II Background

Spain's remarkably high rates of economic growth stability, and improve Spain's external accounts through, over the decade and a half between the implementation inter alia, a substantial liberalization of foreign trade. of the Fund-supported Stabilization Plan of 19592 and The various measures adopted as part of this liberal- the onset of the oil crisis in the mid-1970s were largely ization effort were to have a profound influence on the made possible by a change in the orientation of its composition of Spanish growth and on the relative role of economic policies, which had theretofore promoted self- the tradables sector. The adjustment program was sufficiency in an increasingly interdependent world. launched with a 43 percent devaluation of the peseta and Prior to 1959, Government policy had sought the rapid the elimination of the system of multiple exchange rates, development of an industrial base through a high degree supported by a marked tightening of financial policies. of protection and official intervention in the economy. Ceilings were imposed on government expenditures and Rigidly enforced quantitative restrictions on imports and on bank lending to the public sector. Prices for transport strict export licensing, widespread price controls, and a and public utilities were raised by nearly 50 percent, and large body of legislation regulating virtually every aspect taxes on gasoline and tobacco were likewise increased. of productive activity ranging from procurement and Ceilings on bank credit to the private sector were also distribution to investment3 were the main characteristics imposed. of what is now referred to as Spain's period of autarky. The objectives of the program were met within a short Policies aimed at promoting self-sufficiency in turn period. The annual rate of inflation fell from 33 percent introduced a number of rigidities in the Spanish economy in 1958 to 1.5 percent in 1960; the trade balance that were to hamper severely the development process. recorded its first surplus since 1951 as a result of a 50 Describing some of the strains on the economy brought percent increase in the volume of exports, and so did the about by autarky, Wright (1977) states: current account under the influence of a rapidly growing tourist sector. More important, growth, which had come Industry had developed, but often based on small units to a standstill over the crisis years, resumed. Between whose high costs and inefficiency rendered them quite uncompetitive on world markets. As industrial growth had 1961 and 1974, the Spanish economy grew at an average accelerated so, too, had the demand for products which annual rate of 7.3 percent, with the highest rates (10 per- could not be produced in Spain, and which could not be cent on average) being registered in the three-year period obtained elsewhere due to the very poor level of exports and immediately following the program. This overall growth the consequent strict implementation of import controls. performance was second only to that of Japan among the This created shortages. In 1959, exports equaled less than member countries of the OECD. As part of an aggressive 4 percent of GNP—lower than the percentage of any OECD export promotion program begun in 1959, an export country except Turkey. The system of multiple exchange subsidy scheme was introduced to offset the effects of rates created further distortions in prices and costs and had a 4 indirect taxes, and rebates were granted for import duties dampening effect on the balance of payments. on intermediate goods used in the production of export The Stabilization Plan, which had been brought into products. At the same time, restrictions on imports were being as a result of a severe balance of payments crisis substantially relaxed, and the number of products subject over 1958-59, sought to restore financial and price to quotas sharply reduced. A concomitant liberalization of capital flows, particularly foreign direct investment, gave a special impetus to Spain's industrialization drive 2Spain joined the Fund and the World Bank in the autumn of 1958. A comprehensive history of the relations between the Fund and Spain by allowing domestic firms to absorb more rapidly 5 is provided by Muns (1986). technological changes. The combined effect of these 3 Public enterprises were required to purchase supplies and equip- measures led to a substantial acceleration in the growth ment on the Spanish market. State authorization was required to expand industrial capacity—and hence output—and to undertake any type of industrial investment. Preferential treatment was granted to certain industries whose development was deemed, to be in the 5The requirement for prior administrative authorization for foreign "national interest." investments involving less than 50 percent ownership of a given 4Wright (1977), p. 28. Spanish enterprise was eliminated in 1959.

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©International Monetary Fund. Not for Redistribution II • BACKGROUND of foreign trade. Both exports and imports in volume try or Agriculture—firms would set specified targets for terms grew over this period at average annual rates in production or some other indicative variable, and the excess of 15 percent, and their corresponding ratios to State would provide the necessary support in the form of GDP more than doubled. The transformation of the fiscal incentives or, most often, subsidized credit. The Spanish economy into an industrial state was hastened by allocation of such resources tended to be arbitrary, less the diversification of imports implied by the opening up guided by market realities than by the desire to to the outside world that permitted the much-needed strengthen industries perceived to be of ''strategic" renovation of capital equipment. Between 1959 and 1974 importance. Thus steel and shipbuilding were accorded the contribution of industry to Spain's GDP rose from 30 preferential treatment; not surprisingly these sectors were to 42 percent, while that of agriculture fell from 20 to 11 most adversely affected by the oil price rises and the percent. The share of the labor force employed in agri- ensuing international recessions. At the same time, and culture fell, over the same period, from 42 to 24 percent. notwithstanding the beneficial impact associated with the Three factors played decisive roles in enabling Spain initial round of trade liberalization, the process of to finance the rapid import growth that facilitated the industrialization, against a background of nearly two expansion of the industrial sector: an enormous increase decades of autarky, proved unbalanced, with the bulk of in receipts from tourism, emigrants' remittances, and industrial output directed to the domestic market. By the foreign investment. Tourist arrivals rose from 4.2 mil- mid-1970s, Spain was still the most closed economy in lion in 1959 to over 35 million in 1974, an eightfold Western Europe as measured by commodity trade flows; increase, which by the early 1970s generated sufficient the ratios of exports to GDP stood at 7½ percent and that foreign exchange to finance the entire trade deficit, then of imports to GDP at 14½ percent. averaging about 5 percent of GDP. The growth of An underestimation on the part of policymakers and tourism over this period had a stimulative effect on other entrepreneurs of the relative importance of cheap oil and sectors of the economy, such as construction and credit, buoyant growth abroad, and the persistence of a commerce, and encouraged the development of much- statist approach to economic policy has been suggested needed infrastructure.6 Although reliable figures on as being partly responsible for Spain's delayed adjust- emigrants' remittances over this period are not available, ment to the first oil shock. While, as a result of the rise in it is estimated that they were equivalent to between 15 to oil prices, various measures were implemented in a 20 percent of the trade deficit. For its part, foreign number of energy-dependent European countries to limit investment began to account for an increasing share of the consumption of energy products, in Spain investment gross capital formation; 20 percent by the end of the in energy-intensive sectors continued unabated. A partial 1960s in the industrial sector. Foreign investment in the indication of this may be gleaned from an examination of chemical and motor vehicle industries was particularly data on net petroleum imports by Spain and other OECD heavy. Other factors that had an impact upon Spanish countries after 1973 (Table 1). While countries differ in economic growth over this period were the continued available domestic energy resources, all the countries prosperity of Spain's main trading partners and the avail- listed are net petroleum importers, and all were thus ability of inexpensive imported oil, which induced a adversely affected by the rapid growth in the price of rapid substitution away from domestically produced crude oil. Nevertheless, it is clear that during 1973-80, coal, but which was to leave the industrial sector in a Spain's net petroleum imports rose in dollar terms by vulnerable position at the outset of the oil crisis. over 1,200 percent, well above the corresponding in- Although the Stabilization Plan of 1959 was a crucial creases for the other countries in Table 1 (with the turning point in Spain's economic development, exception of Portugal) and substantially in excess of the signaling the beginning of a more outwardly oriented cumulative percent increase for the totality of the smaller policy stance, by the mid-1960s the pace of liberalization European countries,7 the EC, and the OECD (less the had slackened as the authorities embarked upon a series United States). A new national steel plan unveiled in of development plans modeled after the French system of 1974, for instance, projected a real average annual indicative planning. In consultation with the appropriate growth of steel consumption of 5 percent, with a target of Government agencies—usually the Ministries of Indus- 20 million tons by 1982.8 These weaknesses were com- pounded by the rapid increase in real wages after 1974, which raised the relative price of labor at a time when the 6Tourist activity in Spain accounts for slightly more than 9 percent terms of trade loss would have required a moderation of of GDP, a figure not substantially lower than the contribution made by labor costs. Between 1975 and 1979 employment in the construction sector. Its influence on employment is no less industry declined by over 20 percent. important: more than 1.1 million people are directly or indirectly employed in the tourist sector, a figure that accounts for more than 11 percent of the labor force. Spain ranks first in most international comparisons of tourist-industry indicators. Specifically, it accounts for 7All European OECD members with the exception of France, the more than 10 percent of the total volume of world tourism and 8 per- Federal Republic of Germany, the United Kingdom, and Italy. cent of the total foreign exchange generated. 8In the event, actual consumption that year stood at 8 million tons.

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©International Monetary Fund. Not for Redistribution Background

Table 1. Import of Oil by OECD Countries, 1973-86 1973-80 1981 1982 1983 1984 1985 1986 (Cumulative percent increase) (Annual percentage change) Germany, Federal Republic of 629 -10.1 -11.4 -11.3 -2.9 -1.0 -36.8 Japan 868 1.3 -12.2 -11.1 -0.5 -11.1 -40.5 France 821 -7.0 -11.3 -18.1 -2.1 -8.8 -42.7 Italy 858 8.2 -15.6 -7.1 -9.7 0.6 -45.2 Austria 854 -4.8 -21.2 -12.6 0.9 -4.0 -35.9 Denmark 499 -11.8 -4.2 -30.1 -5.9 -4.4 -43.4 Greece 801 -6.4 54.7 -6.4 -10.0 18.9 -49.5 Belgium-Luxembourg 686 13.8 -4.2 -39.9 30.0 -11.2 -47.3 Portugal 1,345 6.9 13.3 -18.6 8.1 -7.7 -25.0 Spain 1,229 5.6 -16.8 -6.5 -10.7 -1.7 -38.7 Switzerland 482 -8.8 -10.6 -3.1 -8.8 2.1 -24.2 Smaller European countriesl 808 -4.2 -11.4 -18.5 -9.9 -3.2 -43.9 European Community 595 -9.8 -14.9 -19.4 -2.7 -4.9 -42.2 Source: Organization for Economic Cooperation and Development, Economic Outlook, June 1987. Excluding Iceland.

Summing up the plight of the Spanish economy over The early 1980s witnessed a rapid deterioration of the the second half of the 1970s Graham (1984) suggests that Spanish economy. The combination of an adverse the problems experienced by Spanish industry in the external environment, precipitated by the second oil early 1980s could in good measure be attributed to the shock and the ensuing international recession, and an errors (e.g., continued investment in energy-intensive inconsistent stance of domestic policies led to the industries) made then. emergence of major imbalances. The current account of the balance of payments moved from a surplus of Before these investments began to pay for themselves, 0.6 percent of GDP in 1979 to deficits in excess of recession set in, creating overcapacity. Energy costs put up production and wage costs. To cover these extra charges 2.4 percent of GDP over 1980-81. Although much of more money was borrowed at a time when cheap interest this deterioration can be attributed to the terms of trade rates had evaporated. Industries which had been making loss of 21 percent over the period 1980-81, there is no steady profits for more than a decade were suddenly doubt that it was also linked to the delayed impact of the overmanned, over producing, their margins being squeezed appreciation of the peseta, which in 1979 alone rose by into the red by the high financial charges. The list was a long more than 16 percent in real effective terms. Exports one covering the whole steel industry, shipbuilding, cars remained stagnant in 1980 while tourist arrivals fell for and trucks, textiles, domestic appliances, paper, chemicals 9 the first time in more than 20 years. As the recession and aluminum. deepened—GDP grew by less than 1 percent on average The absence of an adjustment to the substantially over the three-year period ending 1982—the financial different set of environmental parameters imposed by the position of the general Government worsened steadily, first oil price rise may also be inferred from the role of with the nonfinancial public-sector deficit rising from exchange rate policy over this period, which sought to 1.6 percent of GDP in 1979 to about 5!/2 percent in 1982 offset, to the extent possible, its impact on domestic under the impetus of rapidly rising social security prices and eventually on disposable income. Between expenditures, increasing transfers to troubled enter- 1975 and 1979, the peseta appreciated by over 35 percent prises, and a tax burden that did not and could not keep in real effective terms, while the stock of external debt pace with the growth of expenditures. Nominal wages, rose from US$8.5 billion to US$19.5 billion. The although on a decelerating trend with respect to the rates adjustment that should have begun after the first oil price of growth registered during the late 1970s, continued to rise began to take place in Spain in 1980 just at the outset rise above the rate of inflation. These factors and the con- of the second oil crisis. It was only then that the comitant rapid expansion of the monetary aggregates magnitude of the crisis became fully evident and that a resulted in a worsening of inflation performance and led national energy plan was brought into being with the aim to a widening of the price differential with respect to of reducing dependence on imported oil. Spain's trade partners, particularly in the EC.

9Graham (1984), p. 86.

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©International Monetary Fund. Not for Redistribution