Elections and the Economy in Spain (published in ARA, December 7th, 2015)

None of the main policy proposals made by Spain’s national parties will solve the two key structural weaknesses — high unemployment, low-paid jobs – that define that country’s economy. The current economic adjustment program, based exclusively on an internal devaluation process, was inevitable for two reasons: eurozone members cannot rely on a standard currency devaluation to bring labor costs down; more importantly, salaries rose much faster than productivity during Spain’s long real estate bubble that burst in 2008. However, this strategy has proved to be insufficient: even though salaries have dropped dramatically, unemployment figures have just returned to 2011 levels and the labor system (in terms of contract duration and wages) has become much more precarious.

Ciudadanos, a brand-new conservative party seemingly luring many voters away from Mr. Rajoy’s Popular Party, has vowed to enact a single employment contract to end Spain’s dual labor market. Although this proposal may introduce some measure of fairness in the hiring and laying process, its impact on the number and quality of new jobs should be negligible. The empirical evidence available to us shows that there isn’t much correlation between labor flexibility and full employment in Europe. The unemployment rate depends on much more fundamental issues (education, business dynamism, the public finance system) than amending labor laws already heavily reformed in the last four years.

In turn, the two opposition parties on the left (the PSOE and Podemos) promise to solve the structural problems of Spain through a larger public sector. Indeed, public spending is an important corrector of inequality and, when applied to certain policies (education and infrastructure), it may foster economic growth. Nevertheless, the creation of wealth depends, after all, on having a dynamic private sector operating within a competitive market economy.

Despite their (important) differences, all Spanish parties share a common thread: statism, that is, a heavy commitment to economic regulations implemented by an (allegedly rational) central state. They are gravely mistaken – driven more by their ideological commitment to the idea of a single Spanish nation than to modern economic ideas. The best economic performers (in terms of unemployment, productivity and innovation) among advanced economies are either small nations (the size of Denmark) or countries that are strongly decentralized, both at federal state and local government level (Germany, Canada, the USA). Large, centralized countries are not faring that well — including France, whose situation is becoming increasingly critical.

There are four reasons why this is the case. First, their institutions are closer to the people, fostering political transparency and democratic accountability. Second, their size facilitates the collaboration between political and social agents (who are disciplined by the need to compete in a global world). Third, a clear match between public revenues and expenditure encourages everyone to manage their budget in a rational manner and to avoid spending beyond their means. Last but not least, their scale allows them to experiment and develop alternative solutions to new problems more rapidly. In contrast, Spain is at the very antipodes of this in the three key policies crucial to economic growth: education, the relationship between businesses and state, and the territorial structure of expenditure.

Today everyone agrees that education is essential in order to be competitive. However, a good education system cannot be brought about by a new ministerial reform alone. To succeed, the educational system should suit the productive structure and social demands of each region — and the economy of the Iberian Peninsula is extremely heterogenous. Moreover, at a time of fast technological and cultural changes nobody knows exactly what will or will not work: just notice how Finland, the paradigm of a successful education system, has just decided to overhaul it again. Hence, the only solution is to strengthen experimentation at the neighborhood, municipal and regional levels and then to encourage the exchange of ideas and institutional cooperation.

As for the structure of the markets and the relationship between the state and businesses, both small nations and federal countries share two traits: a minimal state-owned business sector and the strong regulation of large private corporations. The high level of trade openness inherent to small economies has persuaded their entire political system to avoid creating public, inefficient companies. The system of institutional checks and balances prevailing in federal nations sustains oversight bodies that are independent from the executive branch and reduces the chances of large companies capturing the political class. In Spain, the situation is the complete opposite: the old state-owned firms set up during Franco’s regime —now privatized— maintain close ties with the political elite. A mere change in the ruling party (without profound institutional reforms that, in fact, none of the candidates wishes to undertake) will be pointless.

Finally, the design of Spain’s regional structure is the opposite of what you would expect from a well-administered country. While the revenue system is organized on the basis of huge interregional transfers, all Spain’s regions are expected to render the same services. As a result, the more dynamic regions are forced to borrow while the less active ones are allowed to overspend. Unfortunately, the vote on December 20 will not change this, either.

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