugal (Mundial Confiança), Brazil (Grupo Financiero Meridional), Argentina (Banco Río de la Plata), and BBVA in Mexico (Bancomer). In the energy sector, Endesa purchased the Dutch company Remu and Repsol-YPF and acquired the Argentine company Astra. Sol Meliá was responsible for major tourism investments in Cuba and the Dominican Republic, while in the clothing industry, Zara embarked on a major programme of expansion abroad. For Spanish firms, internationalization usually progressed through a number of stages. Initially, economic integration encouraged the development of closer economic ties between Spain and its immediate neighbours, notably Portugal and Morocco. Geographical proximity and low labour costs provided the attraction for investments in textiles and footwear production. A dramatic increase in trade between the nations sharing the Iberian Peninsula was accompanied by a surge in foreign direct investment. In particular, BBV and SCH targeted Portugal’s banking sector (Corkill 1999b, 174), arousing historic sensitivities that the takeovers were leading to domination by a larger, more economically powerful neighbour. In the case of the Champalimaud group, the takeover by BSCH prompted intervention by the Lisbon authorities. The ensuing stand-off was only eventually resolved following intervention by the EU Competition Commissioner.

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For Spanish firms, the cross-border acquisitions served as a springboard to investment opportunities in Portuguese-speaking Brazilian market. Indeed, Brazil absorbed a quarter of Spain’s total overseas investment in 2001. Morocco became the most important destination for Spanish investment in North Africa, following the changing attitudes to inward investment in the Maghreb country signalled by the launch of its own privatization programme in 1993. Spain became the fifth largest investor in Morocco in the period between 1993 and 1998, with 6.5 per cent of total FDI (Bacaria and Juárez 2001, 47). At first, the target sectors for the pioneer investors were phosphate mining and banking. Morocco proved attractive because of its natural resources and low labour costs, which offered a competitive edge. In addition, access to other countries of the Maghreb and a growing, politically stable internal market were motivating factors (Bacaria and Juárez 2001, 57). Some Spanish companies built upon the foundations provided by earlier trade relations with Morocco. By 2000, as many as 800 companies were involved in the country. Expansion in Morocco bore witness to the maturation of Spanish business, moving from advantages based on low labour costs to the ability to exploit a potential market utilizing their own products, technologies and brands. The second stage in the internationalization process involved establishing Spain as a bridge between the EU and Latin America, creating what Keith Salmon (2001a, 41) described as an ‘Iberian–South Atlantic axis’. As already indicated, Spain’s presence in the region began to grow during the late 1980s. Bilateral trade was boosted with export credits to countries purchasing Spanish goods and services under the banner of financial cooperation. Spain’s economic recovery in the 1980s enabled its firms to compete successfully in privatization programmes across the region. Latin America was viewed as a natural extension of Spain’s domestic market and, by 1992, Spain held the position of the largest European investor in the region, accounting for 31 per cent of total EU investment and second only to the USA overall. During the 1990s, Spain accounted for half the 144 billion euros invested directly by EU countries in Latin America (The Economist 2002b). Within a few short years, Spain’s largest companies were deriving between one-third and a half of their entire income from their Latin American ventures. In the case of Endesa, the leading domestic power company, it held more assets in Latin America than in Spain. The largest share by country was taken by Argentina, followed by Venezuela, Chile and Mexico. Spanish investors focused on the service sector, in particular tourism, public works and utilities, such as water supplies. It quickly became a leading force in Latin America’s airlines and telecommunications systems.

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The concentration which verged on overcommitment on Latin America was logical given the common cultural heritage (Baklanoff 1996, 109; Chislett 2001, 145). Longstanding business relationships also played a part, especially the presence of Spanish banks and close trade relations, as did the opportunity to gain access to the coveted North American market (Salmon 2001b, 104). The foundations for the ‘investment rush’ had been laid in the early 1990s when Spain exploited the commemorations for the five hundredth anniversary of Columbus’s voyages to the New World to promote its ambitions for an IberoAmerican community of nations (Baklanoff 1996, 111). In some cases, alliances were forged with local partners, as with Telefónica and Iberdrola, Spain’s second largest power company, in Brazil, or by acquiring stakes in telecommunications companies in order to gain a foothold in the fixed line and cellular markets. Indeed, Telefónica invested some $10 billion in Latin America between 1991 and 1999 (Chislett 2001, 150). The BBV, re-branded as a Euro-Latin American group following the acquisition of retail banks in Brazil and Chile, had become the second largest financial group in Latin America by 2000, claiming a 10 per cent market share and 30 per cent slice of the pension fund market (Salmon 2001b, 100). The third stage in the internationalization process, which is still very much in its infancy, has been to invest in more mature markets in the USA and Europe. Usually, this involved joining a consortia or building an alliance with local partners. Examples of this strategy phase include Terra’s purchase of the Lycos portal in 2000 and Telefónica’s acquisition of Endermol, a Dutch television production company responsible for the Big Brother concept following its first venture into Europe to purchase Austria’s European Telecom International. Meanwhile, Repsol expanded into Europe by acquiring a chain of petrol stations in the United Kingdom.

Exposure to instability: the Efecto Tango (Tango Effect) The strengthening economic link between Spain and its former colonies was replete with dangers. Given their levels of exposure in Latin America, the fortunes of Spanish multinationals became inextricably linked to the economic health of a notoriously unstable region, as the Argentina crisis demonstrated when it unfolded during 2001–2002. Spain was second only to the USA among the leading investors in Argentina as BBVA, SCH, Repsol, Telfónica and Endesa made major acquisitions there. Investments totalled $41 million during the last decade of the millennium, giving the Spanish control of companies

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representing 10 per cent of Argentina’s GNP (El País 2001a; Actualidad Económica 2002). However, the tempting prospects held out by Latin America’s emerging markets in the 1990s, with its continuing economic growth, political stability and weak regulatory regimes, failed to endure (Salmon 2001a, 103). Although democratic rule was far from consolidated and corruption, crime and guerrilla activity still common, Spanish investors unwisely discounted their exposure to risk. Ultimately, they bore the brunt of the backlash once the Argentine economy went into a tailspin early in 2002. The Spanish banks were especially at risk because they controlled a fifth of Argentina’s banking system. As a result, they were forced to set aside provisions to cover government debt default and currency depreciations. For the non-banking multinationals, reliant on Argentina for between 10 and 40 per cent of their profits, substantial losses were incurred. A disturbing feature of the intense economic crisis that afflicted Argentina was the hostile anti-Spanish public reaction there. Angry protesters attacked the Spanish embassy in Buenos Aires and the offices of Spanish firms and their subsidiaries. In particular, they vented their anger on the former national airline carrier, Aerolíneas Argentinas, now under majority Spanish ownership through the state holding company SEPI, which had been forced to adopt draconian cost-cutting measures. The hostility generated towards Spanish multinationals during the Argentine crisis reflected wider fears expressed earlier that the former imperial power once again harboured hegemonic pretensions. Although wrapped in terminology such as ‘zones of economic cooperation’ and a ‘special relationship’, the investment flows became politically sensitive, rekindling fears among Latin Americans about neo-colonialism and a surrender to the ‘new conquistadores’ (Baklanoff 1996, 117). Argentine government debt default and currency depreciation threatened to derail Spain’s economic expansion into Latin America. Repsol, a small European refiner until its purchase of YPF, the Argentine oil and gas company, for $15 billion in 1999, found that its efforts to become a major oil company had backfired. Its share price collapsed and investment plans were frozen amidst the political uncertainties spawned by Argentina’s prolonged economic crisis. Overnight, Repsol–YPF became Europe’s most indebted oil company, plagued by fears that the Argentine government would raise oil taxes, prevent profit repatriation or even renationalize the assets. SCH set aside a staggering $1.14 billion to cover its losses in the southern cone, a major blow since Latin America generated around half of its net profits (Financial Times 2002). Elsewhere, anti-foreign outbursts occurred in Peru where Telefónica was embroiled in corruption investigations, accused of inflating its charges to customers under the Fujimori government. In such an inclement

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climate, it is hardly surprising that Spain’s overseas investment tumbled in 2002, down a third since the previous year. Another characteristic of the foreign investment boom in Latin America was that when one Spanish bank made an acquisition, its Spanish rival invariably responded with a matching move. To do so, they often had to outbid competition from US firms whilst, in the lucrative Brazilian market, they faced competition from the Portuguese, who had strong cultural–linguistic advantages. Nevertheless, Spain still headed the list of foreign investors in Brazil in 2000, having invested in banking, telecommunications and call-centres, and natural gas and mining (El País 2002e). Generally speaking, the record shows that mergers and acquisitions do not automatically translate into synergies. Iberia was a case in point, having been forced to withdraw from resource-draining investments such as its stake in Viasa, the Venezuelan national carrier. By 2002, it was clear that the government’s ambitions of becoming a ‘bridge’ between Europe and Latin America would have to be scaled down. Business strategists now recognized the inherent dangers of an overcommitment to Latin America and accepted that a broader-based investment portfolio carried fewer risks. With this in mind, BBVA began to dispose of some of its Brazilian assets in 2003, selling BBV Banco to a home bank, thus reducing its exposure to risk.

CHAPTER 7

The employment crisis and the labour market Since joining the European Union, Spain has been amongst the leading performers with regard to most economic indicators. Employment is the most glaring exception to this. Since the late 1970s, Spain has suffered from an employment crisis, recording the highest levels of unemployment in the EU, the lowest participation rate (53.9 per cent of the working-age population in 2001), and the worst long-term joblessness levels. Although fluctuating with the economic cycle, the unemployment rate remained persistently high at between an average 12 per cent registered during the decade after Franco’s death and peaking at 24 per cent in 1994, as can be seen in Table 7.1. Throughout the democratic era, the majority of economists have subscribed to the neoliberal view that Spain’s poor employment performance can be mainly explained by labour market rigidities (Blanchard et al. 1995, 4; OECD 2000, 54; Pérez 1999, 661). Indeed, Spain is often cited as a textbook example of the link between labour market structures and unemployment. Accordingly, employers, economic liberals and, in its 2003 report, the European Commission’s taskforce on employment strategy joined in the chorus for labour market reform (Financial Times 2003). In response, both the PSOE and PP governments have focused on labour market policy, implementing a staged programme of measures. Beginning in the 1980s, the reforms have sought to make Spanish labour cheaper, more flexible in its attitudes and internationally competitive Table 7.1

Spain’s unemployment rate, 1965–2002 (as percentage of employed population)

1965–74 1977–86 1986–90 1991 1992

1.5 12.0 18.4 16.3 18.4

Note: e = estimate Source: El País (2002); INE.

1993 1994 1995 1996 1997

22.7 24.2 22.9 22.9 20.8

1998 1999 2000 2001 2002

18.8 15.9 14.1 13.1 11.7e

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145

(McVeigh 2000, 9). The wisdom of this strategy appeared to be confirmed by the substantial reductions in the levels of unemployment that occurred during the late 1990s. Paradoxically, the turnaround came about just as the conventional wisdom that blamed the institutions of the Spanish labour market (collective bargaining, high dismissal costs, and so on) for the high unemployment levels was no longer accepted uncritically. An understanding began to develop that its causes were far more complex.

The structure of employment A case can be made that the labour market in Spain, far from being too rigid, has undergone substantial change. Over the last four decades, the employment structure has gradually approached more closely that of the advanced European economies. The size of the Spanish labour force increased by a quarter from the mid-1960s to the early 1990s. Such a rate of growth, considerably above the EU average, exacerbated the gap between the numbers seeking jobs and the economy’s ability to generate employment (Muñoz de Bustillo Llorente 2002, 5). Certainly, a major transformation has occurred in employment distribution. The agricultural workforce declined sharply, down to under a million in the late 1990s from 4 million thirty years earlier. Restructuring and technological change have contributed to a reduction in the number of jobs in the secondary sector. The employment haemorrhage was most acute in ‘older’ industries such as textiles, steel, shipbuilding and engineering. The destruction of jobs, particularly in the long-established industrial regions, such as Cantabria and Asturias, added 1.5 million to the dole queues between 1975 and 1985. When the world economic slowdown provoked a second employment crisis in the early 1990s, the manufacturing sector bore the brunt once again, losing 670,000 jobs (Castro et al. 1999, 236). As can be seen in Table 7.2, the exception to the overall drop in employment was the services sector. The latter has benefited from the continued prominence of Spain as a major world tourist destination, state sponsorship of welfare state provision and a boom in administrative jobs, particularly outside Madrid, following the establishment of the autonomous communities between 1979 and 1983. What factors account for Spain’s poor employment performance? And why have only modest inroads been made into bringing down unemployment levels that were until recently double the EU average? There is little consensus on the causes of Spain’s high unemployment, but we can examine the various explanations in order to weigh up their respective importance. Given the persistence of the problem, cyclical

146 Table 7.2

Agriculture Industry Services

SPAIN: A MODERN EUROPEAN ECONOMY

Labour force distribution, 1975–98 (percentages by sector) 1975

1985

1990

1995

1998

22.1 38.3 39.7

16.2 31.8 52.0

11.9 33.5 54.6

8.6 29.4 62.0

8.0 20.4 67.5

Source: INE.

features can only be partly to blame, and deeper, structural factors must be sought to explain the phenomenon. The most commonly identified weakness in the orthodox analysis centres on labour market inflexibility. A substantial literature identifies a number of rigidities. The first factor to take into account is the legacy of the paternalistic and protectionist Franco regime and, in particular, employment legislation that remained embodied in law. Under the labour system, permanent labour contracts, high redundancy payments and substantial social security contributions dissuaded employers from taking on more workers (Catalán 1995c, 370). This reluctance was compounded by the costs of hiring and firing workers, together with lengthy administrative procedures which made it hard for firms to reduce their workforce in response to changing market conditions and even deterred them from taking on new workers during periods of economic expansion. The intention of the Francoist policymakers had been to compensate workers for inadequate social security provision by offering them guaranteed jobs for life. In return, the workforce was expected to exercise wage restraint and accept, or at least not challenge, the authoritarian political arrangements, or it was punished. In addition, wage bargaining remained inflexible under the dictatorship’s strictly controlled and legally circumscribed labour relations regime, creating ‘a relative insulation of wages from labour market conditions’ (Castro et al. 1999, 240). The traditional interpretation, which focused almost exclusively on the labour market, eventually came under critical fire. The chief objection was that a monocausal explanation failed to take into account the complexities surrounding Spain’s persistently high unemployment. Throughout the ensuing debate, comparisons were made with neighbouring Portugal, where employment protection measures were arguably even tighter than in Spain, yet unemployment remained amongst the lowest in Europe (Castro et al. 1999, 239–43; Bover et al. 2000, 382). Scepticism was expressed that employment rigidity could by itself explain the jobs crisis (Jimeno and Toharia 1994, 22). Critics pointed out that firms were able to dismiss workers after 1980, although

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they incurred heavy costs in doing so. For others, the core explanation centred on the breakdown of the Franco era political economy, coinciding as it did with the international economic crisis (Marimón 1996, 3–4). Such factors combined to expose the extent to which the Spanish economy comprised inefficient, uncompetitive firms that relied heavily on cheap labour. Despite presiding over an unprecedented economic boom, which saw the emergence of Spain as a leading industrial power and rapidly rising living standards, the dictatorship bequeathed certain vulnerabilities that contributed to rising joblessness. International integration exposed Spain to fluctuations in the economic cycle. Spain also relied heavily on foreign direct investment and emigrant remittances to offset a chronic trade deficit. A two-tier industrial structure developed in which thousands of small and medium-sized enterprises (SMEs) coexisted alongside large, ‘modern’ production units. Hampered by low productivity and hemmed in by restrictive labour laws, these SMEs were severely limited in their ability to expand and take on more workers. The political crisis that plagued the Franco regime in its twilight years (1968–75) combined with the almost exclusive and understandable focus on political issues during transition to democracy (1975–82) to ensure a weak and belated response to the effects of the oil-price crisis of the late 1970s. With their attention focused on the mechanics of the political transition, Spain’s policy-makers were deflected from taking urgent remedial action to deal with the external economic shocks. Despite these distractions, economic management did incorporate efforts to tackle rising wages and rampant inflation, beginning with the Moncloa Pacts of 1977. In return for an agreement on wage moderation with the trade unions, the UCD government unwisely agreed not to tamper with Franco’s labour relations legislation. Subsequently, labour market arrangements remained unchanged through the period of sluggish growth before 1986. It proved almost too convenient for the governments to renew the corporatist arrangements, including job protection and overmanning, the widespread use of protectionism, and the cosseting of industry from competitive forces. The Pacts, together with the new Workers’ Statute, the centrepiece of Spanish labour law passed in March 1980 (amended 1983, 1984 and 1994), perpetuated many of these restrictions at the behest of a trade union leadership keen to make the most of their newly won freedoms. The direct effect was to force up unemployment, especially among the non-unionized workers and the baby boomers entering the labour market. In summary, political priorities, above all the need for social harmony and consensus, led the policy-makers to postpone Spain’s adjustment to the external shocks that were felt in the 1970s. As a result, Spain suffered from a deadly

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combination of low growth, declining investment, high inflation and rising unemployment. Later, during the 1980s, rather than putting employment issues at the top of their list of priorities, Socialist governments were more concerned with reducing inflation and demonstrating their ‘orthodox’ credentials in order to gain international respectability and avoid capital outflows (Recio and Roca 2001, 175).

Deindustrialization and industrial modernization The recession that accompanied the transition from dictatorship to democracy revealed the defects in the Franco regime’s development model. It laid bare Spain’s uncompetitive industrial structures and excessive dependence on external energy sources, especially oil. A wage explosion, caused in part by recently acquired trade union freedoms and pent-up pressures, occurred at a particularly sensitive moment. Social corporatism, as represented by the Moncloa Pacts, had been an essential element in building a political consensus during the transition, but was no longer justifiable in purely economic terms. This combination of factors eventually persuaded the post-transition governments to take remedial action. Not all ministers shared the enthusiasm of Miguel Boyer (1982–85) and Carlos Solchaga (1985–93), the leading economy ministers in the Socialist government, for neo-liberal ideas, but all subscribed to the conviction that, if the Spanish economy were to be integrated into the European economy, action would have to be taken to modernize its structures. It is this, above all, which helps to explain why sustained high unemployment levels failed to trigger social protest, and why the negative political consequences for the Socialist governments throughout the 1980s and 1990s were so limited. Indeed, unemployment became ‘an accepted fact of life’ in post-Franco Spain (Pérez Díaz 1999, 104). As mentioned in Chapter 4, the centrepiece of the Socialist government’s economic strategy during its first term in office was an industrial reconversion programme to deal with failing industries. Under its provisions, cuts were made in capacity and jobs in sectors such as steel, engineering, shipbuilding, mining and textiles. Their workers became casualties of the integration process and the drive to restructure in order to enhance international competitiveness. Whenever possible, many firms, particularly in manufacturing, reacted to external competitive pressures by trimming their workforce. In contrast to the pre-ERM era, the traditional strategies used to overcome an employment crisis such as devaluation were no longer available to the Spanish authorities. The international recession of the late 1970s and

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early 1980s disrupted recent emigration patterns to Western Europe, where the contraction in demand for foreign labour meant that the opportunities to work abroad were severely curtailed. In addition, the true extent of the employment crisis was camouflaged by early retirement schemes and the choice of increasing numbers of adolescents to stay on in the education system, thereby postponing their entry into an unwelcoming labour market. Other factors played a minor part in explaining Spain’s enduring unemployment problem. The first was the increase in the economically active population as Spain felt the effects of a demographic transition caused by a rise in the number of women seeking employment and the entry into the labour market of the baby-boom generation of the 1960s. The working-age population increased faster in Spain than elsewhere in the European Union. Between 1964 and 1994, the Spanish labour force grew by more than 3.5 million, or around a quarter. However, employment generation failed to keep pace (Viñals 1996b, 92). The participation rate among Spain’s working-age population remained low, especially since women were not yet fully integrated into the labour market. The female participation rate, which stood at 32 per cent in 1975, had risen gradually to 45 per cent by 1994 (Castro et al. 1999, 235). Changing social trends are reinforcing this rise as more women seek work and opt for smaller families. However, caution must be exercised when directly linking female labour market integration to high unemployment. As Víctor Pérez Díaz (1999, 662) points out, the increase in the female participation rate has been offset by the declining male participation rate. Another often-cited contributory factor to high unemployment is the failure to develop Spain’s human resources. Historically, there has been little synchronization between educational supply and the demand for labour. There are a number of reasons for this, including inadequate education and training. It is unsurprising given that investment in workrelated education was some 40 per cent lower in Spain than the average for the EU in the 1990s (Bertelsmann Foundation 2002, 3). The resulting ‘skills mismatch’ means that workers are often either overeducated or lack even the minimal qualifications. Many over-qualified job seekers are compelled to take jobs previously held by less qualified staff. As a result, the less well qualified are ‘crowded out’ of the labour market (Dolado et al. 2000, 943). Therefore, it is often ‘unemployability’, rather than a lack of demand for labour, that exacerbates the unemployment problem. Insufficient labour mobility in Spain is often singled out as an explanation for high unemployment levels. Indeed, indications are that geographical and inter-sector mobility has actually decreased since the

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1970s. Possible causes for the low level of mobility range from disincentives, including generous unemployment benefits and regional schemes to protect the rural unemployed, the lack of suitable housing, and the role of the Instituto Nacional de Empleo (National Institute of Employment – INEM). However, the Encuesta de Población Activa (EPA) evidence does not suggest that posts remain unfilled because workers are reluctant to give up their unemployment benefit in return for a job that fails to live up to their expectations. Attempts by some economists to lay the blame at the door of generous unemployment benefits are undermined by the fact that not all the jobless receive unemployment benefit (EIRO 2002c). More specifically, a distinction needs to be made between skilled workers, who are quicker to migrate long distance in response to a decline in regional labour demand, and the unskilled who, tend to remain unemployed or do not seek work (Mauro and Spilimbergo 1999a, 2). Pablo Antolín and Olympia Bover (1997, 215) provide confirmation that unemployment may not act as a ‘push’ factor. They found that the registered unemployed were less likely to migrate than the rest of the labour force. Unsurprisingly, therefore, regions with chronic unemployment problems recorded the lowest out-migration. This outcome can probably be attributed to unemployment benefits, although personal circumstances, including the family situation, were found to be equally, if not more, important. The affected regions, such as Andalucía, became the target for the state-funded Plan de Empleo Rural (PER – Rural Employment Plan), later known as Plan de Fomento de Empleo Agrario, a Rural Employment Generation Plan, launched in 1984 to meet the social needs of landless labourers, provide jobs in areas where unemployment was higher than the national average and reward Socialist voters. Under this scheme, which benefited over 200,000 workers, temporary jobs on infrastructure projects were offered to unemployed agricultural workers. Farm workers on low incomes who worked at least 60 days per year received unemployment benefits equal to three-quarters of the minimum wage for a six-month period (Jimeno and Toharia 1994, 117–18). There is a further explanation for limited mobility. Regions with the lowest levels of unemployment have generated fewer new jobs than those with high levels of joblessness. Indications are that the former are no longer able to absorb the surplus labour from regions with large numbers unemployed. Confirmation that geographical mobility remains an obstacle came from employment surveys. Under a quarter of the workers surveyed were prepared to change their residence in order to find a job, and women in particular demonstrated resistance to moving home, citing female domestic responsibilities as the main stumbling-

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block. Indeed, in its controversial 2002 reform package, the Aznar government was obliged to take family responsibilities into account and modify its original proposals to penalize workers who would not accept a job less than 50 kilometres from their home (EIRO 2002a). The generosity of unemployment benefits is regularly singled out as contributing to unemployment in Spain. By 1993, some 70 per cent of the unemployed qualified for benefits, although the proportion later fell, following the tightening up of the eligibility criteria and the decision to tax unemployment benefits (Toharia and Malo 2000, 322). How generous Spain’s unemployment benefit actually is can be debated. According to one source, the unemployment protection system is one of the least protective in the EU (EIRO 2002c). What is indisputable is that the increasing use of temporary contracts, which reduce benefit entitlement, has steadily eroded the coverage rate (Bover et al. 2000, 387). Lastly, high unemployment levels have been linked to Spain’s poorly coordinated system of wage bargaining. Bover et al. (2000, 411) argue that during negotiations core workers or ‘insiders’, who enjoy employment security on indefinite contracts, force up pay awards, which encourages firms to balance the increased costs by keeping down wages and worsening working conditions for marginal workers, or ‘outsiders’. Despite the apparent attractiveness of the ‘insider–outsider’ analysis of the labour market, it disguises the substantial job destruction among permanent employees during the recession in the early 1990s despite the expenses incurred by employers when making dismissals. Almost certainly, there was a deliberate attempt by employers to ‘casualize’ their workforce by seeking out cheap, non-unionized labour (Recio and Roca 2001, 184–85). Since wages are determined by sector and the minimum levels agreed are binding on both parties, there is little differentiation in the wage structure and labour costs have remained insensitive to the high levels of unemployment. As bargaining takes place at the regional and sectoral level, little room is left for flexibility at the level of the firm (Blanchard et al. 1995, 6). As a result, real wage growth bears little relation to productivity improvements. Inflexibility is hardened further through indexation, by which wages rise in line with inflation, although the decentralized and fragmented bargaining process does allow some flexibility to suit local and sectoral conditions.

The Spanish labour market A notable feature of Spain’s unemployment crisis has been its differential

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impact on the public and private sectors. While job losses in the private sector were considerable, the public sector has, by and large, bucked the trend (Viñals 1996b, 95). This imbalance can be largely explained by the burgeoning growth in public expenditure as a percentage of GDP and the expansion of Spain’s embryonic welfare state provision. Between 1977 and 1984, the proportion of public employees in the total labour force nearly doubled. A major contributor to this expansion was the policy of maintaining employment in loss-making state industries. When real employment growth did occur, as in tourism, other services and rural industry, it displayed distinctive characteristics. Many of the new jobs created were insecure, temporary or seasonal and attracted principally female workers (Perrons 1998, 21). This is explained in part by the expansion that took place in low-paid, part-time rural industrial activities that often involve homeworking, while the development of rural tourism created mainly seasonal jobs. Homeworking has become a core feature of the modern, flexible systems of production which rely on the casualization of labour. It has become a key survival strategy in an increasingly competitive domestic and international marketplace. Subcontracting of work is particularly prevalent in the footwear and garment-making industries of Alicante and Galicia as efforts are made to reduce production costs and retain a competitive edge. Small workers’ cooperatives spread across northern Spain and Portugal are able to respond quickly to orders for constantly changing designs. In addition to the decentralized production, there has been a growing diversity in types of employment. Nowadays, employers require a more flexible labour force, while women are sometimes regarded as ideal for ‘informal’ work as part of an underground economy beyond the reach of labour legislation. Often homeworking is a second job and forms part of the multiple employment structure (pluriempleo). It is common in rural areas where it dovetails conveniently with farmwork and serves to supplement low or insecure family incomes. Significantly, the phenomenon of homeworking is most prevalent in traditionally low-wage areas where seasonal work is common and unionization limited. Given the economic and employment problems facing the contracting rural sector and the socio-cultural environment (patriarchy and so on), non-urban workers often favour this type of work (Baylina and García Ramón 1998, 55–56). A prime example of extensive subcontracting work is the highly successful Spanish clothing firm Zara, part of the Inditex group, based at Arteixo in the Galician province of La Coruña, managed by the reclusive Amancio Ortega Gaona, Spain’s richest man. After starting work as a clerk for a clothes retailer, Ortega left to set up his own lingerie firm before opening his first Zara shop in La Coruña in 1975. Today, Intidex

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has 1,148 stores in 33 countries and employs 12,000 textile workers. Zara exhibits many characteristics associated with this type of activity: a network of workshops utilizing a ‘just-in-time’ production model and employing mainly female homeworkers spread out across Galicia, northern Portugal and, latterly, extra-European locations, such as Hong Kong. Local production allows the company to have new designs in the stores within a fortnight, compared to the six months that is normal for the industry, and eliminates problems over freight costs and uncertain deliveries. Providing high fashion at high-street prices, Zara’s success is based on little or no advertising and strict control over the manufacturing process, both in-house and outworking (Howard 2000, 24). The relatively muted social and political reaction in Spain to such high levels of unemployment and patterns of social exclusion merits comment. Among the reasons put forward to explain the generally quiescent reaction, the most common are the existence of state compensation schemes and family networks serving a welfare function (Bermeo 1999, 265). Few claimants are the sole wage-earners in the family, and income sharing generally cushions them against the worst effects of jobless status. Nearly four-fifths of young Spaniards, between 15 and 29 years of age, live with their parents and benefit from family transfers. Hence the surprising existence of social harmony despite rising long-term youth unemployment. It is true that significant numbers do not qualify for unemployment compensation, but the insurance provided by family networks ensures that consumption losses are less and job seeking is not so urgent (Muñoz de Bustillo Llorente 2002, 10–11). An additional factor to be taken into account is the existence of a large informal economy which, as we shall see later, provides ample opportunities to earn supplementary income.

Unemployment patterns Spanish unemployment has followed an uneven trajectory over the last three decades. Before the international economic crisis of the late 1970s, there had been buoyant demand for largely unskilled labour. This had come to a halt by mid-decade and was compounded by a series of external shocks that cruelly exposed weaknesses in the labour market. The resultant crisis saw a sharp drop in employment prospects, most markedly in manufacturing, construction and agriculture, which declined by 25, 37 and 30 per cent respectively between 1976 and 1985 (OECD 1996, 57). Only the service sector, which grew at a modest 3 per cent per annum over the period, was able to take up part of the slack.

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By 1977, there were three-quarters of a million unemployed, constituting 5.7 per cent of the active labour force. The situation deteriorated markedly as the number of job vacancies shrank while the working-age population expanded due to the high birth rates in the early 1960s (Castaño 1999, 90). During the 1980s, unemployment continued on its relentless upward path, adding another million to the jobless total. New entrants into the labour force ensured that unemployment remained high despite an economic recovery after 1986 and the substantial rise in the numbers in work. The recession of 1992–93 took its toll on the employment situation, forcing the jobless total to a historic high of over 3.4 million in 1994, or 24.2 per cent of the active labour force. The employment shock had its severest impact on sectors exposed to foreign competition or where labour costs were an important element. Unfortunately for the out of work, Spanish manufacturers responded typically to the recession by increasing capital-intensive investment. Thus a combination of falling employment and strong labour market growth, along with the removal of training subsidies for young entrants into the labour market, helps explain the renewed surge in unemployment. It was not until the economic upturn of the late 1990s that clear signs emerged of a downward trend in unemployment. During the first Aznar administration (1996–2000) unemployment fell from 3.5 million to 2.3 million, helped, it must be said, by a lower number of labour market entrants. Among the characteristics of unemployment in Spain are its high segmentation, geographical concentration and prevalence among both the young and women. Long-term unemployment became a signature feature, particularly in areas hardest hit by industrial decline, in agricultural regions and, most commonly, among men. There was territorial concentration, with some regions, like Andalucía, experiencing joblessness at around 30 per cent of the workforce in 1997. At the opposite end of the scale, regions such as Navarre and the Balearic Islands recorded unemployment rates below 14 per cent (see Table 7.3). In Andalucía’s case, specific reasons can be identified to explain its persistently high unemployment rate. Its principal causes were a high dependence on traditional agriculture, Spain’s high birth rate in the early 1960s, and a dearth of manufacturing industries capable of absorbing surplus labour (Méndez and Caravaca 1997, 156).

Youth and long-term unemployment Another unwelcome feature of Spain’s mass unemployment problem is the high incidence of youth and long-term joblessness. Firms have little

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Unemployment: long-term; employment: part-time and temporary, 1990–2000 (as share of total, in percentages)

Year

Long-term

Men

Women

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

54.1 51.1 47.4 50.0 56.1 56.9 55.7 55.5 54.1 51.2 46.1

45.8 42.8 38.4 42.5 49.7 51.1 49.8 49.9 47.9 45.4 39.5

61.5 58.9 56.2 58.4 62.9 62.5 61.3 60.4 59.0 55.6 50.8

Part-time 4.2 4.1 5.0 5.8 6.4 7.1 7.4 7.9 8.0 8.2 8.1

Temporary 30.3 32.3 33.5 32.3 33.8 34.9 33.8 33.5 33.0 32.8 32.0

Source: Astudillo (2002, 4).

incentive to recruit young people seeking their first job and tend to ignore those without work experience. This partly accounts for the disappointing results generated by programmes designed to promote employment among the young. In such circumstances, other strategies have been developed by the state and the family to deal with youth unemployment on such a large scale. These include the expansion of further education and a continued reliance on the cushion provided by the still important extended family. Spain offers a classic example of insurmountable youth unemployment, defined as the number of 15–24-year-olds without work. A total of 45.2 per cent of this age group was unemployed in 1994 (double the rate for those over 25). Since then, steady progress has been made in cutting the numbers of young people out of work. INE figures demonstrate that from a high point in the mid-1990s unemployment among the 15–24 years age group had almost halved by 2000. This reflected the impact of schemes designed to assist first-time job seekers through a combination of financial incentives, work experience and vocational training. In particular, the introduction of work experience programmes and apprenticeship contracts for the 16–25 years age group encouraged more firms to take on youngsters. Such contracts allowed employers to offer a contract for up to three years, paying apprentices less than the minimum wage. Indeed, the existence of a minimum wage has been blamed by some economists for pricing unskilled workers out of the market. However, experience

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elsewhere in the European Union indicates that it is likely to be the level at which the minimum wage is fixed that is the critical factor. A second disadvantaged group is the long-term unemployed. At just under 50 per cent of total unemployment in 2000, Spain’s share of longterm unemployment is well above the average for the developed economies (OECD 2000, 55). The search for the cause of long-term unemployment indicates high dismissal costs and generous unemployment benefits as the most likely explanations (Bover et al. 2000, 396). Clearly, long-term unemployment is undesirable, not least because of its psychological impact on the jobless and contribution to social exclusion, crime and health problems. The evidence available from across Europe suggests that long-term unemployment is mitigated only with great difficulty and tends to affect a country’s poorer regions. Across the European Union, early retirement and a reduction in the length of statutory benefit entitlement have been tried as palliatives for youth and long-term unemployment. The Aznar government has begun to show concern that such arrangements are becoming increasingly expensive. Policy-makers considered them inappropriate and extremely costly for companies no longer seeking to restructure their activities.

Women in the workforce Spain suffers from one of the poorest records among the more advanced economies for incorporating women into its labour force. Although there has been a steady growth in female participation from 27 per cent in 1985, the female participation rate stood at 38.3 per cent in 1999, well below the EU average of 55 per cent (El País 2001b). During the same period, the number of women in employment increased by 2.7 million, exerting extra pressure on an already stretched labour market (Muñoz de Bustillo Llorente 2002, 5). Female employment is concentrated in two main areas: manufacturing, primarily in the textile, leather and footwear industries, and services, particularly retailing, hotels, education and domestic service. Typically, employment areas in which women constitute the majority are part-time, low paid and insecure. Consequently, as the female participation rate has grown, unemployment has become increasingly ‘feminized’ (Threlfall 2000, 317). Only 47.7 per cent of jobless women who are registered for work receive any form of unemployment benefit (EIRO 2002a). In addition, women were less able to escape from unemployment than men. The jobless total among women rose from 200,000 in 1977 to 1.7 million in 1999. In part, the explanation for this development lies with the market reforms introduced since the 1980s. Four out of five part-

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time contracts are held by women. Distinct inequities exist in pay rates between men and women as well as the latter’s entitlement to unemployment benefits. Women workers are often ghettoized in lowpaid employment, creating a substantial earnings gap in Spain where average female earnings represent only 74 per cent of male remuneration (see Table 7.3). The Women’s Institute (Instituto de la Mujer), set up by the government to tackle inequities and assist female entrepreneurs, identified some of the reasons for their under-achievement and the paucity of women in managerial positions. These included widespread discrimination by employers (despite anti-discriminatory legislation passed in 1988), the unreceptive machista (male-dominated) Spanish business culture, together with the difficulties of balancing work and family responsibilities. The Aznar government has amended the Labour Statute to establish the principle of equal pay for women, but much remains to be achieved with regard to equality of opportunity, particularly child care provision and other measures to reconcile work and family life (Threlfall 2000, 310).

Job creation: Spain’s Achilles’ heel? Disappointingly, there have been long periods when employment creation has not matched economic growth in Spain. A general impression exists among economists that the failure to generate enough new jobs has inhibited an effective response to rising unemployment (Sebastián 1996a, 119). Yet this has not always been the case, as the surge in employment during the late 1980s bears witness, when Spain created jobs at previously unparalleled rates (Toharia and Malo 2000, 309). Overall, however, Spain does not have an impressive record of job creation. Under Franco, relatively few new jobs were created, while in the democratic era there has been a failure to create sufficient stable employment. Reflecting this long-term trend, employment fell by 0.4 per cent between 1972 and 1990, despite Spain’s GDP almost doubling in real terms over the same period (Sebastían 1996a, 122). Rising labour costs and other deep-seated problems inherited from the interventionist and protectionist Franco era have been blamed by economists for the country’s unsatisfactory employment growth. During the period 1960–1975, gains in productivity, abetted by emigration that siphoned off surplus labour, became the engines of economic growth (European Commission 1995, 21). As already noted, state-created jobs in manufacturing were destroyed during the early 1980s as the industrial reconversion programme trimmed labour requirements. Since the death of Franco both UCD and PSOE governments

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acknowledged that an employment crisis existed and electoral manifestos regularly included commitments to tackle the problem. In 1982, the Socialist opposition promised the electorate to create an additional 800,000 jobs, but did little when in government to stem the rise in the jobless total. Yet it took until 1996 for employment to return to its 1977 levels. The overall picture, moreover, hides sharp variations in job creation: widespread job destruction until 1985, followed by a strong reversal during the late 1980s when Spain registered the second highest job-creation rate among OECD countries and more job destruction 1992–94 (Recio and Roca 2001, 179). Not until 1996 did evidence emerge that employment capacity had begun to recover. Optimistically, some commentators interpreted the turnaround as a major structural shift. They maintained that the cyclical character of Spanish growth had been smoothed out and that a new model of development had emerged, based on falling interest rates, lower inflation and euro zone membership. However, much of the growth was one-sided, as it came from an expansion in public-sector employment. Despite the curbs imposed by the PP government after 1996, total public employment still increased by over 17 per cent between 1990 and 1999. Regional governments took on an additional 165,000 employees, more than compensating for the drop in the numbers employed by central government (Marqués Sevillano and Villalonga 2002, 7).

Labour market policies The general agreement among economists that the malfunctioning labour market was to blame for Spain’s high level of unemployment prompted a series of attempts to remove existing rigidities. Unfortunately for those without work, the reform process has been partial and piecemeal. There are a number of reasons for this. During the transition from dictatorship to democracy, the consensus on economic policy, involving trade unions, employers and government, played a key role in ensuring stability. Under what became known as social concertation (concertación social), organized labour was able to extract concessions from the government such as delays to the labour adjustment programme (Rand Smith 1998, 131). However, once democratic consolidation was assured, roughly from the mid-1980s, social concertation began to break down and the Socialist government’s hands were no longer tied by the requirement to negotiate social pacts. In the 1980s, there was a major revision of the role played by the state in the economy, resulting in a shift away from state-guaranteed employment protection towards looser regulation and more diverse

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employment conditions (Encarnación 1999, 33). Under the Socialists, employment policy initiatives, such as the Rural Employment Plan mentioned earlier, focused on maintaining income levels rather than on training and skills enhancement, which suggests that policy-makers were treating the symptoms rather than tackling the root causes of the problem. There were two major attempts at labour market reform under the Socialists, in 1984 and 1994, as well as a much-maligned youth employment proposal (PEJ–Plan de Empleo Juvenil). In the first package, the Workers’ Statute was reformed to encourage employers to use of temporary and fixed- term contracts. The government’s aim was to extend the use of such contracts, which carried few of the related costs associated with permanent ones, in order to encourage job offers. In particular, the measures helped to ensure that the costs involved in terminating a contract were reduced. Although modest inroads were made into the pool of long-term unemployed, these reforms did little ‘to reduce the rigidities in the protected sector and the dualism in the Spanish labour market’ (OECD 1996, 63). Short-term contracts were derided by the trade unions as contratos basura (rubbish contracts), because they offered workers no job security. Whereas previously a distinction had existed between permanent workers and those out of work, a new dualism developed between those employees who benefited from the rigid employment security legislation on the one hand and the fixed-term contract workers with low termination costs plus the unemployed on the other. A second batch of reforms in 1994 aimed to introduce more flexibility into the management of labour resources to cope with all phases of the business cycle and to assist companies undertaking restructuring. To this end, apprenticeship, part-time and temporary replacement work contracts were introduced. Collective dismissals deemed to be justifiable on technological, economic and certain other grounds were made easier. In the case of SMEs, changes in working conditions no longer required workforce and administrative approval. INEM, the state employment agency, surrendered its monopoly as an employment agency, and non-profit-making private job agencies were authorized to operate. As a result of the legislation, flexible working agreements became commonplace. The Spanish car industry is a case in point, where extra shifts and weekend working were permitted. The measures included job creation inducements through tax exemptions for employers taking on young people, workers over 45, long-term unemployed and the disabled. Did the reforms improve matters? The OECD (2000, 60) admitted that it was difficult to assess how effective and useful active labour

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market policies had been. By the early 1990s, Spain topped the EU list for expenditure on unemployment measures at 4.9 per cent of GDP. How effective this targeted expenditure was is open to question. Severance payments, although lower than before, continued to be generous. In some cases, employers offered attractive redundancy terms in the hope of avoiding adverse court decisions or labour troubles (OECD 1996, 64; Bover et al. 2000, 385). This certainly did not prevent the trade unions harbouring considerable reservations about the reform package. In particular, they expressed concern that the reforms forced workers to accept low-paid, insecure employment. They pointed to 3.3 million workers employed on temporary contracts in 1998, most commonly in tourism, leisure and food retailing. The growing demand for such workers spawned hundreds of employment agencies specializing in temporary work. Before long, the rise in the number employed on short-term contracts brought demands for greater employment regulation. This pressure bore fruit in November 1998, when temporary workers were accorded rights with regard to wage rates, end-of-contract bonuses, and in-work training programmes (EIRR 1999b, 12; 1999c, 18–21). Labour reform entered a more determined phase following the election of the pro-business centre-right Popular Party in March 1996. The Aznar government introduced a further reform package in May 1997. Its twin aims were to cut the numbers on fixed-term contracts and reform Spain’s collective bargaining system. First, permanent contracts were introduced with lower severance payments. Second, firms were allowed to dismiss workers on permanent contracts on the grounds of falling consumer demand and the need to regain their competitiveness. However, in practice, labour courts still tended to rule in favour of employees, which, as stated earlier, encouraged companies to pay higher rates in order to circumvent the legal process (OECD 1998, 66). The May 1997 reforms adopted a twin-track approach. They tried to encourage the use of indefinite contracts by lowering employers’ social contributions. Fixed-term contracts were made less attractive financially, as the government attempted to put the brake on the growth of casual work. Tighter regulation was imposed to ensure equal treatment for temporary employees, together with penalties for companies abusing temporary contracts, and incentives to encourage the use of permanent part-time contracts. The policy-makers promised that state tendering would henceforth discriminate in favour of companies offering permanent rather then temporary contracts, and there was to be closer monitoring by Labour Ministry inspectors in order to reduce temporary contract abuses. So can Spain’s labour market reforms be credited with the steady fall

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in unemployment? Certainly substantial progress was made in cutting the numbers out of work. Between 1996 and 2000, Spain created half the new jobs in the European Union, as unemployment plummeted from 22 to 14 per cent of the country’s workforce. However, before attributing the fall directly to the reforms, it must be acknowledged that they coincided with a period of continuous economic expansion. At the same time, it has to be recognized that the jobs created in this new phase were not exactly comparable with earlier forms of employment. They comprised chiefly atypical jobs based on temporary, fixed term or parttime contracts and recruited mainly from among the ranks of female workers. According to a study by the Caixa Catalunya, just under 2.7 million jobs were created between 1995 and 2001. However, the new jobs were heavily concentrated in the private sector and in low-valueadded areas, such as construction, catering and commerce. Only 12 per cent of those jobs were in the high-value-added sectors, including information technology and R&D (Cinco Días 2002c). Throughout the 1990s, the level of temporary employment rose steadily, effectively keeping the lid on rising wage costs. By 1997, around one-third of the workforce was employed on temporary contracts but, contrary to official expectations, there was little or no reduction in the unemployment rate. Instead, the failure to generate stable employment produced unintended negative consequences, not least the reinforcement of labour market segmentation triggered by the introduction of new technologies. While Spain was creating jobs at double the European average rate, the quality of the new jobs was generally poor. According to the government’s Annual Employment Survey for 2001, 31.5 per cent of new employment was due to temporary contracts, more than twice the European average of 13.2 per cent, indicating that the proportion of temporary employees has not declined (El País 2002f). Indeed, the vast majority of new hirings were on fixed-term contracts and the length of job tenure had decreased. The labour reforms introduced by the Aznar government in 2002 explicitly recognized the obligation to eliminate the widespread abuses relating to temporary contracts and the exploitation of temporary workers, among them high staff turnover, short duration and discrimination against women. By reducing dismissal costs for workers on permanent contracts and improving the conversion rate of temporary into permanent ones through a social security rebate scheme, the policymakers intention was to bring down the number of temporary jobs. The early evidence suggested that it had done little to reverse the incidence of temporary employment, largely because the progress made in the private sector was not matched by similar advances in the public sector. Despite the government’s best efforts, only one in every three such

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contracts has been converted into a permanent one. The CC.OO (Comisiones Obreras – Workers’ Commissions) demanded greater vigilance by the labour inspectorate, rather then yet more legislation, which so often proves ineffective, or easy for employers to circumvent (Cinco Días 2002a). Rampant unemployment has provided a boost to self-employment. Independent employment has been most prevalent among males, older workers and immigrant groups. Unfortunately, the growth in selfemployment did not signal the emergence of a new entrepreneurial class. Throughout the OECD, and Spain is no exception, there has been a steady growth in the numbers of self-employed in recent decades, often encouraged by support schemes that provide funds and skills to help start-ups. Unemployed workers wishing to launch their own business are offered grants and a lower rate of interest on loans. Self-employment grew at a faster rate than non-agricultural employment in Spain during the 1980s. By 1990, the Spanish Labour Force Survey estimated the percentage of the workforce who were selfemployed at 18.5 per cent of the total. The possibility that some of the unemployed might be encouraged into entrepreneurial activities and to start their own businesses was explored by Raquel Carrasco (1999, 37), who found that, while many unemployed were extremely motivated, their endeavours suffered a very high failure rate. Indeed, the growth of self-employment can be an indication that the new self-employed have merely moved into precarious and unstable employment.

The informal economy One of the consequences of the employment crisis has been the expansion of an unregulated, informal economy. Indeed, the economic recession that accompanied the transition to democracy together with labour market rigidities has been credited with encouraging the rise of Spain’s black economy (Benton 1990, 8; OECD 1998, 144). Pluriempleo, or moonlighting, was common among poorly paid workers, notably the army and civil servants during the Franco era, while bureaucratic red tape and personal taxation later encouraged widespread evasion and non-declaration of work. Despite the apparently inflexible labour market, employers were able to reduce their costs during economic recessions by resorting to the informal economy (Argandoña 1997, 199). According to Eurostat estimates for 1998, untaxed ‘shadow’ economic activity accounted for between 20 and 25 per cent of Spain’s GDP, involving a fifth of the workforce and valued at around 12 billion pesetas (The Guardian 1999). Illegal employment was

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most prevalent in such areas as seasonal agriculture, construction, the textile industry and domestic service. The extent of the clandestine economy varies on a regional basis. Murcia has the highest proportion of ‘irregulars’ among its total workforce (30.3 per cent), while Navarre and Madrid record the lowest (15.8 and 15.4 per cent respectively). The ranks of ‘irregular’ workers have been swelled by a growing number of undocumented immigrants. According to some estimates, over 20 per cent of service-sector workers can be classed as ‘irregulars’. This means in practice that they have no contract of employment, are not covered by social security, and pay no taxes. Agriculture is the sector with the highest proportion of irregular workers. Over 30 per cent of farm workers there were working illegally. Nor is the black economy just confined to domestic service, agriculture and construction, but extends to the modern sectors where new technologies facilitate clandestine self-employment, especially among women and students. Faced with little prospect of finding a job in the official economy, many Spaniards have been forced into precarious forms of employment. In some cases, a small firm may shut down in the official economy, only to reopen in the black economy (Benton 1990, 37). It became common practice as a strategy to reduce costs in industries such as textiles, leather-, shoe- and toy-making, viticulture and dairy products, which face strong international competition. For example, around a quarter of the industrial output in Catalonia and Comunidad Valenciana emanated from factories, often micro-firms, operating outside the official economy (Baiges et al. 1991, 61). This factor may go some way to explaining why labour shortages were reported by employers’ organizations in the construction, electronics and metallurgy industries, despite continued high unemployment. Although the black economy is notoriously difficult to monitor and control, the central authorities have made efforts to eradicate it through tighter regulation and surveillance. However, policy-makers were aware that over-zealous policing might put some firms out of business, thereby adding to the numbers out of work. Despite the Exchequer’s desire to recoup tax revenue from firms in the informal economy, there is no denying the tacit official support for, or ambivalence towards, the parallel economy as a practical mechanism allowing new businesses to get on their feet. For this reason alone, it is unlikely to disappear in the short term. Governments are all too aware that there are major social and political costs associated with high unemployment. Not least, it distorts income distribution, diminishes tax revenues and makes criminal or non-formal activity more attractive. As already mentioned, the PSOE’s 1982 election pledge to create 800,000 jobs did fall flat but,

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encouragingly, the economically active population increased by more than a million over the next decade. However, the numbers seeking work still outstripped the capacity to generate new employment. Nevertheless, job creation had improved considerably during the late 1990s’ upturn. Despite the disappointing performance in 2002, there is evidence that Spain can generate a net increase in jobs with 1–1.5 per cent growth, rather than the 2.5 per cent required previously (Chislett 1998, 18). Furthermore, data on offers of employment have begun to show that relatively new and dynamic industries such as IT and telecommunications had a higher-than-average demand for labour. Against this, it has to be acknowledged that any net job creation in the past two decades has been chiefly in temporary jobs. Part-time employment is not as common in Spain as in other parts of the European Union. In 1999, just over 8 per cent of workers were employed on contracts with non-standard hours of work, well below the 17.7 per cent recorded for the EU as a whole. In October 1998, the CC.OO and UGT (Unión General de Trabajadores) signed an agreement with the government on part-time work. It formed part of the tripartite social dialogue, although the employers’ organization, CEOE, declined to endorse the deal. The aim of the policy-makers and unions alike was to expand part-time working in order to create more jobs, especially for women. The essential task was to balance the need to boost the attractions of part-time working while ensuring adequate protection and rights for the workers involved. To this end, the government offered inducements to employers to make temporary contracts permanent by reducing social security contributions, while part-timers were promised fairer terms and conditions of employment and improved pension entitlements (EIRR 1999a).

Trade unions The existence of powerful trade unions is often put forward by neoliberals as a reason for the persistently high unemployment throughout Europe. Spain is one of the countries to provide evidence that the connection may be a tenuous one. Levels of trade union membership have in fact been in steady decline since the early 1980s, a phenomenon shared with France and the United Kingdom. The Socialist UGT and Communist-linked CC.OO claim only 1.6 million members and, when figures from minor unions are included, the total falls short of 2 million. That said, Spain’s trade unions are often more influential than their membership figures suggest, largely because they participate in collective bargaining with the government and employers. In Spain, labour

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organisations moved from an unofficial, but in some respects, relatively influential position gained in late Francoism during the late 1960s and early 1970s to a more ‘defensive, subordinate posture’ by the 1980s (Estivill and de la Hoz 1990, 265). The key to explaining this transformation is to be found in the post-1975 transition to democracy following the breakdown of the industrial relations system established by the Franco regime and the new legal and institutional status afforded to the trade unions by the 1978 Constitution. Independent trade unionism built upon the pre-1939 traditions and illegal workplace union organizations that sprouted in late Francoism. The most prominent illegal organizations were the Comisiones Obreras, which had led the fight against official trade unions under the Franco regime, and the UGT, linked to the Socialist Party until the general strike against Felipe González’s PSOE administration in December 1998. The CC.OO’s strongholds included the larger industrial establishments and the public sector (railways, airlines, public utilities, banks). Miguel Martínez Lucio (1998, 426) argues that Spain’s contemporary industrial relations system evolved in the context of political fragmentation and was shaped by what he calls ‘the new supranational imperative’. Because of the unstable political system in the late 1970s, trade unions, along with employers and the state, directed a greater part of their energies into underpinning democratic stability than was the case elsewhere in Western Europe. Having contributed to democratic consolidation, the trade unions have become progressively marginalized as the labour market has undergone major surgery and reform, colouring workers’ perceptions of industrial relations in the liberal-democratic era. However, this has led to closer cooperation between the UGT and CC.OO as they have gradually decoupled from the political parties that had once been their partners. Although effective in helping to consolidate democracy, both the unions were seen as tools of the political parties. As a result, union membership began to fall substantially. Other factors eroded traditional forms of collective solidarity, including the restructuring which badly hit those industries with a historic tradition of trade union membership, such as shipbuilding and metallurgy, and the growth of small firms where unionization is weaker. Industrial relations became increasingly subordinated to political concerns and distanced from bread-and-butter issues (Martínez Lucio 1998, 430). It was a feature of the ‘pacted’ transition (reforma pactada) that the employers, represented by the CEOE (Confederación Española de Organizaciones Empresariales), joined with the trade unions to forge social agreements which formed the basis for the emerging industrial relations system. Unquestionably, social concertation helped to

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consolidate the new democracy, but the CEOE helped to influence the evolution of the highly politicized labour movement by, on the one hand, favouring the UGT and, on the other, attempting to isolate the more militant Communist-influenced CC.OO. Hindsight allows us to see that neo-corporatist arrangements represented a pragmatic choice by those seeking consensus. Some elements of the social concertation era remain, like the tripartite consultative body, the Consejo Económico y Social (Economic and Social Council–CES), but trade unions have not been at the epicentre of economic policy-making since the early 1980s. The Moncloa Pacts signed in October 1977 involved a trade-off between the trade unions’ acceptance of wage moderation and government concessions on social benefits and employment. The Pacts constituted the most important contribution made by the trade unions and political parties to the successful transition to democracy as they guaranteed ‘social peace’, staunched inflation and acted as a political stabilizer. Such compromises helped lay the foundations for economic growth in late 1980s. Once democracy was consolidated it became less easy to reach Moncloa-type agreements and follow-on negotiations became increasingly fraught. After 1982, fissures began to appear in the relationship between the PSOE governments and the trade unions over various aspects of social and economic policy. Buoyed up by their large parliamentary majority, the PSOE ministers Boyer and Solchaga preferred government by decree (decretismo) to consensus. What is indisputable is the general weakening of trade union influence under the Socialist governments, helped, it must be said, by the complacency of their leadership (Magone 2001, 225). A rift appeared between the UGT and the PSOE largely over social policy, cuts in state spending, and measures designed to ensure qualification for currency union (Gillespie 1990, 55–56; Royo 2000, 173). The estrangement process culminated in well-supported general strikes of 1988 and 2002, as Spain confirmed its reputation as one of the EU countries with the highest number of days lost through strike action. One estimate puts that incidence of strikes at five times the average of other EU countries (Bertelsmann Foundation 2002, 1). Typically, by the late 1980s only partial agreements were reached. Often one or more of the parties refused to be a part of them, as was the case when the trade unions resisted the government’s ‘competitiveness pact’. A number of structural factors have inhibited union membership. First, the high incidence of small firms and the perception among whitecollar employees that the unions are primarily focused on representing blue-collar interests, second, rising levels of unemployment, especially among workers in traditionally unionized industries such as textiles,

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third, the new patterns of employment, particularly temporary contacts, which began to prevail discouraged union membership. Such factors explain why, apart from a brief period during the transition, Spain has had low levels of union membership, in contrast with many of its European Union partners. On the other hand, there was some increase between 1985 and 1995, against the general trend. Data from elections to works councils (comités de empresa), which occur ever four years, reveals high participation rates, indicating that the unions are more popular than raw membership figures would suggest. In addition, the high incidence of strikes and withdrawal of labour indicate wide support for such affirmative actions (Martínez Lucio 1998, 436). In the 1990s, faced with rising unemployment, government efforts to deregulate labour markets and general disillusionment with social concertation, the two main trade union confederations have coordinated their strategies aimed at fighting job losses and maintaining security of employment. It is ironic that the Spanish trade unions found their power and influence eroded just at the time when they enjoyed greater political freedom and legal recognition and when an ostensibly pro-labour party (the PSOE) was in office. Moreover, the swing to the right in 1996 meant that their ability to influence policy-making on labour market and employment issues was further diminished. Nevertheless, the trade unions have continued to campaign vigorously on issues such as unemployment, job contracts, reductions in working time, subcontracting, pensions and the rights of immigrant workers.

A labour market transformed? During the last two decades of the twentieth century, the Spanish labour market experienced massive change. It became less rigid and more segmented by contract type and by wage bargaining, partly due to the sharp increase in temporary employment. Yet the liberalization of work contracts has proved to be a double-edged sword. While it has undoubtedly contributed to the reduction in the numbers out of work, the alarmingly high proportion of such contracts marks Spain out from its European partners. Most notably, although blurred by recent changes, a two-tier labour market emerged in which roughly two-thirds of workers retain their permanent status, with the rest trapped in the ‘secondary’ market (Toharia and Malo 2000, 326). Certainly, a growing divide now exists between, on the one hand, the sectors using advanced technologies and permanent contracts and, on the other, the increasingly unstable employment patterns among the less advanced areas where temporary contracts are predominant. Labour market dualism and the

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persistence of long-term unemployment among young people, the over 45s and women, still presents a challenge, despite some success in reducing the scale of unemployment. The young in particular experienced difficulty not just in gaining access to the labour market, but also in retaining a foothold once in work (OECD 2000, 55). A number of conclusions can be drawn from this survey of employment and labour market trends. As has been made clear, rigidities alone cannot explain Spain’s high levels of unemployment. It did not help that labour market reform efforts often ‘traded liberalization in one area for rigidity in another’ (Glatzer 1999, 109). Where reforms did take effect, the focus was on freeing up access to, rather than exit from, employment and failed to tackle the high cost of termination. Encouragement of a new type of contract (contratación indefinida), which limited compensation to 33 days, still left existing contracts (contratos ordinarios) unaffected. In practice, the overall effect has been to reduce the costs of dismissal in the majority of cases. In fact, measures to encourage the use of temporary contracts worked too well, creating a major imbalance in the labour market. Employers benefited from cheap and flexible labour but, on the other hand, temporary employment rose to three times the European Union average, making job instability a major concern. Despite these difficulties, the signs were that labour had become more flexible and firms could respond to changing market conditions more easily than before. Less encouragingly, long-term unemployment remained a major problem, even during periods of high growth, and its seriousness was not reflected in countervailing active employment measures. Inequalities have also increased, with managerial and executive wages rising more quickly than for workers in stable employment, while those in precarious employment lagged even further behind. Clearly, European economic integration has proved disappointing as a means of combating high levels of unemployment. In her interpretation, Sofia Pérez (1999, 669) identified factors such as the high financial costs imposed on firms, deficiencies in Spain’s financial markets and the PSOE government’s high interest rate and strong currency policy as bearing the chief responsibility for the enduring employment crisis. An alternative explanation is therefore available: that the mistaken macroeconomic strategy explains such a lamentable employment record. Of course, it must be recognized that the drastic programme of industrial restructuring combined with tight fiscal policies, fortified by ERM membership, permeated the thinking of most central bank and academic economists throughout most of the postFranco period. Turning their backs on state interventionism, they laid the blame for inflation and unemployment squarely on labour market imperfections (Pérez 1999, 686–87).

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Spain’s labour market and its industrial relations continue to be in transition. To date, progress has been uneven and in some areas, such as above-average weekly working hours, limited part-time working, significant regional disparities, and high unemployment levels, much remains to be done before the Spanish labour market approximates more closely to its EU partners. As for labour market reforms, the conclusion must be that, while they represented an important development, their impact was dependent upon appropriate government macroeconomic policies. With regard to the future, labour supply has emerged as a nagging problem. Demographic trends may ensure that Spain’s future labour requirements cannot be met from the existing population stock, despite the fact that Spain continues to have one of the lowest participation rates in the EU (62.1 per cent in 1999) and the lowest female activity rate. Labour shortages have already appeared in agriculture, construction and tourism, to be only partially redressed by importing immigrant workers. The projections are for a substantial labour shortfall and a requirement for hundreds of thousands of immigrant workers over the next few decades in order to prevent a permanent imbalance in the labour market. Unless there is a drastic change in thinking about unemployment, only a continuous expansion in female activity rates and the employment of mature, post-retirement age workers is likely to alleviate the pessimistic scenario. On the positive side, the leeway exists for further changes as Spain remains the EU country with the lowest percentage of households in which both partners work and which has the lowest fertility rate.

CHAPTER 8

European integration and the Spanish regions Spain, together with Portugal, became a full member of the European Community (later European Union) on 1 January 1986, as part of its third enlargement. Since then, the Spanish have participated in all the major phases in the integration process, including the single market (1993), monetary union – EMU (1999), and the launch of the euro (2002). A Europeanist consensus has underpinned these developments as all the major political parties subscribed to the notion that the benefits of membership would outweigh the costs (Donaghy and Newton 1997, 344; Powell 2001b, 2). Indeed, it would be no exaggeration to state that the domestic economic agenda has been shaped by the exigencies of the integration project (Jones 2000, 39–42). Before 1992, any political debate about Europe was notable for its absence, or at best can be described as superficial (Crespo MacLennan 2000, 4). That meant there was little or no discussion either in parliament or the press of the relatively high costs of entry and the narrowing options and policy tools available to the Spanish administration that stemmed from closer integration. Opinion polls before and after accession consistently revealed that the public regarded EU membership in a positive light, even when the initial euphoria gave way to bouts of ‘euro-realism’. The generally favourable view is unsurprising given that most Spaniards associated Europe with democratic freedoms, free markets, growing prosperity and expectations of an improved welfare regime. This was crucial, for the ruling élite participation in the European project was expected to perform an important legitimizing function, exorcizing the ghosts of the defunct dictatorship and confirming Spain as a maturing democracy (Closa 2001, 9). In the process Europe became a yardstick with which to measure economic and social modernization. It was only belatedly that Spain began to develop into a modern industrialized economy. As the accession date approached, policymakers were faced with the challenge of how best to transform the country’s unevenly developed and largely uncompetitive economic structures. This chapter looks at the integration process and reviews its impact on the Spanish economy. As already indicated, integration into Europe dominated Spanish economic policy-making, but wider

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international forces such as globalization also played their part. Political stability and continuity in policy-making proved to be crucial elements for Spain as the integration process advanced under the longest-serving socialist government in contemporary Europe. Since the early 1980s, successive administrations have been committed proponents of European integration and enthusiastically endorsed the various stages in economic and monetary union. Spain first applied to the EEC for membership in 1962, only to receive a rebuff from Brussels because the Franco dictatorship did not meet the criteria on democratic practice, human rights and liberties laid down in the European Parliament’s Birkelbach report as a precondition for becoming a member of the Community (Tsoukalis 1981, 77). The technocrats, such as López Rodó, who dominated Franco’s later cabinets up to 1973, regarded integration as a predominantly economic domain, preferring to concentrate on development issues rather than the political aspects, which were relegated to a distant future. None the less, there was no denying that Spain’s ties with Europe were becoming ever closer, providing the main motors of Spain’s economic growth, namely foreign tourism, inward investment, agricultural exports and emigrant remittances (Crespo MacLennan 2000, 83).

Partial integration Following eight years of protracted negotiations, a preferential trade agreement (PTA) was signed in 1970 (Tsoukalis 1981, 78). In such circumstances, the creation of a free trade area was the most that the EEC Commission was prepared to offer. Representing the government, López Bravo hailed the agreement as ‘no more than a first step’, although the Community representatives at the signing ceremony preferred to talk about the ‘economic rapprochement’ that it represented (Crespo MacLennan 2000, 88). The PTA involved the creation of a free trade area between Spain and the EEC through the removal of barriers for agricultural and industrial products. The accord involved a quid pro quo reduction with regard to industrial tariffs, which were weighted in Spain’s favour (Jones 2000, 26). Madrid’s satisfaction at its partial integration into the European Community did not last long. By extending membership from six to nine, the 1973 enlargement threatened to neutralize many of the advantages Spain had gained three years earlier. The prospects were not propitious for Spain. Not least, the three new members (the United Kingdom, Ireland and Denmark) were obliged to adopt the EEC’s common external tariff, thereby wiping out the recently acquired

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advantage that accrued to Spanish exporters. Enlargement also exposed the economic rivalry that existed among the members, like France, which had powerful agricultural lobbies. Unfortunately, negotiations on a new agreement between the Spanish and the Community were cut short by war in the Middle East and the oil crisis. A new dawn in Spanish–European relations followed Franco’s death in November 1975. The end of the dictatorship provided an opportunity for Spain to assert a European vocation that had long remained subdued. In July 1977, the newly elected UCD government applied to be admitted as a full member of the European Community. Formal negotiations opened in 1979 while Spain’s transition to democracy was incomplete. As argued earlier, Spain had already moved closer to Western Europe through developing trade relations. Almost half her exports were destined for the Common Market and just under one-third of her imports originated there. The commercial logic dictated to Spain that restrictions on exports to Europe be removed and that her struggling industries and backward regions should become eligible for much-needed aid. Despite this, concerns about the terms negotiated did surface among some economists. The common denominator among them was the perception that Spain was unprepared for the ‘shock’ that would inevitably be administered during the accession process (Viñals et al. 1990, 155). A general consensus existed that Spanish manufacturing industry had most to fear as Spain’s overly protected internal market gradually withered away to expose its uncompetitive products, inexperienced management and antiquated labour relations. Sectors identified as being particularly vulnerable to both European and extra-EC external competition included steel, shipbuilding, engineering and textiles. Most studies published at the time underlined the weaknesses: the concentration in low-growth industries, the dependence on imported capital and technology, and labour-intensive operations. According to Otto Holman (1996, 151), it was foreign multinationals rather than indigenous firms that would reap the benefits. The bulk of Spanish agriculture, hampered by low yields and its concentration on cereals, livestock and dairy products – which were in surplus in the EC–faced a challenge from duty-free imports. As outlined in Chapter 3, the short transition period (up to 1993) offered little time for adjustments to be made, and the farming community, with the possible exceptions of the wine, fruit and vegetable producers along the Mediterranean coast, faced a bleak future. In common with the nation’s farmers, prospects for the fishermen looked even less bright. Spain’s fishing fleet, among the world’s largest, still could not meet a voracious internal demand for fish. Its 17,000 vessels added 70 per cent to the total tonnage in the

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Community. Moreover, an estimated 700,000 jobs depended on fishing. Any reduction in the size of the fleet, the introduction of fish quotas and restrictions by Brussels to conserve stocks would hit the already dependent regions of Galicia and the Basque Country disproportionately hard. Ultimately, the Socialist government felt compelled to trade concessions on agriculture to secure a better deal on fish which perpetuated the licence restrictions on Spanish vessels, but did not deal such a blow to the catch quotas. In the meantime, the aged and predominantly inshore fleet did benefit from EU subsidies destined to modernize existing vessels. The CEOE, the employers’ federation, lobbied for a lengthy, phased transition to cushion the impact of the tariff reductions, a call echoed by the leading trade unions who demanded that social improvements accompany the modernization measures. The lengthy negotiations, caused largely because the French dragged their feet, somewhat dampened the early enthusiasm for integration. In reality, Spanish negotiators faced a difficult task representing so many different interests. Some, like the dairy farmers of Cantabria, felt they would be vulnerable to French imports. At a regional level, Catalonia felt better equipped to survive in a more competitive marketplace and was the most enthusiastically pro-integration. Other regional governments expressed varying degrees of apprehension. Doubts only surfaced in the latter stages of the negotiations and were usually countered from Madrid with reminders about the cost of non-agreement. On the European Commission’s part, Spain’s incorporation involved a delicate balancing act because it contained sectors, such as agricultural products, chemicals and electrical goods, competitive enough to threaten existing interests in the Community alongside uncompetitive ones, such as textiles, clothing and metals, that would require extensive adaptation (Viñals et al. 1990, 206). The negotiations were drawn out because of concerns among existing member states about the dire consequences that Spain’s accession would have for certain sectors of the European economy. In the midst of the squabbling over the details, the rift between Spain and France widened (Daltrop 1986, 155). The accession of such a large agricultural producer increased the area of cultivated land by 30 per cent, while the size of the rural workforce rose by a similar proportion. French farmers in particular feared the competition expected from Spanish agriculture, which could take advantage of lower labour costs, cheaper prices and highly developed marketing systems. At this stage, 60 per cent of Spain’s exports was destined for the Community, raising fears among existing members about ever larger food mountains, wine and olive oil lakes and the imposition of unbearable strains on the outmoded Common

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Agricultural Policy. The lengthy transition period was agreed in order to allow the rural population to contract by up to three-quarters as Spain’s economic structure was transformed. Spain required long-term assistance from the Community’s budget to achieve this aim. Overcapacity was not just limited to agriculture. The prospect of additional capacity in textiles and footwear, shipbuilding, steel, and oil-refining aroused particular misgivings among existing members about the Spanish accession. The EEC was seen as vital ingredient in the transition from dictatorship to democracy and a key element in the drive for economic and social modernization. Initially, the core motive behind Spain’s application was to guarantee its new-found democratic stability. Such priorities dictated that economic policy was constrained by the domestic political agenda (Salmon 1995a, 67). However, by the mid1980s the political goal had been superseded by economic motives, and in the case of Carlos Solchaga and his team, the choice of an external stimulus to modernize the economy and import appropriate macroeconomic policies to achieve this aim. Furthermore, Spain’s application to join the EEC had a deeper, symbolic meaning. It signalled that the political élite was ready to join the European mainstream and to reorientate from its earlier semi-isolationism. Above all, EC membership neutralized any opposition within the PSOE to further liberalizing measures. Clearly, integration into a large prosperous market chimed well with Spain’s post-autarkic economic experience. Liberalization after 1959 had sparked economic growth, and the transformation of Spain’s outmoded economic structures required free trade and larger markets (Boix 2001, 167). Admission to one of the world’s largest trade blocks was expected to sweep away ‘the cobwebs of autarky and Spanish corporate capitalism’ (Salmon 1995a, 71). Trade policy was among the first areas to be affected as harmonization measures were introduced in the run-up to the single European market. Import duties were lowered in stages between 1986 and 1993, when Spain adopted EU commercial policy in full As Mary Farrell (2001, 34) points out, it is difficult to disentangle this ‘dual process of liberalization’ since the removal of trade barriers and the single market programme overlapped. Reciprocally, tariffs on Spain’s intra-Community exports continued to be lowered and duties on imports from third countries were brought into line with the rest of the EC, triggering a surge in imports (Salmon 1995a, 73). The trade deficit had quadrupled within a year of accession and many industries struggled to compete following the opening up of the Spanish market to competition. As with trade, the removal of investment controls sparked strong growth in inward investment as foreign

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multinationals penetrated the Spanish economy in greater numbers, chiefly into manufacturing and services. The PSOE victory in 1982 was interpreted as an economic as well as a political watershed signalling ‘the start of an overtly Europeanist economic policy’ (Murphy 1999, 55). Armed with a large electoral majority, Prime Minister Felipe González could claim a mandate to introduce a major restructuring and modernization programme, spurred by the knowledge that EC regulations would limit the extent of the overhaul once Spain became a full member. Contrary to their electoral promises, the Socialists ditched many of their long-held principles and embraced economic liberalism (Marks 1997, 4). The modernizers implemented monetarist policies, justified in the name of harmonization, in order to tame inflation and cut the public and trade deficits. Meanwhile, many Socialist heartlands were affected by an industrial reconversion programme launched in preparation for the tougher conditions expected after accession. The inevitable social costs were discounted on the grounds that closer integration was desirable in itself and that the adherence timetable dictated that the restructuring be compressed into the Socialists’ first term. The European project was used by the first González administration to justify restrictive policies. The adoption of such measures meant that some of Spain’s deep-seated economic problems were not tackled directly (Kennedy 1996, 87). However, it can be argued that the lessons derived from the failure of expansionist experiments in France and Greece in the early 1980s were duly absorbed by the Madrid government and, lacking alternatives, the Socialists adopted a more pragmatic approach. Nor did the Socialist government shy away from using the state to intervene in areas such as corporate restructuring and resource allocation to major infrastructure projects (Heywood 1995, 227). Under the Socialists, economic management was oriented towards securing a stable macroeconomic framework, containing wage and price inflation and reducing the public deficit in an effort to produce non-inflationary growth. Once this was achieved, the focus could shift to the next stage and consider how to bolster competitiveness in a liberalized global marketplace. For the Spanish, conceding sovereignty was regarded as the price to be paid for economic integration and closing the gap with its EU partners, provided that it was counterbalanced by a commitment from Brussels to cohesion funding for the poorer countries. González put economic and social cohesion at the heart of his Europeanism. It was hoped that the cohesion funds would deflect growing criticism from employers that integration had inflicted considerable harm on Spain’s illequipped economy once convergence and meeting the criteria for EMU became the top priority. The sting was taken out of such criticism once

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Spain qualified relatively comfortably for monetary union. On the other hand, a case can be made that it is only possible to calculate the true costs in the longer term. Whatever the resulting balance sheet, restructuring before EC admission alone has been estimated to cost around 1,000 billion pesetas. It contributed to high unemployment levels and a haemorrhaging of industrial jobs as the underlying weaknesses in the Spanish economy were exposed (Kennedy 1996, 87–89). In October 1982, the Socialists inherited an economy in urgent need of modernization. The dilemma facing the policy-makers was how to balance higher social spending with the monetary discipline needed for the country to compete internationally. Given the demands of the Maastricht Treaty, the parameters had been very firmly set. There were two policy choices: either a social compact with the trade unions to limit wage increases and keep inflation under control; or a restrictive monetary policy. The government rejected the former and the social pacts dating from the mid-1970s were abandoned, prompting the wellsupported general strike in 1988. It is unfair, however, to focus exclusively on the monetary and fiscal yardsticks associated with the Maastricht criteria. Under the PSOE governments, Spain belatedly developed into a welfare state with a growing proportion of public spending directed to education, health and other social services. The government was certainly left with very little room for manoeuvre in its spending plans and remained dependent on external factors such as European growth. Little wonder then that the PSOE fell between the stools of restrictive economic policies and the political imperative to protect its supporters from the worst impact.

The Aznar government Following the PSOE’s attempts to balance economic liberalization with social spending, the PP’s macroeconomic management after 1996 aimed to sharpen the former at the expense of the latter. The Populares called for ‘a new model of economic growth’, but in reality there was little change to Spanish management of EU business as both leading political parties were fully committed to the European project. Policy areas remained broadly similar, concentrating on economic stability with particular concern for budgetary control to consolidate the public finances, structural change to eliminate rigidities, and labour market reform (Jiménez 2000, 61–64). The intention remained to improve Spain’s ability to compete in the single market and internationally. Some changes of emphasis were detectable. With regard to the sale of state

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assets, the Aznar government injected a dose of ideological commitment into the privatization process, which became the cornerstone of its liberalization programme. The quick sale of state companies, often to European multinationals, was made a priority (Jiménez 2000, 65). Foreign companies control or hold a prominent position in key areas, such as motor manufacturing, cement, electronics, retailing and financial services (Chislett 2002, 151). Ministers regarded the sell-offs as the quickest and most efficient way to reduce the public deficit and tackle undercapitalization. Eventually, the Aznar government could claim success by fulfilling the Maastricht convergence criteria for EMU. Despite the improved economic climate, problems were mounting even for viable and profitable companies in the more competitive single market. Devoid of state subsidies, many found it hard to survive in the harsher commercial climate. This led to some breaches of EC competition law, under which subsidies can be permitted but only on a one-off basis. An example was the national airline, Iberia, which eventually fell foul of the European Commission’s drive to phase out state subsidies in its plans to limit state aid. In 1995, Neil Kinnock, the European Commissioner for Transport, approved a capital injection amounting to 87 billion pesetas, justified on commercial grounds as the aid was restricted to redundancy payments, debt reduction and meeting international standards of competitiveness.

The implementation of EU policy The Mediterranean enlargement transformed the Community’s agenda in a number of ways. Iberian enlargement in 1986 presaged a shift in EU policy and budgetary priorities away from the Common Agricultural Policy towards structural spending on regional development. This fitted in well with Spain’s priorities in policy-making which have gradually modified since accession. The early focus was on modernizing and adapting the country’s administrative structures to EU requirements and on promoting regional development. During the lengthy transition periods before full participation, primary-sector interests inevitably loomed large. Agriculture and fisheries were particularly concerned about any contraction that full accession would entail. By 1993, the long transitional period had been completed and Spain’s policy preoccupations began to alter. Henceforth, its priorities were financial assistance from the EU in the form of the Agricultural Support Fund (EAGGF – European Agricultural Guarantee Fund), the Structural Funds and the Cohesion Fund. By 1998, these funds accounted for over half of the total gross EU transfers to Spain (OECD 1998, 33; Donaghy

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and Newton 1997, 339). Similar shifts in emphasis occurred in regional policy. The initial priorities given to the economic infrastructure, agricultural and industrial modernization and labour market reform were expanded to encompass vocational training, health, education infrastructure and environmental projects (sanitation, waste disposal, and so on).

EU convergence: nominal and real Even before accession, Europe became a benchmark or comparator against which Spain’s progress and targets were to be measured. Closing the gap in the standards of living and levels of development enjoyed in the EU became a primary objective of economic policy. Using GDP per capita at purchasing power parity as a measurement, Spain stood at 57.2 per cent of the EU average in 1960. By 1996, it had made steady, if hardly spectacular, progress to 76.2 per cent (Villaverde and Sánchez Robles 1999, 67). However, when the convergence performance is examined more closely, it becomes apparent that the most rapid improvement in terms of real convergence in per capita GDP with the European core occurred before 1975. At the time of Franco’s death Spain had reached 79 per cent of the EC average, only to fall back to 70 per cent in 1986, before rising again during the 1990s (Salmon 1995a, 68). This inability to close the gap in terms of income per head following the strong gains recorded during the 1960s requires explanation. One school of thought regards it as the price paid for the transition to democracy, while others blame policy errors, including irresponsible public spending and borrowing policies, the 1970s oil shocks, and continuing structural rigidities that made recessionary impacts worse in Spain than elsewhere in Europe (The Economist 1996). What can be said is that successive governments failed to address the root causes of these problems, preferring to focus narrowly on the convergence criteria laid down in the Maastricht Treaty in preference to real convergence. As Farrell points out (2001, 18), real convergence is a long-term process that requires a judicious and harmonious blend of economics and politics. As a complex process encompassing investment in human capital, infrastructure and technology, convergence requires a consensus on objectives and involves a balancing act between national and regional interests. Economic integration should assist growth, but there are no guarantees that this will be the case. Recent growth theory emphasizes the important contribution made by factors such as human capital, research and development, and capital investment (Crafts and Toniolo

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1996, 578). The danger exists that the more advanced economies are superior in these areas and may grow faster, further delaying any progress along the road to convergence. As is often the case, the same divergent trends operate between regions within a country. There may, in fact, be a concentration of economic activity and resources in the more advanced regions, a process underlined by the fact that expenditure cuts were made at the very point when economic convergence required increases in public investment, particularly in areas such as education and training. This is where the distinction between nominal convergence and real convergence comes into play. Nominal convergence refers to the requirements in order to qualify for monetary union and is measured against specific criteria (inflation, interest rates and the budget deficit). On the other hand, real convergence is the process by which the less developed countries move towards the levels of social and economic welfare enjoyed by the more advanced economies. It measures a broader range of indicators, including human capital, technology stock and social development (Díaz Fuentes and Clifton 2002, 4). Not surprisingly, a conflict invariably arises between nominal and real convergence, notably when spending cuts are proposed. Further progress towards closing the gap in living standards between Spain and its European partners was made during the 1990s. By 2001, the country’s per capita GDP had risen to 87 per cent of the EU average. One of the principal factors usually advanced to explain the improvement is the availability of mechanisms to reduce the inequities between the richer and poorer regions. Apart from the decision to double the Structural Funds in 1988, a Cohesion Fund was established in 1994 to help the poorer EU states. The Fund was sanctioned in the wake of the Maastricht Treaty to provide assistance with convergence for the least developed EU partners and to help them cope with the 1992 project. The eligible countries, otherwise known as the Cohesion Group, or ‘poor 4’ (Ireland, Greece, Portugal and Spain), comprised the least developed of the EU members. Apart from EU transfers, what else explains Spain’s relatively good, but inconsistent, performance in per capita GDP growth? Investment has played a key role, driven by public investment in infrastructure provision, especially transport. Total investment was boosted by inflows of foreign direct investment that helped to modernize the productive structure. To this list must be added improvements in education and R&D, which contributed to a reduction in the human and technological capital gap that existed between Spain and the EU average. Nevertheless, it is a sobering thought that to catch up with the other leading nations in Europe, Spain must grow faster than them over a period of decades rather than years.

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EU transfers: the ‘culture of expectation’ Significant financial resources have flowed into Spain from the EU in recognition of the development gap that exists between Spain and its EU partners. These transfers built up a ‘culture of expectation’ fuelled by the large injections for development projects (Farrell 2001, 45). Most of the country benefited because over three-quarters of Spain’s territory qualified for ‘Objective 1’ funding, defined by a GDP per capita lower than 75 per cent of the EU average. As a result, Spain has been a net gainer from EU transfers, particularly the structural and cohesion Funds and received more in absolute terms than any other member state, although the proportions are much lower on a per capita basis. In the early stages, the assistance was relatively modest, but was tripled for 1994–99. The increase benefited Spain’s current account and created a surplus on the balance of payments, helping to improve the country’s finances (Farrell 2001, 42). When the Cohesion Funds were dispensed, Spain became the largest net recipient, swallowing over a quarter of total net subsidies (Chislett 2002, 75). Spain’s position as the leading beneficiary was confirmed in a study by La Caixa which estimated that Spain received 7,700 million euros from the EU in 2001, or just under half the net total subsidies dispensed (Martín et al. 2001). By improving the economic and social infrastructure endowment, the various assistance funds contributed to raising regional per capita income towards the EU average. Net EU transfers represented between 1 and 2 per cent of GDP from the mid-1990s (OECD 1998, 33). They helped to compensate for the cuts in public expenditure implemented as part of the government’s efforts to meet the Maastricht criteria. However, EU largesse should be seen in context. Inflows from Brussels represented a smaller proportion of overall income in Spain than was the case for the three other Cohesion states. Certainly we must be careful not to attribute the regional growth recorded in the late 1980s and early 1990s in any great degree to EU transfers (Tondl 1998, 111). Financial support does not by itself guarantee that inequalities will be reduced. Spain could not avoid the deficiencies that manifested themselves during the first two Community Support Framework Programmes (CSF1 and 2, 1989–93, 1994–99). To some extent, teething problems were to be expected given that national governments lacked experience in programme implementation, while monitoring and auditing procedures were often remiss and regional policies poorly coordinated or undermined by national macroeconomic policies (Tondl 1998, 94). Improvements were introduced in time for the next volume of financial transfers. Brussels committed some 135 million euros between 2000 and 2006 to the less developed regions in the EU in order

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to close further the gap between the rich and the less advanced countries. Along with matched national funding, the monies were intended to strengthen basic infrastructure, especially the transportation network, improve human resources and stimulate economic activities. Having obtained substantial funding in the 1990s, Spain took on the role of lead advocate for the Cohesion Group countries and pressed the case for continued assistance for countries whose per capita income was below the EU average. Spain is generally regarded as a successful example of decentralized economic development and has been presented as a model for other countries undertaking regional integration (Moreno 2001, 154). However, despite the undeniable progress that has been made, difficulties and inconsistencies remain. Spain is an example of integration among regional economies where the competencies are unevenly distributed. Since 1978, seventeen regionally based autonomous communities have been set up and given different degrees of self-rule. Indeed, a defining characteristic of the Spanish decentralization model is the variations with regard to the responsibilities devolved. The extent of the powers devolved has depended on historical and political factors as well as the levels of economic development. Consequently, some regions, such as Catalonia, the Basque Country and Navarre, have been given greater economic and financial capacities than others. Ultimately, it is necessary to ask whether the resources transferred have been used wisely and whether regional policies have mitigated the disparities in regional economic development and income distribution.

Regional convergence or divergence? The existence of regional disparities comes as no surprise in a country as large and diverse as Spain. Historically, regional GDP in Spain has evolved unevenly over the past two centuries and there have been large regional variations. No matter which measure is used, the Balearics emerges as the most highly developed autonomous community (Villaverde 1999, 25). As the country’s richest region, its per capita income is more than double that of the poorest regions, Andalucía and Extremadura. The regions whose contribution to national GDP has declined most dramatically are Andalucía and Castilla y León, whereas Catalonia, Madrid and the Comunidad Valenciana have made notable advances in their participation. When it comes to regional analysis, it is difficult to quantify with any certainty the impact that economic integration has had on Spain’s autonomous communities. However, the

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convergence patterns can be identified and compared with the progress made across regions during specific periods. From a historical perspective, it is clear that the less developed peripheral regions closed the gap on Madrid and north eastern Spain during the final years of the dictatorship (Villaverde 1999, 33). Then, in common with the experience elsewhere in Europe, convergence slowdown occurred in the late 1970s and early 1980s. For Spain, the challenge was even greater than elsewhere because, apart from the exigencies of economic restructuring and accelerating globalization, the country undertook a major transformation at governmental level by moving from a centralized to a quasi-federal system. Following EU accession, Spain’s convergence performance did not follow a linear pattern. All regions grew strongly, but some grew faster than others, despite the complex battery of economic development initiatives at local, regional, national and supranational tiers of government. This provides the backdrop to regional performance trends. From the mid-1950s through to the late 1970s, steady convergence occurred followed by relative stagnation. After EU accession the convergence process continued, albeit unevenly, but stagnated again by the mid-1990s. So regional disparities increased, despite the improvement in Spain’s overall progress in convergence with the EU average. It may be some measure of the impact made by regional funding efforts that all regions with Objective 1 status improved their relative position with the European average. However, the division of the country into Objective 1 and Objective 2 regions may be unhelpful in that, ideally, distinct policies are required for both sets of autonomous communities. This may explain why, in general terms, economic convergence between the autonomous communities has stalled since 1994. In general terms, the conventional wisdom holds that regional convergence occurs more rapidly during periods of strong economic growth. However, the Spanish case provides no evidence that the poorer regions grew at a faster rate than the more developed. One study estimated regional convergence in income per capita during the 1965–75 sub-period at 2.49 per cent. Over the next decade it slowed substantially to 1.08 per cent, and continued to decline (to 0.38 per cent) between 1985 and 1995, when Spain’s growth rate comfortably exceeded the EU and OECD average. In direct contrast to the trend in the 1960s and early 1970s, the richer regions benefited more than the poorer ones following the economic recovery (Fuente 2001, 4). Where regional growth did occur, it was usually tourism-driven, or related to new technology industries. This generated large regional income differentials and placed the southern and central parts of Spain firmly in the low-

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income group (Tondl 1998, 99). Only two regions (Canaries and Extremadura) have narrowed the gap with the Spanish average, while some poorer regions have actually fallen back (Asturias, Galicia). Rather than decreasing during periods of economic growth, economic polarization continued apace as less developed regions performed comparatively badly. In terms of GDP per capita, it is revealing that the worst performers have made little progress in closing the gap since the 1970s. How do we account for the continued disparities? It will be argued here that the explanation for this must be found in the pace of structural change occurring across the regional economies. Conventional explanations identify technological concentration and foreign direct investment as the chief differential factors in uneven regional economic development. Others have emphasized the labour market component and in particular the end to interregional migration, resulting in the ‘homogenization of regional productive structures’ (Rodríguez Pose 2000, 91). In many respects, employment emerges as the key variable in explaining the performance of regional income per capita. As pointed out elsewhere, once the transfer of labour from agriculture dried up, or became confined to relatively few regions, interregional migration ceased and labour mobility was limited to the transfer from industry to services, principally in the more advanced labour markets, where jobs in the tertiary sector are more abundant. In the case of the poorer regions, the continued contraction in rural employment was not matched by job creation. As a direct result, economic slowdown triggered a surge in unemployment in the laggard regions and declining convergence rates. Even when conditions improved after 1985, employment growth did not pick up significantly (Fuente 2001, 11). Thus low and slow-growing GDP levels are directly attributable to low labour productivity, persistently high unemployment and low participation rates. All these deficiencies are related to the survival of outdated production structures and the weight of primary sector activities.

Regional income differentials It is perhaps surprising to conclude that the deceleration in the rate of regional convergence coincided with concerted efforts to reduce regional economic and social divergence. In this regard, it has to be said that the evidence points to the relative failure of national and EU regional policies, or at least their inability to be more than a palliative. A key explanation here may be the complexity and duplication of efforts to correct regional imbalances. Overlapping and diverse aims inevitably

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generated conflicts between different layers of government and led to unstructured and uncoordinated efforts by administrative departments. A raft of problems hinders the comparative analysis of regional development and it is not an easy task to draw general conclusions. In the first place, no two regions are alike. Some were granted greater powers to operate their own regional policies and are able to offer favourable tax treatment or subsidies. Some are more economically diversified, with sophisticated employment structures. A few benefit from their location close to the dynamic economic core, while others are less fortunate geographically. The more advanced regions possess superior human capital resources based on their stronger educational infrastructures and workforce skills. These regions have proved more adept at taking advantage of the integration process and responded more effectively to the challenges because of their competitive, servicebased economies. It is also worth noting that interregional disparities exist. There is sometimes as much variation in income disparities between individual provinces within an autonomous community as between regions. New growth theory encourages the belief that regional convergence can be nurtured by public investment in areas such as education and human resources. Often the key is the design and implementation of balanced and appropriate regional development strategies. As a comparative study of Galicia and Navarre suggests, regional policies have tended to assume that the key development strategies involve infrastructure improvements and attracting foreign investment. As a consequence, job creation, competitiveness and entrepreneurship have been relegated to a secondary level concern (Rodríguez Pose 2000, 106). This has meant that human resources and the problems facing local firms, often small-scale, family-owned, inadequately capitalized and technologically backward, were neglected. The evidence shows that lagging regions attracted only a small percentage of total FDI, while Madrid and Barcelona received over 70 per cent of the total inflows entering Spain. In less developed regions, such as Galicia, FDI had only a minimal impact on economic development. Nevertheless, this did not preclude the nurturing of some dynamic companies, as the success achieved by the fashion company Zara and the textile group Inditex confirms. The Spanish experience appears to support the case that the more developed regions are able to extract greater rewards from FDI than the less developed ones because they are better equipped to take advantage of the increase in capital stock and the introduction of new products and technologies. It appears that, in order to ensure a successful outcome, firms must be integrated into the regional economy and this has not always been the case.

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The focus on regional economic growth encouraged large-scale borrowing. As the poorer regions experience greater difficulty in generating indigenous investment capital they are forced to look elsewhere. As a direct consequence, regional indebtedness has become a growing concern. It is clear that some autonomous communities such as Catalonia dealt with European integration more effectively than others. At a regional level, there have been quite diverse experiences with growth and adaptation. The tendency has been for national trends to be replicated at regional level, producing polarization and a growing concentration of economic activity in the main urban centres. Understandably, regional governments prefer to avoid any association with unpopular decisions or higher taxes. Equally, it has been all too easy to blame Madrid for shortcomings and unsatisfied needs at the regional or local level. Moreover, regions are in competition with each other to extract scarce resources at the national and supranational level (Pérez 1996, 22). The competition for scarce water supplies offers an eloquent example and raises questions about the efficiency of decentralization. There is substantial overlap in the competencies granted to both central and regional government with regard to water resources. The central authorities can regulate the flow of water, while the regional governments have responsibility for the infrastructure in their territory, such as dams and reservoirs. During frequent periods of drought, as occurred during the late 1980s and early 1990s, the absence of a national hydrological plan generated conflicts over water transfers between the suppliers and receivers (Financial Times 2001). While European funding has been welcomed, some spending decisions have provoked controversy. An example is the scheme for subsidizing day labourers in Andalucía. In another high-profile case a dispute arose between Madrid and the Basque autonomous community over the latter’s offer of exemption from corporation tax for ten years in order to lure more foreign investment into the region. When the EU Competition Commissioner was drawn in, the Basque authorities were censured for their attempts to steal a march over other autonomous communities in the battle to attract business and industry to the region through tax incentives (Bourne 2002, 108–9). Such measures are justified by the Basque authorities on the grounds that they help to compensate for the disincentives emanating from the violence, kidnapping and the ‘revolutionary tax’ extracted by the terrorist group, ETA. Other regions regarded the Basque tax incentives as unfair as they lured business which might have gone elsewhere in Spain. In 1993, competitor regions successfully appealed to Brussels, claiming that the tax breaks violated the EU Treaty. The Basque strategy was only one of an array that have been employed by regional authorities to attract

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investment and generate employment. These have included tax breaks, incentives and subsidies for R&D activities, infrastructure provision (technology parks, electricity and so on); and human resources measures, such as higher education and training programmes (Rodríguez Pose 2000, 102). Spain’s regional GDP compared with EU-15 and EU-27 averages is shown in Table 8.1. It is possible to develop a typology that distinguishes the regional groups according to their capacity for growth. Based on data from the mid-1980s, one study (Zaragoza Rameau 1989, 6) divided the communities into four groups: the fastest- growing regions with a selfsustaining development capability (Madrid, Catalonia, Balearics, La Rioja, Navarre, Aragón); regions in industrial decline (Basque Country, Cantabria); those at an intermediate development stage (Comunidad Table 8.1

Spain’s regional GDP compared to EU-15 and EU-27 averages

Region

Per capita 1999

Per capita 2005

Spain=100 EU-15=100 Spain=100 EU-27=100 Andalusia Aragón Asturias Baleares Basque Country Com. Valenciana Canarias Cantabria Castilla y León Castilla-La Mancha Cataluña Ceuta y Melilla Extremadura Galicía La Rioja Madrid Murcia Navarra

71.7 109.8 90.2 119.6 122.3 94.7 93.1 94.8 92.6 82.9 123.1 80.4 62.9 80.0 114.8 135.1 82.5 129.9

57.8 88.5 72.7 96.4 98.6 76.3 75.0 76.4 74.6 66.8 99.2 64.8 50.7 64.5 92.6 108.9 66.5 104.7

58.9 90.3 74.1 98.3 100.6 77.9 76.5 77.9 76.1 68.1 101.2 66.1 51.7 65.8 94.4 111.1 67.8 106.8

67.2 102.9 84.5 112.1 114.7 88.8 87.2 88.9 86.8 77.6 115.4 75.4 59.0 75.0 107.6 126.6 77.3 121.7

Spain

100.0

80.6

82.2

93.7

Sources: Martín et al. (2001).

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Valenciana, Asturias); and low-growth, backward regions (Andalucía, Extremadura, Canaries, Castilla-La Mancha, Castilla y León, Galicia, Murcia and Ceuta-Melilla). By 2000, the regional growth rate groupings remained more or less valid, but some regions had progressed sufficiently to justify reclassification. Clearly the later developers have stolen a march over the early industrializers burdened with the inheritance of traditional sectors. Late developers could benefit in the catch-up process from productivity improvements associated with the modern sector. They became part of new foci for economic growth such as the Mediterreanean Arc, which included the dynamic regions of Catalonia and Valencia as well as less developed Murcia and Eastern Andalucia. Another growth axis ran along the Ebro Valley from Tarragona through Aragón, Navarre and La Rioja. Declining regions, with their economies based on traditional industries, had much less capacity for growth. Many are agriculture-dependent regions that tend to be labour-intensive with a low capacity to generate employment. As noted earlier, Spain allocated 0.94 per cent of its GDP to R&D in 2000, a proportion well below the EU average destined for such purposes, which stood at 2 per cent (Chislett 2002, 54). However, the percentage has risen sharply in recent years and Spain can boast the highest rate of growth for R&D personnel in the EU. By 2000, there were 120,000 people employed in such activities, according to the newly established Ministry of Science and Technology. This improvement disguises the substantial technological gap that exists between the regions, exemplified by the highly skewed concentration of technology capacity that positions Madrid, Barcelona, Valencia and the Basque Country in the vanguard, but allows the rest of the country to trail a long way in arrears. The high-technology regions cluster together a mix of human capital, innovation and technology. One feature of research spending in Spain worth noting is that most is publicly funded and only a small proportion is derived from the private sector.

Regional policy Spain’s experience of regional policy has not been a particularly distinguished one. Within the framework of Franco’s development plans, a number of schemes, including ‘growth poles’ based on the French planning model, met with limited success in the 1960s. During the transition to democracy regional policy was afforded low priority and the Zonas de Urgente Reindustrialización (ZURs–Urgent Reindustrialization Zones) were little more than a ‘knee-jerk reaction’ to the industrial restructuring taking place in the 1980s. During the decade after the death

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of Franco, regional policies were mainly in abeyance and where they did exist their impact was negligible (Cuadrado Roura 1991, 193). Under the Socialist administration, a Fondo de Compensación Interterritorial (ITCF–Interterritorial Compensation Fund) was set up in 1984 as an instrument to correct interregional inequities and imbalances. It failed in its redistributive function because poorer regions have continued to lose out at the expense of wealthier ones. After 1990, a growing European influence over regional policy is noticeable and the Fund was reformed to allow only the poorer Objective 1 regions to benefit from its investment projects. One outcome was that Andalucía became the largest beneficiary, receiving 30 per cent of the total ITCF and regional incentive funds. Further regional policy instruments were established, including the ZURs, while the Ley de Incentivos Regionales (Regional Incentives Law) was an attempt in the mid-1980s to rationalize the myriad schemes that had sprung up during the 1970s (Zaragoza Rameau 1989, 63). Regional policy received a shot in the arm when the new autonomous communities began to promote development within their own territories. Meanwhile, EU regional policy filled the gap left when central government purse strings were tightened in order to meet the Maastricht criteria. Access to the European Regional Development Fund and the European Social Fund undoubtedly helped, but the poorer regions were still at a disadvantage because they lacked their own investment capital to pursue the convergence goal. The ever-larger sums dedicated to regional development by Europe spawned an avalanche of schemes, including road and rail links, hydrological projects, and other infrastructure improvements. Most were co-funded with the EU, principally those associated with tourism, rural development and environmental protection. Assistance programmes vary from region to region. In the richer regions there is less emphasis on infrastructure and more on labour market integration, environmental protection, training programmes and economic diversification in the rural sector (Rodríguez Pose 2000, 105). Basically, the success of regional development depends on factors as diverse as geographical location, the level of economic and social development, human resources and skills, politics and culture. It can be said that the more favoured laggard regions are catching up more rapidly than the less favoured, usually rural and peripheral, ones. The conclusion can be drawn that Spain has converged with the richer European partners, although the record with regard to regional disparities is more patchy and there is evidence that the unevenness is reducing at a decelerating rate. Others argue that the ‘forces of convergence’ among the regions no longer operate and some regions are

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‘close to their steady state’. This implies that, without remedial action, regional inequalities will persist, albeit with distinct regional variations clustered in ‘convergence clubs’ (Villaverde and Sánchez Robles 1999, 71–79). Closing the technology gap appears to be one of the determining factors in regional disparities. An interesting development has been the emergence of a greater degree of regional specialization. Madrid, the Balearics and the Canaries specialize in tertiary activities; Catalonia, the Comunidad Valenciana, the Basque Country and Asturias, although much more diversified, continue to rely on their industrial base; while Galicia, Castilla y León, Castilla-La Mancha and Murcia remain predominantly agricultural regions. The key emerging issue is whether progress can be sustained following further enlargement in 2004 and the redistribution of funding. Underlying all this, the key factor remains the maintenance of strong overall growth rates for the national economy (Villaverde 1999, 57).

Decentralization and the economic issues European integration was accompanied by a decentralization process which led to the establishment of the autonomous communities. Initially, the motives for the devolution of powers were not overwhelmingly economic ones. However, the gradual redistribution of powers to the regions began to redefine the relationship between state and region (Squires 1999, 34–35). As a result, the regions, led by Catalonia, carved out a role for themselves in Europe, joining the Committee of the Regions (COR) and establishing their own representation in Brussels. Spain has proved adept at extracting full benefit from EU regional policy. Since submitting their first regional plan in 1985, the Spanish authorities have received substantial amounts of funding. However, to the annoyance of the regional governments, the central administration has dominated the funding process. In response, the more assertive autonomous communities, led by Catalonia and the Basque Country, demanded greater participation and closer relations with the Commission (Jones 2000, 112). Inevitable tensions were generated between Madrid and some regional authorities over the competencies, although others conceded that they lacked the requisite skills and resources to administer substantial funds. Gradually, as the regions became more experienced, they demanded greater input into policy formulation and evaluation. None the less, many regional authorities continued to air grievances based on what they perceived to be excessive financial centralization.

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As Objective 1 regions, many of Spain’s autonomous communities have received large sums in structural funding. During the 1989–93 funding round, the extent of any sub-national input became an issue. When the second tranche of funding was decided for 1994–99, regional participation had become enshrined as a core principle. Yet an enhanced role for the regions was not counterbalanced by reduced central influence. In her analysis of regional development, Rachel Jones (2000, 118) did not detect a transformation or reduced role by the Spanish state, despite the greater regional input, and concluded that the transfer of structural funds was ‘still essentially a centralized operation’. She found that the distribution of funding at the central and regional levels did not vary significantly between the two Objective 1 funding periods. The explanation appears to be the inadequate mechanisms at autonomous community level, which obliged the central authorities to retain a strong input. Certainly this would be confirmed by the amount of fraud uncovered that involved misuse of EU cash. Two recent cases reveal the extent of the problem and the existence of systematically organized fraud that prompted the intervention of the European AntiFraud Office. During the late 1990s, staff at the Agriculture Ministry accumulated large sums from subsidies to flax producers for their fictitious output, and money was made illegally from ‘phantom’ students supposedly attending courses organized by trade unions and employers’ organizations (Kerby and Chari 2002, 417).

Catalonia: a Spanish region in Europe Catalonia has been one of fastest-growing regions in the EU. As such, it has tended to develop semi-independently from the rest of the more sluggish and inward-looking Spanish economy. Historically, the region has benefited from its proximity to Europe and the Mediterranean, the presence of an entrepreneurial business community, its educated and skilled workforce, a strong domestic market and a productive agriculture (Squires 1999, 36). The Catalan business élite have been proEuropean in outlook, attracted by the ‘Europe of the Regions’ concept. Although stopping short of demanding full independence, the Catalans have sought special recognition as a region with its own culture and autonomous institutions (Keating 2000, 33). Catalans have proved particularly adept at projecting themselves externally and deriving the maximum advantage from their participation in Europe. A network of Catalan offices and trade bureaux give the region a powerful voice in the EU helped by the high profile adopted by Jordi Pujol, the long-standing president of the Catalan

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parliament, the Generalitat, and a former president of the Assembly of the European Regions, who has lobbied effectively throughout the continent on behalf of Catalan interests. Pujol argued forcefully that regionalism brings economic benefits, helping to stimulate enterprise and initiative as well as enhanced competitiveness. As one of Spain’s wealthiest regions, Catalonia can marshal the resources to pursue its interests at the European level, but finds itself ‘one of the many’ in a Committee of the Regions comprising representatives from other autonomous communities (Roller 1999, 8). However, enthusiasm for the ‘Europe of the Regions’ concept has waned among Catalans. One reason for this is the realization that European integration will eventually involve the surrender of hard-won competencies to Brussels. Changes to European regional policy had a direct impact on the Spanish regions. Since 1988, Brussels has dealt directly with regional authorities and the relationship was strengthened further when the Committee of the Regions came into existence in 1994. Indeed, the Catalans have demonstrated an ability to use their relationship with Europe to promote their ultimate goal of greater autonomy from Madrid. Coupled with the era of minority national governments, the Catalans were able to demand concessions from Madrid in return for their support in the national parliament. As a national power-broker during Spain’s minority administrations between 1993 and 2000, the Convergencia i Unió (CiU), a centre-right nationalist party, supported both the PSOE and PP administrations in return for concessions on regional autonomy. The national political equation meant that the regional business élite were able to press their concerns, which included their conviction that taxes were too high and inequitably redistributed.

Spain and monetary union Joining the European Monetary Union in the first wave must rank as a major achievement for Spain. Albeit at some cost, Spain succeeded in meeting the criteria for EMU. Given the dire warnings and pessimistic predictions in the run-up to monetary union, this was a considerable feat. In key areas, such as inflation, public debt and the budget deficit, the Aznar government had its work cut out to meet the tests. The 1997 budget froze public-sector pay, cut public investment and controlled utility prices. Creative accounting also played its part as the proceeds from privatization were used to cover losses by state-sector enterprises, while borrowing was disguised in the public-sector finances. Unsurprisingly, eurosceptics warned that Spain’s longer-term economic health was being sacrificed to short-term expediency in the public sector

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(The Economist 1996, 5). They were rightly concerned that the dominance of nominal convergence to meet the criteria of monetary unification had encouraged window-dressing and one-off measures, sparking fears that it would undermine the goal of long-term convergence. As with other areas of European integration, the Spanish appeared to have a blind spot when it came to monetary union. Few searching questions were asked about what benefits EMU would bring to Spain. As ever, political concerns overrode any economic doubts. Qualification for monetary union assumed the status of an economic virility test to prove that Spain was among the pace-setters in Europe, rather than a second-rank power. As a result, policy-making was driven by the fear of being left out rather than by any rational economic motives. In many respects, psychology must be evoked to explain Spain’s European policy. Over the centuries, the country failed to modernize its economy and society and fell from being a major world power to a minor one. Whether deserving or not, ‘decadence’, ‘decline’, ‘insularity’, ‘resistance to change’ and ‘backward-looking’ were the phrases most frequently applied when assessing Spain. This is hardly surprising when the Franco regime actively promoted the concept of Spanish exceptionalism. Throughout the thirty-six long years of the dictatorship, lack of support from Europe and the refusal to countenance Spanish accession until the democratic preconditions were fulfilled encouraged the opponents of Franco to equate democracy with membership of the EU club. Hence the strong commitment to Europe and its use as a vehicle for domestic transformation, noted by John Hooper (1991): González and his closest political allies can sometimes appear possessed of almost messianic zeal to undo the damage inflicted by the dictatorship. His Former deputy in government, Alfonso Guerra, entered office proclaiming that the Socialists were going to change Spain ‘so even its own mother wouldn’t recognize it’.

Little wonder, then, that Europe became equated with modernization. The Caudillo had upheld traditional values associated with religion, imperialism (repackaged as pan-Hispanism), and isolation from the rest of the continent, or at least a Europe as yet unpurged of alien evils, including freemasonry and communism. Not unnaturally, his opponents utilized Europe as a model and a symbol for democracy and it gradually became embedded in the political culture. It has never been a simple matter of economic advantage; rather participation in the European project has become associated with national pride. That said, élite and popular attitudes are never frozen in time and gradually public opinion has moved in the direction of a more utilitarian approach, carefully

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weighing the costs and benefits (Closa 2001, 3–5). Indeed, changing perceptions of Europe lay behind the insistence on cohesion as a quid pro quo to Spain for its willingness to support the integration project and carry out the necessary domestic reforms. In June 1989, the peseta was admitted to the European Exchange Rate Mechanism (ERM) at the relatively high rate of 64 to the Deutschmark. A 6 per cent fluctuation margin was permitted. Charles Boix (2001, 177) contends that entry into the ERM was driven, as much as anything, by the crisis in monetary policy caused by the increasing mobility of capital within the EC and the country’s growing interdependence across the international economy. Yet joining the ERM limited still further the government’s economic policy options and, by focusing on the exchange rate, deflected attention away from the structural challenges facing Spain. As it happened, balancing an antiinflationary monetary policy with an export-friendly exchange rate proved a step too much for the unfortunate Spanish authorities. Since the mid-1980s, they have failed to overcome ‘the strained equilibrium of political pressures and competing policies’ as they struggled to meet the requirements of life within a managed exchange rate system (Boix 2001, 178). After joining the ERM, the peseta traded near its ceiling, aided by high interest rates. Maintaining the peseta within the ERM became the central plank in the government’s and Bank of Spain’s economic strategy. This situation did not endure for long. During 1992, an exchange rate crisis, triggered in part by the costs of German reunification, exerted speculative pressure on the peseta and other currencies, forcing it downwards (Farrell 2001, 85). This necessitated a series of devaluations, beginning in September 1992, followed by another one in May the following year. Tight budgetary controls and higher interest rates were the price to be paid for remaining in the ERM. Just how much freedom of manoeuvre Spain had lost was apparent from the contradictory policies (high interest rates and belt-tightening despite soaring unemployment) pursued during an economic recession. Fortunately, what effectively amounted to a humiliating currency depreciation did generate the conditions for an immediate improvement in the competitiveness of Spanish exports. The 1992 ERM crisis underlined the potential costs inherent in the government’s European strategy. A fixed exchange rate meant that Europe took over responsibility for the running of monetary policy. It raised questions about the wisdom of applying a single monetary policy to divergent economies. Nevertheless, the commitment to monetary union did focus attention on efforts to achieve nominal convergence. An optimistic-sounding Convergence Plan was unveiled by the Socialist

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government to demonstrate how the criteria for ERM were to be met. Targets were set for reducing the government deficit, controlling inflation and managing the debt. This was to be achieved through structural reforms, policies to introduce flexibility, deregulation, labour market reforms, wage restraint agreements, a higher tax take, and tighter control over public spending. By the mid-1990s, the convergence programme required urgent revision. The new centre-right government of José María Aznar introduced a third convergence programme to 2000 which continued to pursue a substantial reduction in the public deficit. With strict budgetary discipline as the centrepiece, the plans envisaged further privatization and a reform package covering energy, transport and other key sectors (Farrell 2001, 91). Little discussion took place inside Spain about the pros and cons of monetary union. On the minus side, it involved surrendering the main instruments of economic management and exposed the participants to the stringent conditions outlined in the Stability and Growth Pact agreed at the Dublin summit in 1996 that limited the budget deficit to under 3 per cent. Given the unsynchronized economic cycles of the partner countries in monetary union, a forced convergence of economic systems threatened to impose serious strains on some participating states. Whatever the prospective dangers of handing over monetary policy to the European Central Bank (ECB), it was seen as the solution to a longrunning problem because, in the past, Spain’s monetary authorities had singularly failed to ensure price stability.

Spain in the euro zone Few tears were shed for the peseta when it was replaced by the euro in 2002. Surrendering the national currency caused little or no controversy, and the issue of sovereignty loss was quickly brushed aside by ministers. Such attitudes should not deflect us from a brief examination from a Spanish perspective of the arguments for and against monetary union and the introduction of the single currency. Those arguing in favour of the euro pointed to the economic stability and reduction in the volatility associated with the economic cycles. The new currency was expected to deliver price stability and keep inflation in check. In addition to the gains in trade and investment derived from the removal of exchange rate costs, Spain was expected to benefit from increased capital mobility. One study calculated that the economy as a whole would benefit to the tune of 3–4 billion pesetas in terms of saved financial costs (Elías et al. 2002). Moreover, joining the euro zone would compel the country to undertake further structural reforms in areas such as the labour market,

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social security, pensions, health and welfare as a matter of urgency. Above all, the new currency would lend credibility to government policy and improve competitiveness and economic growth. Most sceptics referred to the loss of exchange rate flexibility for improving competitiveness once monetary policy was decided in Frankfurt rather than Madrid, and the severe constraints imposed on fiscal policy. In general terms, the likelihood exists that, despite the compensation from EU transfers, economic disparities between rich and poor states will be exacerbated. The single currency involved a further transfer of economic policy levers to Brussels, leaving little room for manoeuvre for national governments to deal with economic slowdowns. Once devaluation was no longer possible, an export-based recovery, such as the one prompted by the three devaluations in the early 1990s, was less likely. Moreover, interest rates would be held low, consigning any favourable returns on investment to the past.

Financing Eastern enlargement The problem for an economy on the road to convergence is that, while Spain may be changing relatively quickly, the pace being set by the EU has been a fast one. In the meantime, initiatives such as Eastern enlargement threw down new challenges to an economy still in the throes of a convergence process. Faced with the prospect that up to ten new members from the Baltic, Eastern and Central Europe and the Mediterranean would be admitted in 2004, doubts began to surface among many existing members. Three areas have been causing concern. The first is the agricultural policy. Given the large agricultural sectors in applicant countries such as Poland (2 million farmers) and the overall 29 per cent increase in the number of farms in the EU, subsidies have became a contentious issue. Not unnaturally, existing member states do not wish to see their budget contributions rise following enlargement, but disagree over how to achieve it. The richer members want to redistribute the EU budget to benefit new members, while the net recipients (Spain, Italy, Greece, Ireland and Portugal) oppose major changes. Spain supported a suggestion that subsidies to farmers be phased in, but this was rejected by the candidate countries on the grounds that it will create a ‘second-class’ membership. Agricultural and structural funds account for approximately 80 per cent of the EU budget, making it difficult to preserve the status quo ante following enlargement, as Spain wishes to do. Second, given that enlargement could add around fifty new regions eligible for structural funds, it is inevitable that Spain’s share of the transfers will be reduced. Third, the

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Spanish are well aware that incorporation of poorer regions will push down the EU’s average GDP capita, thus reducing the number of regions eligible for funds, perhaps only two or three in Spain’s case. Fourth, the expectation is that Spain will be exposed to greater competition as many of the countries due to join in 2004 have lower production costs, generating downward pressure on prices and margins. Inevitably, the new entrants will appear very attractive to foreign investors, threatening the investment flows that continue to transform Spain’s manufacturing sector. Just how important the cohesion and structural funds are for Spain can be gleaned from the following data. In 1999, receipts from these funds were the equivalent of 1.5 per cent of GDP in Spain. The Spanish are acutely aware that, once the current round ends in 2006, their allocations are likely to fall considerably. Assuming that there are no changes to the criteria for the receipt of Objective 1 assistance from the Structural Funds, the number of Spanish regions eligible is likely to fall from ten to three. Only Andalucía, Extremadura and Galicia are likely to remain below the 75 per cent of EU average. According on one estimate, Spain will stand at around 94 per cent of the average in an enlarged (27-member) EU (Martín et al. 2001, 13). A further blow is likely to come from the loss of Spain’s share of the Cohesion Funds. When the threat of capital reorientation to Eastern and Central Europe is taken into account, there can be no doubting the scale of the challenge confronting Spain. Another contentious area that arose during the enlargement negotiations centred on aid to Slovakia’s industrial sector. The Spanish authorities were particularly worried about SEAT’s decision, taken in September 2002, to relocate 10 per cent of its Ibiza model production to the Volkswagen plant at Bratislava (EIRO 2002b). Ultimately, Spain accepted EU assurances that controls would be applied and a ceiling imposed on the amount of state aid involved.

Conclusion Spain’s ever-closer relationship with Europe dominates its recent economic history. Longer-term processes were at work (agricultural contraction, tertiarization and so on), and the historical perspective enables us to see that incorporation into the European framework speeded up the liberalization process initiated in 1959. What can be said is that the pace of economic change was often externally driven and, apart from the restructuring programme in the early 1980s, relatively speaking, Spanish governments played a passive role, or merely reacted

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to events (Farrell 2001, 42). Suffice it to say that EU membership presented both a challenge and an opportunity for Spain. The political élite presented European integration as short-term pain for long-term gain as idealism mixed with realism in equal measure. Lone voices have been raised in support of the contention that the enthusiastic advocacy of integration ‘harmed Spain’s national interests’ and that ‘Spain’s honeymoon with Europe’ had ended by 1996 (Kennedy 1996, 97). This negative viewpoint is given some credence by mounting evidence that economic integration, while having a positive effect on growth and convergence between countries, can exacerbate interregional inequities (Giannetti 2002, 539). Certainly, it can be argued that pursuing the Maastricht criteria, with their insistence on reducing public-sector deficits, the national debt and state intervention, encouraged contraction rather than expansion, thereby undermining efforts to create a modern public sector and welfare state system (Farrell 2001, 121). Shackled by the Stability and Growth Pact, the capacity of Spanish governments to intervene in the economy declined significantly. As Spain lost its ability to conduct an independent economic policy, expansionary policies were no longer an option because they produce soaring imports, a worsening trade deficit and weakening competitiveness. Nevertheless, limitations on the policy tools available did not prevent the Socialist governments in the late 1980s from using public expenditure to increase social spending on extended unemployment benefits, pensions and universal health care provision. However painful the process, Spain’s membership of the European Community must be judged a success, albeit with significant caveats. Some sectors of the Spanish economy did become internationally competitive and embraced new technologies. EU integration has boosted competitiveness: Spain ranked 23 in the World Competitiveness Yearbook ranking for 2002 (Chislett 2002, 22). Previously hamstrung by protectionism, rising labour costs, high inflation and low levels of R&D, competitiveness improvements have come as a result of a lower exchange rate, a more flexible labour market, and wage moderation. If the process is far from finished, it has to be recognized that less than two decades is a short time-span for such a transformation to be completed. Spain’s entry into the EC marked the final stage of the transition to democracy. A broad social and political consensus underpinned the aspiration to join the European mainstream. Spain’s integrationist approach ensured continued good relations with Brussels. However, when national interests are perceived to be at stake, Spain has acted to protect them. It has vigorously rejected the extension of majority voting in areas such as structural funds. The pro-Europe consensus has held good, despite some wavering when conflicts arose over such thorny

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issues as reductions in the fishing fleet. Few dissenting voices have been heard over developments in the process of European integration. Things may be starting to change and European issues are no longer considered to be above party politics. As part of a general policy reassessment, the leftist Izquierda Unida (IU) adopted a more critical stance while the Partido Popular (PP) began to employ a more nationalist discourse. While reflecting a growing mood of mild disenchantment about Europe, it was also partly the consequence of the growing competition among the political parties and the possibility of alternation in power. Although the discourse on Europe has become less uncritical in recent years, basic areas of agreement still exist. These can be boiled down to a preference for redistributive policies, the rejection of a two-speed Europe and an insistence that Spain be treated as a major, rather than a middle-ranking European state. As was to be expected, there are numerous loose ends. Two areas in particular have sparked controversy and retain the potential for conflict: fisheries and agriculture. The recurring disputes over fishing rights with Morocco and plans to cut quotas and size of the fleet, not to mention reductions in wine and milk production, threaten to rumble on. It remains to be seen whether José María Aznar’s repositioning of Spain alongside the USA and the United Kingdom during the 2003 Iraq war presages a breaking of ranks with the European majority over economic policy.

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Index Abril, Fernando 84 Activo Bank 116 Aerolíneas Argentinas 142 aerospace equipment 89 Africa 102 Agencia Industrial del Estado (AIE) 92 agriculture 1, 7, 13, 19, 38, 40, 43, 45, 47–70, 72, 89, 110, 112, 126, 128, 132, 146, 153, 163, 169, 172, 173, 177, 183, 187, 190, 195, 198 concentration of holdings 33, 56, 57, 60, 61 fertilizers 52, 58, 60, 85 irrigation 48, 58, 60, 61 mechanization 50, 52, 54, 55, 58–60 part-time 56, 70 workforce 145 Agua de Valencia 137 airlines 140, 165 Álava 134 Albertos Puebla, Juan M. 42 Alcampo 120 Alicante 121, 152 alfalfa 62 Algeria 34, 39, 48, 94, 97 Alicante 41 Almería 40, 41 aluminium 76 anarchism 50, 54 Andalucía 25, 30, 31, 35, 40, 41, 44, 48, 49, 66, 67, 89, 104, 109, 133, 150, 154, 181, 185, 186, 187, 188, 196 Antilles 2 Antolín, Pablo 150 Annual Employment Survey 161 Aragón 30, 44, 61, 67, 69, 186, 187 Arango, Joaquín 34 Aranzadi, Claudio 90 Arburúa, Manuel 7, 8, 52 Areces Rodríguez, Ramón 121

Argentina 6, 34, 35, 138, 139, 140, 141, 142 Arias Navarro, Carlos 14 armed forces 4 Arteixo 152 artificial fibres 74, 76 Assembly of the European Regions 191 Asia 126 Astra 139 Asturias 30, 31, 45, 49, 65, 71, 81, 84, 92, 109, 145, 183, 186, 189 AT&T 132 Auchan 120 Australia 32, 69 Austria, 23 Austro-Hungarian Empire 32 autarky 4–10, 42, 62, 73, 75, 124, 174 automobiles 74–7, 83, 84, 86, 127, 129, 131, 132, 177 autonomous communities 99, 126, 134, 145, 181, 182, 183, 185, 188, 189, 191 Aznar, José María 3, 4, 21, 40, 119, 132, 151, 154, 156, 157, 160, 161, 176, 177, 191, 194, 198 baby boom 27, 28, 30, 33, 46 Badajoz Plan 35 balance of payments 102, 125, 126, 180 Balearic Islands 1, 25, 31, 41, 44, 45, 102, 104, 108, 111, 154, 181, 186, 189 Baltic 195 Banco Argentaria 114, 118, 136 Banco Central 113 Banco Central Hispano 114, 117 Banco Continental 118 Banco de Bilbao 113, 114 Banco de Vizcaya 113, 114 Banco Español de Crédito (Banesto) 113

232

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Banco Hispano-Americano 113 Banco Popular 117 Banco Rio de la Plata 139 Banco Santander Central Hispano (BSCH) 114, 115, 117, 118, 122, 136, 137, 139, 141 Banco Totta e Açores 117 Banco Urquijo 113 Bancomer 139 Bank of Spain 3, 8, 9, 12–18, 73, 81, 113, 193 banking and insurance 139, 143 banks 83, 112, 113, 114, 117, 123, 130, 165 foreign 116 savings see cajas de ahorro Barceló, Luis Vicente 57, 58 Barcelona 8, 41, 42, 44, 45, 46, 72, 80, 84, 94, 106, 107, 116, 121, 184, 187 Barciela, Carlos 52, 59 Barclays Bank 116, 118 Barrera de Irimo, Antonio 14 barley 65, 66 Barrios, Salvador 133 Basque Country 8, 30, 31, 44, 45, 49, 71,107, 109, 114, 129, 134, 173, 181, 185, 186, 187, 189 Bayón, Ignacio 84 BBVA 114, 115, 117, 118, 136, 137, 139, 141, 143 BBV Banco 143 Belgium 23, 25, 39 Benetton 87 Benidorm 103, 108 Bilbao 107, 113 Birkelbach report 171 birth rate 23–31, 43, 154 black market 5, 7, 51, 52 Boix, Carles 193 Botín, Emilio 118 Bover, Olympia 150 Boyer, Miguel 18, 148, 166 Bratislava 196 Brazil 34, 35, 82, 138, 139, 140, 141, 143 British Telecom 122, 139 Brussels 133, 171, 175, 180, 185, 189, 191, 195, 197 Buenos Aires 142 Bulgaria 39

Burgos 80, 94 business culture 157 Cabello del Alba, Rafael 14 Cabré, Ana 30 Cádiz 84 Cairns Group 69 Caixa Catalunya 161 Caixa de Barcelona 116 Caja de Madrid 116 cajas de ahorro (savings banks) 116, 117, 118 call centres 143 Calvo Sotelo, Leopoldo, 17 Camino de Santiago 106 Canada 32, 69 Canary Islands 25, 30, 31, 41, 104, 108, 110, 183, 186, 187, 189 Camilleri, Arturo, 53 Cánovas, Cirilo 53 Cantabria 31, 49, 65, 109, 145, 173, 186 Caprabo 121 Carrasco, Raquel 162 Carrefour 120, 121 Carrefour España 120 Carrero Blanco, Luis 14 Carreras, Albert, 71, 72, 73 Carriles, Eduardo 14 Carrillo, Santiago 16 Castellón 121 Castilla-La Mancha 30, 35, 40, 44, 67, 69, 80, 187, 189 Castilla y León 30, 31, 35, 44, 49, 61, 67, 69, 80, 109, 127, 181, 186, 187, 189 Catalán, Jordi 5 catalogue selling 120 Catalonia 24, 30, 41, 71, 76, 81, 89, 93, 104, 109, 120, 127, 129, 133, 163, 173, 181, 185, 186, 187, 189, 190–91 catering 161 Catholic Church 4, 116 Caudillo 192 Cavestany, Rafael 7, 53 Cazorla Pérez, José 38, 39 cement 74, 87, 93, 177 Central America 136 Central Europe 195, 196 Cepsa 136

INDEX

ceramics 89, 126 cereals 48–52, 55, 64–7, 172 Ceuta y Melilla 186, 187 Chaqués, Laura 133 Chari, Raj S. 91 Chávez, Hugo 118 chemicals 73, 75, 76, 78, 89, 93, 127, 129, 131, 132, 173 Chile 2, 138, 140 China 39, 121 Citibank 116 Citröen 129, 132 clothing 83, 86, 119, 126, 152, 173 coal mining 49, 71, 75, 81, 91–7 cohesion fund 177, 179, 180, 196 collective bargaining 145, 160, 164 Colombia 39 Columbus, Christopher 141 colonization 57 Comisión del Mercado de las Telecomunicaciones (CMT) 122 Comisiones Obreras (CC OO) 162, 164, 165, 166 comités de empresa 167 Committee of the Regions (COR) 189 ,191 Common Agricultural Policy (CAP) 49, 67, 68, 174–75, 177 communism 192 Communist Party 16 Community Support Framework (CSF) 180 competitiveness 105, 126, 127, 128, 131, 132, 133, 148, 160 , 166, 175, 177, 184, 191, 193, 195, 197 computers 89 Comunidad Valenciana 30, 41, 44, 89, 104, 109, 127, 163, 181, 186, 189 Confederación Española de Organizaciones Empresiariales (CEOE) 164, 165, 166, 173 concertación social 158, 165, 167 concerted action 12 concierto económico 134 Consejo Económico y Social (CES) 166 conservation 111 Constitution (1978) 165 construction 16, 43, 71, 72, 76, 78,

233

87, 89, 98, 112, 153, 161, 163, 169 consultancy 99 Continente 120 contratación indefinida 168 contratos basura 159 contratos ordinarios 168 convenio económico 134 convergence clubs 189 convergence plans 20–22, 193 Convergencia i Unió 191 cooperatives 152 Córdoba 80, 107 Cortal 116 Costa, Joaquín 61 Costa Blanca 103 Costa Brava 103 Costa del Sol 118, 193, cotton growing 61 corruption 74 Corunna 80, 152 counter-urbanization 41, 42, 46 Credit Suisse 118 Crédito Predial Português 117 Croissier, Luis Carlos 90 CRT 138 Cuba 34, 139 current account 124, 127, 180 customs duties 124 Daewoo 134 dairy farming 49, 53, 67, 163, 172 dams 185 death rate 23, 25, 31–3 decentralization 189 decretismo 18, 166 defence sector 91, 131 Defense Support Programme 7 Dehesa, Guillermo de la 19, 90 de-industrialization 148 Delgado Pérez, Margarita 29 Denmark 23, 171 Deutsche Bank 115, 118 devaluation of peseta 8, 9, 10, 69, 87, 110, 193, 195 Development Plans 10, 12–13, 27, 44, 53, 62, 80, 95 Díaz Nicolás, Juan 32 distribution 98 domestic service 156, 163 Dominican Republic 139

234

INDEX

Donges, Juergen 74, 77 Dragados 137 drought 52, 65, 66, 67, 93, 185 Dublin 194 e-commerce 120, 122 Eastern Europe 102, 131, 134, 195, 196 Ebro valley 187 eco tax 112 economic convergence 2–4, 11, 71 economic nationalism 2, 72, 74 Ecuador 39 education 28, 30, 80, 116, 149, 156, 176, 178, 179, 184 El Corte Inglés 120, 121 electrical appliances 14, 82 electrical goods 132, 173 electrical materials 78, 85 electricity supply 72, 75, 76, 93–7, 123 electronics 89, 128, 163, 177 El Ejido 40 El Salvador 138 emigrant remittances 2, 11, 37, 50, 125, 147, 171 emigration 19, 28, 30, 33–41, 53, 149, 157 employers 157, 158, 159, 164 employers’ organizations 16, 82, 83, 163, 190 employment 98, 99, 100, 101, 121, 133, 144, 146, 149, 149, 152, 154, 162, 163, 167, 168, 183, 184, 186, 187 agencies 159, 160 creation 157–8, 159, 164, 183, 184 temporary 151, 152, 155, 159, 160, 161, 164, 167, 168 part-time 155, 156, 161, 164 women 156, 161,163, 168 Enasa 91 Encuesta de Población Activa (EPA) 100, 150 Endermol 141 Endesa 122, 136, 137, 139, 140, 141 energy 3, 11, 71, 73, 81, 83, 90–97, 139, 148, 194 Engel’s Law 63 engineering 145, 148, 172

epidemics 25, 31 Equinoccio 121 Eroski 120 España verde 106, 108, 109 ETA (Euskadi Ta Askatasuna) 185 euro zone 1, 117, 136, 194 Europe of the Regions 190, 191 European Agricultural Guidance and Guarantee Fund (EAGGF) 66, 70, 177 European Anti-Fraud Office 190 European Capital of Culture 106, 107 European Central Bank (ECB) 194 European Commission 134, 171, 173, 177, 189 European Commissioner for Transport 177 European Economic Community (EEC) 3, 11, 18, 20, 68, 84, 124, 171, 174 European Monetary Union (EMU) 1, 4, 19, 20, 23, 25, 127, 170, 175, 177, 191 ,192 European Parliament 171 European Regional Development Fund 188 European Social Fund 188 European Telecom International 141 European Union (EU) 1, 4, 19, 20, 23, 25, 28, 39, 40, 47, 48, 57, 62, 64–70, 85, 87–8, 113, 122, 127, 130, 170, 182 Competition Commissioner 139, 185 convergence 178, 179, 181–3, 192, 194, 195 enlargement 134, 170, 171, 172, 177, 195 funds 125 subsidies 173, 177, 180, 195 transfers 125, 177, 180, 185 europeanism 175 europeanization 20 Eurostat 162 Euskadi see Basque Country exchange rate 124, 127, 193, 194, 195, 197 Exchange Rate Mechanism (ERM) 20, 21, 148, 168, 193, 194 Expo 192, 197

INDEX

exports 125, 127, 128, 129, 173, 193 foodstuffs 48, 63, 64, 68, 69, 93, 126, 171 manufactures 75–7, 82, 126 Extremadura 25, 31, 35, 44, 49, 66, 80, 181, 183, 186, 187, 196 factory outlets 120 Falange 59 family planning 28, 29 Farrell, Mary 174, 178 Fernández Asperilla, Ana 37 fertility 26–30, 169 Fiat 91 financial services 99, 112–18, 132, 135, 177 First World War 2, 34 fisheries 19, 47, 110, 172, 173, 177, 198 flax 190 Fondo de Compensación Interterritorial (Interterritorial Compensation Fund) 188 food and drinks 132, 133, 160 foodstuffs 55, 71, 87, 88 footwear 14, 73, 83, 84, 86, 87, 89, 126, 139, 152, 156, 163, 174 Ford 129, 132 foreign direct investment (FDI) 2, 11, 18, 20, 74, 76, 78, 88–91, 123, 125, 128, 129, 132, 133, 134, 135, 139, 140, 147, 171, 174, 179, 184, 185 foreign exchange 102 Fraga, Manuel 104 France 3, 6, 12, 17, 19, 23, 25, 29, 34, 35, 37, 39, 51, 68, 78, 81, 88, 101, 104, 109, 125, 129, 130, 132, 135, 164, 172, 173, 175 France Telecom 122 franchising 120, 123 Franco, Francisco 1, 4–9, 14, 27, 28, 38, 42, 48, 52, 59, 62, 65, 72, 73, 75, 76, 92, 95, 146, 147, 157, 165, 168, 171, 178, 187, 192 Frankfurt 195 fraud 190 freemasonry 192 Fuentes Quintana, Enrique 15, 17, 21

235

fueros 134 Fujimori, Alberto 118, 142 furniture 72, 87 further education 155 FUTURES 111 Galerías Preciados 121 Galicia 30, 31, 35, 44, 61, 65, 84, 109, 127, 152, 153, 173, 183, 184, 189, 196 Gambia 39, 41 García Coll, Arlinda, 45 García Delgado, José Luis, 6, 16, 47 García Díez, Juan Antonio 15 García Grande, María Josefa 47 gas 123, 136 Gas Natural 137 gasógeno 93 Gaudí, Antonio 106 Gehry, Frank 107 General Agreement on Tariffs and Trade (GATT) 11, 69, 70 General Electric 132 General Motors 129, 132 general strike 176 Generalitat 191 Gerona 102 German reunification 3, 193 Germany 3, 4, 19, 23, 25, 29, 37, 38, 39, 78, 81, 88, 104, 125, 129, 130, 132 Gil Alonso, Fernando 30 Giscard D’Estaing, Valéry 68 glassware 126 globalization 21, 35, 40 gold standard 2 González, Felipe 16, 17, 18, 40, 175 González, Manuel-Jesús 6 Granada 80 Great Britain see United Kingdom Greece 23, 25, 28, 47, 57, 62, 71, 104, 132, 175, 179, 195 growth poles 80, 187 Grupo Financiero Meridional 139 Guadalajara 94 Guatemala 138 Guggenheim museum 107 Guirao, Fernando, 6, 12 Guipúzcoa 94 guardia civil 50

236

INDEX

Hajnal, John 25 health services 33, 176, 178 Heywood, Paul 15 Hipercor 120 Hispanism 192 Hitler, Adolf 4, 5 HIV/Aids 33 Holman, Otto 20, 172 homeworking 152 Hong Kong 82, 121, 153 Hooper, John 192 horticulture 48, 49, 51, 58, 59, 66 hotels 41, 107, 135, 156 housing 46, 80 HSBC Bank 118 Huelva 41, 49, 80 human capital 184, 187, 188 hunger 2, 32 hydro-electric power 93, 94, 97 hypermarkets 119, 120 Iberdrola 136, 137, 141 Iberia 177 Ibero-American summits 136 Ibiza 196 Iceland 29, 32 ICEX 127 Ikea 120 illegitimacy 25, 29 immigration 24, 33–41 imports 125, 127, 128, 129, 172, 174, 197 capital goods 6 foodstuffs 50, 64, 65, 69, 76, 78 manufactures 20 raw materials 5, 6, 11, 72, 73, 77 import-substitution industrialisation (ISI) 5, 6, 7, 73, 124 Inditex 152 ,184 industrial reconversion 45, 83–5, 148, 157, 175, 187 inflation 8, 9, 12, 13, 15, 16, 20, 21, 63, 93, 148, 158, 175, 179, 191, 194, 197 informal economy 103, 152, 153, 162–3 information technology 161, 164 ING Direct 116, 188 Instituto de Estudios Fiscales (IEF) 13 Instituto de Estudios Turísticos (IET) 106

Instituto de la Mujer (IM) 157 Instituto Español de Emigración (IEM) 36, 37 Instituto Nacional de Empleo (INEM) 150, 159 Instituto Nacional de Estadística (INE) 24, 63, 101, 108, 146, 155 Instituto Nacional de Hidrocarburos (INH) 91, 92 Instituto Nacional de Industria (INI) 9, 75. 76, 83, 85, 90–92 interest rates 114, 135, 136, 158, 168, 179, 193 internal migration 41–6, 50, 53, 54, 56 International Monetary Fund (IMF) 9, 113 internationalization 117, 123, 135, 138, 139, 140, 141 internet 115, 122 Iran-Iraq War 95 Ireland 19, 23, 25, 47, 125, 171, 174, 195 iron and steel 14, 45, 74, 75, 83, 84, 85, 87, 91, 93, 127, 145, 148, 172, 174 Isla Mágica 108 Istituto per la Ricostruzione Industriale (IRI) 75 Italy 4, 19, 23, 25, 28, 29, 32, 34, 39, 57, 62, 68, 81, 121, 125, 195 Iraq war 198 Iveco-Pegaso 91 Izquierda Unida (IU) 198 Japan 11, 32, 76, 81 Jazztel 122 Jones, Rachel 190 jornaleros 53, 54 Juan Carlos, King 1 Kinnock, Neil 177 La Caixa 99, 114, 116, 180 La Coruña see Corunna labour inspectorate 162 labour force 146, 149, 154 Labour Force Survey 162 labour market 12, 17, 21, 28, 111,

INDEX

149, 151–3, 162, 165, 167–169, 183, 194, 197 casualization 151, 152 mobility 149, 150 participation 144, 149, 156, 183 policies 158–162 reforms 144, 158, 160, 176, 178, 194 rigidities 144, 146, 158 training 149, 155, 159, 160, 178, 179, 186 Labour Ministry 160 labour relations 146, 147 Lamo de Espinosa, Jaime 67 Landry, Adolf 23 Languedoc-Roussillon 38 latifundios 50, 51, 53, 56–61 Latin America 34, 35, 39, 41, 54, 102, 114, 117, 121, 122, 126, 130, 136 ,137, 138. 139, 140, 141, 142, 143 Law for the regulation of Retail Trade 119 LEADER 108 Lear Corporation 131 leather 87, 89, 133, 156, 163 leisure 160 Lérida 131 Levante 58 Ley de Comercio 119 Ley de Conservación de Espacios Naturales 111 Ley de Costas 111 Ley de Extranjería (Foreigners’ Act) 40 Ley de Incentivos Regionales (Regional Incentives Law) 188 Lieberman, Sima 59 life expectancy 32–4 Lince 122 Lisbon 121, 139 livestock 51, 53, 65–7, 172 Lloret de Mar 103 Lloyds TSB 118 Logroño 80 López Bravo, Gregorio 12 López Rodó, Laureano 8, 12, 171 Luxembourg 23, 39 Luxembourg Accord 11

237

Maastricht Treaty 20–22, 131, 176, 177, 178, 179, 180, 188, 197 machine building 10, 87, 127 Madrid 1, 7, 30, 31, 41, 42, 44, 46, 72, 80, 84, 89, 100, 104, 107, 112, 113, 117, 120, 121, 127, 128, 129, 133 ,134, 145, 163, 171, 173, 175, 181, 182, 184, 185, 186, 187, 189, 191, 195 Madrid Stock Exchange 131 Mahgreb 38, 40 maize 62, 65 Majorca 108 Málaga 41, 121 Maravall, Fernando, 79 Maremagnum 121 Marks & Spencer 121 Marshall Aid 6 Martín Carmela, 4, 21, 86 Martínez Lucio, Miguel 165 Martínez Serrano, José Antonio 88 MCI-World Com 139 MECDE 109 media 131 Melgarejo, Joaquín 62 Melilla 41 Men of Development 12–13 Mercedes 87, 134 mergers 78, 79, 84, 85, 115, 116, 117, 118, 123, 130, 132, 136, 138, 143 metallurgy 72, 75, 77, 81, 87, 88, 97, 163, 165, 173 Mexico 82, 138, 139, 140 Middle East 172 milk 198 minifundios 50, 51, 53, 56–61 minimum wage 150, 155, 156 mining 113, 140, 143, 148 Ministerio de Ciencia y Technología (Ministry of Science & Technology) 132, 187 Miranda, José Antonio 73 Mitterrand, François 17, 68 modelo abierto 124 Moet et Chandon 87 Moncloa Pacts 15, 16, 147, 148, 166 monetary policy 124, 193 Morellá, Enric 73 Morocco 39, 41, 139, 140, 198 motor vehicles see automobiles

238

INDEX

multinationals 20, 88, 91, 125, 128, 129, 130, 132, 133, 136, 141, 142, 172, 175, 177 Mundial Confiança 139 Muñoz Guarasa, Marta 88 Murcia 30, 31, 40, 41, 163, 186, 187, 189 Mussolini, Benito 4, 75 Myro, Rafael 88 Nadal, Jordi 34 Naredo, José Manuel 52, 53, 55 National Water Plan (Plan Hidrológico Nacional) 63 natural gas 91, 94–7, 143 Navarre 8, 134, 154, 163, 181, 184, 186, 187 Navarro Rubio, Mariano 8, 9, 12 Netherlands 23, 25, 29, 42, 88, 139 neutrality 5 Newly-industrializing countries (NICs)14, 82, 87 Nicolau, Roser 51 Nigeria 39 Nissan 129, 132 North Africa 104, 139, 140 Norway 42 nuclear power 94–7 nuptuality 25–9 office automation 89 oil 13, 14, 16, 71, 81, 85, 91–7, 148, 172 oil refinery 75, 76, 91, 94, 129, 174 olives 51, 55, 61, 65, 66, 173 Olympic Games 107 Oporto, Antonio 37, 38 Opus Dei 8, 19 oranges 48, 51, 61, 62 Organization of Petroleum-Exporting Countries (OPEC) 3, 14, 94 Organization for Economic Cooperation and Development (OECD) 9, 10, 13, 21, 76, 86, 88, 132, 162, 182 Organization for European Economic Co-operation (OEEC) 6, 9 Ortega Gaona, Amancio 152 Ortiz Gracia, Juan Antonio 8 Oviedo 80

Pakistan 39 Panama 135 papermaking 10, 87, 88 paradores 109 Pardo, Lorenzo 62 Parque Bonaire 120 Partido Popular (PP) 4, 21, 92, 97, 144, 160, 176, 191, 198 Partido Socialista Obrero Español (PSOE) 16–21, 28, 40, 45, 63, 68, 83–5, 90–91, 95–7, 144, 157, 163, 165, 166, 168, 174, 175, 176, 191 Patagón 116 peaches 62 pears 62 Peña Boeuf, Alfonso 62 Penedés 66 pensions 33, 141 Pérez, Sofia 168 Pérez Díaz, Víctor 17, 149 Perón, Juan 6 Perroux, François 80 Peru 118, 138, 139, 142 peseta 126, 127, 193 Peugeot 129, 132 pharmaceuticals 131, 133 pharmacies 119 Philippines 39 Philips 128 Plan de Dinamización Turística (PDT) 107 Plan de Empleo Juvenil (PEJ) 159 Plan de Empleo Rural (PER) 150, 159 Plan de Fomento de Empleo Agrario (PFEA) 150 Plan Integral de Calidad del Turísmo Español (PICTE) 105 Plan Viala 121 plastics 82, 86, 87 pluriempleo 152, 162 Poland 71, 131, 195 political transition 1, 14, 15, 19, 147, 148, 158, 165, 174, 178, 197 Popular Party see Partido Popular Port Aventura 108 Portugal 5, 19, 23, 25, 28, 33, 34, 39, 47, 57, 62, 109, 117, 121, 125, 127, 128, 132, 135, 139, 146, 152, 153, 179, 195

INDEX

Portugal Telecom 139 Poveda, Raimundo 12 Prados, Leandro 2, 4 Primo de Rivera, Miguel 59, 61, 72 privatization 21, 90–92, 122, 123, 126, 131, 133, 136, 137, 138, 140, 177, 191, 194 productivity 111, 129, 133, 147, 151, 183 preferential trade agreement (PTA) 171 Promodès 120, 121 property 123 protectionism 2, 5, 10, 11, 50, 51, 72, 77, 78, 85, 86, 147, 157, 197 Pryca 120 public services 99 public utilities 90, 165 public works 72 Puerto Rico 135 Pujol, Jordi 190 Puyol, Rafael 39, 45 Pyrenees 93, 116 Quinto, Javier de 87 railways 72, 93, 165 reforma pactada 165 regional development 80, 177, 178, 180, 181, 187, 188, 189 Reher, David Sven 27 Renault 129, 132 Renfe 9, 121 renovadores 90, 91 repression 4, 27 Repsol 121, 136, 137, 139, 141, 142 research and development (R&D) 20, 78, 132, 133, 161, 179, 186, 187, 197 reservoirs 185 retailing 118–21, 123, 156, 177 Retevisión 122 revolutionary tax 185 Ribera del Duero 66 rice cultivation 53, 55, 61, 64 Richards, Michael 4 Rioja, La 30, 31, 66, 186, 187 roads 80 Ródenas, Carmen, 35, 36, 38

239

Rojo, Luis Ángel 73 Romania 39 Romero González, Juan 42 Ros Hombravella, Jacint 11 Royal Bank of Scotland (RBS) 118 rubber 76, 86, 87 RUMASA 113 Russia 32, 39, 71 Ruta de la Plata 106 Salamanca 106 Salmon, Keith 49 Salou 108 San Román, Elena 75 Sánchez Alonso, Blanca 34 sanitation 178 Santiago de Compostela 106 Santillana, Ignacio 44 Sanz, Jorge 2, 4 Saragossa 46, 80 Sardà, Joan 8 scandals 21 Schengen Agreement 40 scientific instruments 127 Seat 91, 196 secano 47, 48, 55, 67, 69 Second Republic 4, 54, 62 Second World War 5, 6, 34, 92 Secretaría General de Turismo 106 Segura, Julio 78 self-employment 162, 163 Senegal 39 services 20, 37, 43, 45, 89, 98–123, 145, 146, 153, 163, 175, 183, 184 Sevilla, Jordi 67 Seville 42, 80, 107 shipbuilding 14, 45, 49, 72, 75, 76, 82–5, 89, 91, 93, 112, 145, 148, 165, 172, 174 shock therapy 10, 15, 18, 19, 86 shopping centres 119, 120, 121 Simpson, James 52, 54 Singapore 81 single European market (SEM) 129 Slovakia 196 small and medium-sized enterprises (SMEs) 102, 147, 159 social concertation see concertación social

240

INDEX

Socialist Party see Partido Socialista Obrero Español Sociedad Estatal de Participaciones Industriales (SEPI) 91 Solbes, Pedro 21, 70 Solchaga, Carlos 20, 21, 84, 90, 148, 166, 174 Sol Meliá 102, 139 Solé, Carlota 38 South Korea 82 Southern Europe 119 Soviet bloc 3 soya 65 Spanish Civil War 2, 4, 27, 29, 31, 34, 42, 50–53, 72, 92 Spanish flu 31–2 Stability and Growth Pact 194, 197 Stabilization Plan 2, 6–11, 36, 43, 71, 113 stock market 90 stop-go policies 13 storage 123 Straits of Gibraltar 39 strikes 8, 20 structural funds 177, 179, 180, 196, 197 Suanzes, Juan Antonio 75, 76 Suárez Adolfo 14–17, 83 subcontracting 152, 167 Sudrià, Carles 93 sugar beet 62, 67 sugar cane 61 sunflowers 66 supermarkets 119, 121 Sweden 5, 23, 25, 32, 42 Switzerland 5, 32, 37, 38, 78, 129 Taiwan 82 Tamames, Ramón 17 Tarragona 94, 187 taxation 8, 10, 15, 20–21, 94 ,136 tax breaks 186 tax havens 88 Telebras 138 Telecom Italia 122 telecommunications 122, 131, 137–9, 140, 141, 143, 164 Telefónica 115, 122, 136, 137, 138, 139, 141 Téneo 91–2 Terra Lycos 115

Terra Mítica 108 Texaco 92 textiles 10, 14, 71, 76, 81, 82, 83, 85, 87, 89, 126, 133, 139, 148, 156, 163, 166, 172, 173, 174, 184 Thatcher, Margaret 90 Third Reich 5 Tió, Carlos 68 Torremolinos 103 Tortella, Gabriel 24, 65 tourism 2, 11, 16, 18, 45, 63, 98, 98, 101–12 ,125, 127, 152, 160, 169, 171, 182 city 107 conference 106, 107 cultural 106 ecological 106, 111 rural 106, 108, 152 sustainable 111 turismo interno 109 Tovias, Alfred 20 toy industry 89, 163 Toys ‘R’ Us 120 trade 123, 125, 174 trade unions 8, 10, 15, 16, 20, 21, 81, 83, 88, 158, 160, 164–7 transport 46, 58, 75, 76, 93, 96, 113, 123, 179, 194 transport material 85, 86, 129, 132 Turespaña 106 Turkey 5, 104, 110 Ullastres, Alberto, 8, 9, 12, 77, 78 unemployment 4, 10, 13, 15–18, 20, 21, 37, 40, 45, 49, 71, 82, 83, 84, 97, 90, 133, 134, 144–51, 153–156, 157, 159, 160, 161, 162, 163, 166, 167, 168, 169, 183, 193, 197 Unión de Centro Democrático (UCD) 15, 17, 67, 83, 157, 172 Unión Fenosa 137 Unión General de Trabajadores (UGT) 164, 165, 166 unionization 152 United Kingdom 23, 25, 29, 39, 88, 90, 104, 125, 129, 130, 133, 135, 141, 164, 171, 198 United Nations 6, 24, 78, 81, 92

INDEX

United Nations Council for Trade and Development (UNCTAD) 139 United States 6, 7, 9, 69, 78, 81, 89, 92, 101, 102, 116, 120, 121, 125, 129, 131, 135, 140, 141, 198 universities 28, 80 Uno-e 115, 116 urbanization 41–4 Uruguay 34 Valencia 42, 44, 46, 48, 58, 120, 133, 187 Valero Lobo, Ángeles 29 Valladolid 66, 80 Vatican 7 vegetables 51, 65 Venezuela 35, 140 Viasa 143 Vigo 80 Villagarcía de Arosa 80 Villar Mir, Juan Miguel 14 Villar Palasí, José Luis 30 Viñals, José 3 viticulture see wine Vitoria 134

241

Vizcaya 42, 45, 80 Volkswagen 91, 196 wage moderation 8, 18, 21, 87, 88 wages 146, 147, 151 Walmart 120 waste disposal 178 welfare state 145 wheat 53, 55, 66 white goods 84, 85, 129 wine 51, 53, 55, 61, 65, 66, 163, 172, 173, 198 winemakers 130 Wolf, Martin 22 World Bank 9, 12, 61 World Competitiveness Yearbook 197 World Trade Organization (WTO) 69 Workers’ Statute 147, 159 Yacimientos Petrolíferos del Fisco (YPF)142 Zara 139, 152, 153, 184 Zonas de Urgente Reindustrialización (Urgent Reindustrialization Zones) 84, 187, 188