Journal Issue

Aninat address: Globalization and careful planning have fueled Spain’s rapid economic development

International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Aninat on Spain and globalization

Benefits and risks of globalization

Globalization could be defined as the increasing integration of activities—especially economic activities—among nations around the world. The world as a whole has benefited greatly from this openness. The strong consensus among policymakers and economists today is that outward-oriented strategies are essential for achieving the sustained economic growth needed to raise living standards.

But this is not to question in any sense that there are very real risks associated with globalization: the risk of overstretching the abilities of societies and political structures to adapt; the risk that excessively volatile capital markets will trigger financial crises that can much more easily ricochet from one country to another; that the benefits of globalization will be concentrated among the few, not the many; that diseases, like AIDS, will spread globally at frightening speeds; that crime will become internationalized, as we are already seeing with controlled substances, leading in turn to problems such as money laundering; and, finally, that expectations will not be met. Thus, our principal challenge, as put so well by Nobel Laureate economist Amartya Sen in a recent lecture, is “how to make good use of the remarkable benefits of economic intercourse and technological progress in a way that pays adequate attention to the interests of the deprived and the underdog.”

Case of Spain

During the 1990s, many Latin American countries took far-reaching steps to better integrate and quickly began enjoying the fruits. But Spain is the star performer in the Spanish-speaking world when it comes to making a dramatic leap into the economic “big leagues”!

  • Spain is catching up with its European peers. Its per capita GDP has jumped from about 75 percent of the European Union (EU) average in the mid-1970s to nearly 87 percent, with most of the increase taking place in just the last five years. The economy has been growing at an average 4 percent annual rate over the last four years and should grow at around 3 percent this year.
  • Trade plays a far more important role in Spain’s economy, with exports (of goods and services) plus imports shooting up from 27 percent of GDP in 1970 to 62 percent in 2000. This increase is most impressive!
  • We also see major changes on the services front. Spanish banks are increasingly playing a prominent role in Latin America, with these banks now controlling nearly 20 percent of Latin America’s banking sector. In addition, major Spanish firms like Repsol-YPF (energy) and Telefónica (communications) are investing heavily in Latin America.
  • Spain’s foreign direct investment (FDI) has shot up in the last decade from less than 1 percent of GDP to nearly 10 percent, and FDI in Spain has risen from just under 3 percent of GDP to nearly 7 percent. Spain has gone from being a net importer of investment on the order of 2 percent of GDP annually to being a net exporter on the order of 3 percent. Indeed, Spain is now the sixth largest investor in the world. It is also the twelfth largest donor of official development aid and the eighth largest contributor to the United Nations.

Why did Spain arrive with a splash? No doubt globalization and a desire to integrate with the rest of the world—after a long period of protectionism and political and economic isolation—were driving factors. Of course, this didn’t happen overnight but rather reflected a carefully calculated act of faith spread over many decades that has paid off. What are the landmarks?

  • Trade liberalization. Beginning with the 1959 stabilization plan and the return of European tourists after the upheavals of civil and world wars, the process of liberalization was gradual and moved in stages, as Spain set its sights on integrating with the rest of Europe and partook in the global trade rounds.
  • Integration into the European Union. This resulted in a very intense period of trade reform, with administered trade regimes abandoned and tariff structures brought into line with EU requirements.
  • Changes in the legal system. These were substantial in the early 1990s as Spain brought its laws into line with European Community standards and updated and reformed its laws to make them as complete, functional, and modern as those of its peers.
  • Changes in monetary policy and status of the central bank. From 1973 to 1983, the government followed a monetary policy that was characteristic of a relatively closed economy, concentrating on the control of broad monetary aggregates. Between 1984 and 1989—when growing financial innovation made ensuring the stability of the financial system an increasingly important goal—monetary policy gradually began to focus more on interest rates and exchange rates. In 1994, parliament recognized the principle of central bank independence, switching the focus of monetary policy to price stability, but keeping Spain within the framework of the European Monetary System. In 1995, Spain successfully implemented an inflation-targeting regime. Finally, in 1999, Spain became a founding member of the euro.

“Why did Spain arrive with a splash? No doubt globalization and a desire to integrate with the rest of the world—after a long period of protectionism and political and economic isolation—were driving factors.”

—Eduardo Aninat

This careful planning has paid off, with Spain significantly outperforming its euro-area colleagues in most respects. Even a casual glance at the data makes clear that Spain stands close to the head of the class. Over the last four years, real output has grown at an annual rate of 4 percent, and over the last six years, it has grown faster than for the euro area as a whole for each and every single year. Over the same period, real exports have grown by an average of 10 percent annually, about one-third better than for the euro area as a whole. Indeed, it was the strong growth of real exports in the mid-1990s that led off the current economic expansion.

Spain also deserves high marks for putting its fiscal house in order. Over the last five years, the budget deficit has declined from 6.6 percent of GDP to just 0.3 percent of GDP—a major achievement by any standard—with the government hoping to achieve fiscal balance this year. In addition, the ratio of debt to GDP, which in the mid-1990s stood at 68 percent of GDP, has now declined by 8 percentage points, and further declines are in the offing.

To be sure, significant challenges still remain. On the job front, although employment has shot up in recent years (averaging 3½ percent annually since 1995, an astounding three times the euro-area average), the unemployment rate stands at a very high 13.4 percent, with significant human and social costs. But keep in mind that as recently as 1996, the rate of unemployment averaged more than 22 percent. Spain was able to turn this around thanks to wage moderation on the part of workers, better labor relations, and substantial labor market reforms that reduced dismissal costs and social security contributions for certain classes of workers. Further reforms are now needed to continue to reduce dismissal costs, enhance labor mobility, and decentralize the collective bargaining process. And Spain must continue to tackle regional disparities.

Spain should also move quickly to dampen inflationary pressures, as its persistent inflation differential relative to the monetary union average could lead to an erosion of exporters’ competitive position in the medium term.

Global challenges

As Spain now charts its way forward, it must do so with a world economy undergoing a critical period of adjustment. The engine of global growth over the past 10 years—the U.S. economy—is sputtering, with no other region taking its place. The IMF is forecasting world growth of around 3 percent this year, significantly lower than was generally foreseen last year. On the plus side, the timely U.S. interest rate cuts and tax relief should help facilitate a pickup in the second half of this year, gaining momentum in 2002. Moreover, global inflationary pressures remain manageable, allowing room for maneuver in monetary policies. But on the negative side, oil prices still remain high, substantial current account imbalances remain among the major industrial countries, Japan’s situation appears increasingly difficult, and stock markets remain volatile.

Against this background, can the euro area manage growth around its underlying potential of 2.5 percent this year? The recent slowdown of industrial production, particularly in Germany, combined with rising headline inflation, gives rise to concern. While the recent increase in headline inflation may limit the scope for aggressive monetary easing by the European Central Bank, a further weakening of activity, or signs that underlying inflation is abating, would allow scope for additional rate cuts. The main policy priority, however, remains that far more is needed in terms of ambitious reforms to get rid of structural rigidities, especially in labor markets, pension systems, and product markets. Moreover, Europe should be aiming at boosting potential growth to well over 3 percent—an increase that would significantly lower unemployment, strengthen the euro, and help strengthen the global economy.

How can the international community help spread the benefits of globalization? Industrial countries should practice what they preach and open up their own economies, especially in areas where developing countries have a clear and demonstrated comparative advantage. Meanwhile, the IMF supports calls for the poorest countries to have duty- and quota-free access to industrial country markets.

Industrial countries should also deliver on their long-promised increase in official development aid to the targeted level of 0.7 percent of GDP. And they should follow through on their pledges for debt relief to the poorest countries—here, we welcome the decisions by a number of Group of Seven countries to forgive 100 percent of bilateral debts.

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