Growth and Crisis in the Spanish Economy: 1940-1993

Sima Lieberman

• Publisher: Routledge
• Year: 2005
• eBook ISBN: 9781134803910
• Topic: Business
• Subtopic: Business General
• Index: Business

Appraises the turbulent development of the Spanish economy over the last fifty years and places current economic problems in their historical context. The author examines the economic, political and social problems inherited from the Franco era and their evolution into the present. The book includes: * a detailed discussion of economic development under Franco, including the boom years of the 1960s followed by the decline of the early 1970s; *an analysis of the decade of economic crisis which only ended in 1985; *an evaluation of the economic successes achieved by the Gonzalez government during the second half of the 1980s; *an analysis of why, despite serious attempts to revitalize the industrial sector, Spain still has one of the highest levels of unemployment in the OECD.

1
THE SPANISH ECONOMY UNDER THE FRANCO REGIME

Many Spanish economists have interpreted the course of economic policy followed by General Franco’s governments as showing two distinct phases. The first corresponds to a period of economic autarky in which the Spanish economy remained practically closed to the world and which extended from the end of the Civil War to 1959 when the seriousness of Spain’s economic problems induced the Franco regime to accept economic reforms. This initial phase of Francoist administration ended with its approval of the National Stabilization Plan of 1959. The second stage was marked by a slow liberalization of economic activity in the country and by a very gradual opening of the Spanish economy. This phase covers the period 1960 to 1975 when the death of General Franco brought to Spain a new political and economic orientation.

Professor José Luis García Delgado believes that a better understanding of Franco’s economy justifies the view that this economy passed through three phases. The first covers the period 1939 to 1949. This was a period of economic stagnation, of blind adherence to the goal of autarky and of extensive government regulations and strict control of any form of economic activity. The second phase covers the 1950s and ends with the enactment of the Stabilization Plan. The final phase extends over the 1960s and ends with the assassination of Admiral Carrero Blanco in 1973, the death of Franco’s chosen political heir, marking the ultimate failure of Franco’s political and economic systems. Professor García Delgado considers the years 1974 and 1975 as being already part of a transition period which guided Spain to a new democratic system (García Delgado, J.L., 1986, 171).

According to García Delgado, the wisdom of the government’s pursuit of economic autarky by means of extensive controls in the 1940s started being challenged by the government formed in 1951. This scholar views the 1950s as forming an important watershed period during which Spain’s authorities gradually abandoned the goal of autarky. It was this change in economic orientation that made the National Stabilization Plan of 1959 possible. The last phase of Francoist economic rule is characterized by the implementation of measures of gradual economic liberalization, though government dirigisme does not disappear.

Table 4 Spanish industrial production indices: 1929–51 (1929=100)

García Delgado refers to the first period of Franco’s rule as ‘the night of Spanish industrialization’, a period during which Spanish industrial production stagnated and was unable to surpass the level it had attained in 1929. This economist bases his conclusions on indices of Spanish industrial production calculated by Professor Albert Carreras (Carreras, A., 1984, 127–57). These figures are shown in Table 4. The indices computed by Professor Carreras differ from those calculated by the National Institute of Statistics (INE) though both studies use 1929 as base year. Contrary to what is shown by the INE data, the indices of Carreras show that post- Civil War Spanish industrial output only exceeded that attained in 1929 in the year 1950.

García Delgado notes that while Greece, Italy and Yugoslavia (countries with relatively poor economies seriously damaged by World War II) succeeded during the period 1946 to 1950 in doubling, or nearly doubling, the index of their industrial production, Spain barely succeeded in multiplying her industrial production index by 1.1 in the same period. García Delgado finds that for the longer period 1936 to 1950 Spain’s industrial activity stagnated and the Spaniards’ welfare level declined. This conclusion is shared by other Spanish scholars (Prados de la Escosura, L., 1984,152).

For García Delgado, the night of Spanish industrialization was particularly tragic because it represented not only the end of a long and sustained period of slow economic growth which was maintained from the last third of the nineteenth century to the end of the first third of the twentieth, but also because it widened the gap separating the growth path of Western European economies from that of Spain. It forced Spain into greater relative economic backwardness. The decade of the night of Spanish industrialization proved also to be catastrophic for Spanish political, social and cultural life. The Franco government banned political parties, did away with independent labour unions, deprived workers of their legal right to strike, fixed salaries and wages and lost to emigration valuable human capital.

The tragic situation of the Spanish economy in the 1940s was observed by Josep Fontana and Jordi Nadal, two outstanding Spanish economic historians:

the new regime [under Franco] was launched under the double banner of social reaction and economic isolationism.
Apart from the nationalism, and indeed xenophobia, of the new government, it was external circumstances which made an isolationist policy inevitable. The outcome of the Civil War brought the complete loss of the gold reserves accumulated during the 1914–18 period and the burden of large debts to Germany and Italy. The Second World War, coming immediately afterwards, drastically reduced the invisible assets of the balance of payments (emigrants’ remittances and capital imports). Under such conditions from 1939 onwards imports could only be financed by the equivalent exports. The problem was made even worse by an inflationary internal policy and the maintenance of overvalued exchange rates, retained for traditional prestige reasons, which put obstacles in the way of the export of home products… calculated in gold pesetas at fixed value, the total (exports plus imports) of Spanish foreign trade, which already had decreased to 35. 9% in 1931–35 as compared with 1926–30=100, reached bottom in 1940–44 (29.7%)… This drastic reduction in foreign trade was the dominant factor of the whole economy…

Fontana, J. and Nadal, J., 1976, pp. 503–4

Fontana and Nadal interpret the economic situation of the Spanish economy in the 1940s as García Delgado does. The two economic historians find that ‘the national income was still, up to and including 1950, below the 1935 level, while the per capita income fell to even lower levels, due to the increase in population which, in spite of everything, had taken place’ (Ibid., 507). Indeed, Spain’s population increased during the 1940s, even though agricultural production had not yet recovered its pre-war level; a major reason for such increase was the cessation of emigration from Spain during the years of World War II.

The weak performance of the Spanish agricultural sector in the 1940s was caused by a number of factors. Warfare, a depleted Spanish treasury and a decline in world supplies forced Spain to import much less nitrogenized fertilizers and phosphates than in the period 1931 to 1935; Spain’s farmers also faced serious shortages of quality seeds and of agricultural machinery; finally, government controls mandated for many years relatively low official foodstuff prices and agricultural producers therefore lacked any interest in expanding their crops. Fontana and Nadal note that it was only after a disastrous grain harvest in 1945 that the government allowed a substantial increase in grain prices in order to encourage grain producers to increase their output. During the entire 1940s food shortages were so serious that imports of foodstuffs from abroad had to be boosted. Given the limited means to pay for such imports and in spite of the government’s interest in industrial growth, the authorities had to restrict imports of industrial machinery, of raw materials and of energy products. Thus, Spanish imports of raw cotton during the first half of the 1940s represented only 74.2% of their 1931–5 level; they stood at only 57.1% of the pre-war level during the balance of the decade (Ibid., 506). Given the enormous excess demand for foodstuffs, the internal terms of trade between agricultural and industrial products changed in favour of the former. While hunger plagued the urban masses, owners of large landed estates increased their wealth. The acquisition of land in the 1940s became a favoured form of investment for the wealthy. Concurrently, the pro-industrialization stance of the government also benefited industrial interests at the expense of rural and urban workers. The 1940s thus witnessed a redistribution of national income in favour of both industrialists and large agricultural producers to the detriment of workers. Exploitation of the latter by the former became more intense with the abolition of independent labour unions and with population growth. In addition, the government’s fiscal reforms of 1941 further intensified the misery of the masses because indirect taxes on consumption were raised more steeply than direct taxes. This is why Fontana and Nadal conclude that:

the civil war was won by the champions of an anti-bourgeois and anti-urban revolution, inspired by the purest spirit of nationalism. Their most representative figure was the smallholding farmer of the centre and north, paragon of the virtues of the race; beside him, sharing the benefits of victory, stood the majority of the clergy, the big landowners and the industrial and financial oligarchy. In the other camp, the vanquished, were the day-labourers of Andalusia and Extremadura, the petty bourgeoisie and the industrial proletariat of Catalonia and the Basque Country, who, during the vile republican era had dared to challenge the sacred unity of the fatherland. Hardly was the civil war over than war broke out between the nations which had supported one side and those which had supported the other, and this contributed to broadening the rift between victors and vanquished within Spain.

Ibid., p. 503

Distinguished economic historians agree with García Delgado that 1951 brought a significant change in the direction of Francoist economic policy (Carr, R. and Fusi, J.P., 1979, 55–7). This change followed the first massive popular protest against the government’s economic policies; in spite of threatened brutal police repression, a general strike took place in Barcelona in March. Fontana and Nadal describe the economic situation in Spain at that time:

In 1951 the failure of a decade of economic isolationism became apparent. War damage could no longer be blamed for the disastrous economic situation. It was now clear to all that the policy adopted since 1939 had failed to recover Spain’s economic strength. Taking as a basis 1935=100, the national income, in fixed-value pesetas, was only 89 in 1950 (i.e. 11% less than in 1935), whilst prices reached 570 (which means that they had increased almost six times). The maladjustment between the rapidly rising prices and the wages rigidly controlled by the Ministry of Labour produced the first great mass movement to disturb the social peace of the national-syndicalist state…

Fontana, J. and Nadal, J., 1976, p. 512

On 18 July 1951 General Franco changed the composition of his government but kept in it old Falangist leaders strongly attached to the course of the economic policies of the 1940s. The new men charged with the task of implementing improved policies supported a slow move to a market economy; they also realized quite clearly that Spanish economic growth required large imports of capital goods and that such imports could only be financed by foreign aid. Without massive imports of capital equipment, it would be impossible for any Spanish government to attempt to integrate the country into the global economy. Without the assistance of foreign aid, Franco’s rule had to end in failure. The advent of the Cold War between the United States and the Soviet Union saved Franco’s crumbling regime. The United States government, pleased by Franco’s posturing as a strong enemy of communism, agreed to extend economic aid to Spain in exchange for the American use of military bases in Spain, bases which would be of great strategic value to the American military in the event of war breaking out between the two superpowers. The United States concluded a mutual defence agreement with Spain in 1953. The Eisenhower administration then proceeded to supply Spain with foodstuffs, fodder, fertilizers and raw materials such as cotton. American aid to the Franco regime started making the latter more acceptable to the governments of the ‘free world’. Spain acquired membership in the United Nations in 1956. Concurrently, American economic aid helped Spanish industrial output to reach and surpass production levels attained in 1935; it also allowed the growth of agricultural production.

Franco’s retention of some old Falangists as cabinet members in the new government limited the extent of economic reform the government was able to carry out. These men were dedicated to the preservation of the economic policy course of the 1940s. Among the most prominent Falangists retained in the government were José Luis Arrese y Magrá, the Secretary-General of the only legal political party in Spain under Franco, the quasi-fascist National Movement, as well as Spain’s Minister of Housing from 1957 to 1960 and José Antonio Girón de Velasco, Minister of Labour in the 1950s.

The inflationary policies pursued by both the government and the private banks further impeded the acceleration of economic growth. The banks were allowed to create unlimited volumes of credit and their indiscriminate lending fuelled the country’s price inflation. In turn, the government financed the National Industrial Institute, the INI, a gigantic holding company created in 1941 to further national economic selfsufficiency and to develop defence industries, by issuing short-term bonds which were immediately redeemable at the Bank of Spain; between 1951 and 1959 the government sold about 22 billion pesetas worth of these bonds and their redemption strengthened the inflationary process in the country (Ibid., 514).

The Ministry of Labour concurrently allowed wage increases to prevent a serious deterioration of workers’ purchasing power. The resulting pricewage spiral was strengthened in 1956 when frosts destroyed most of Spain’s exportable citrous crop, thereby weakening the country’s export capacity. In order to maintain a minimum level of indispensable capital goods imports, the government practically exhausted its foreign exchange holdings in 1957. It also tried to contain labour strife by granting workers new wage increases.

Renewed strike activity caused by prices rising faster than total production caused General Franco to alter once again the composition of his government in February 1957. Falangists were replaced by better educated technocrats belonging to the secret Rightist and religious group known as Opus Dei. Among the new men coming to power were Alberto Ullastres, a former professor of economic history, who became Minister of Commerce, Mariano Navarro Rubio, appointed Minister of Finance, and Laureano López Rodó, also a university professor chosen to head the Technical Secretariat of the Presidency of the Government. These men agreed to follow a liberal economic policy which would bring the Spanish economy closer to a market system. They favoured tax reform, the suppression of the existing system of multiple exchange rates, a devaluation of the peseta and a more effective containment of domestic inflation.

Workers, too, pushed for significant economic reforms. New strikes broke out in Asturias in March 1958 and labour unrest extended to the Basque region and to Catalonia. The government appeased the workers by enacting the ‘Law of Collective Agreements’ which ended the power of the Ministry of Labour to determine wages; henceforth, wages were to be determined by negotiation between employers and selected employees. By the end of the 1950s, the men of Opus Dei had left far behind the old ideals of the 1940s.

Indeed, a number of significant economic reforms succeeded each other with amazing rapidity in both 1957 and 1958. In April 1957, the government abolished the complicated system of multiple exchange rates and devalued the peseta. Tax reform followed at the end of the year. Spain became an associate member of the OEEC in January 1958 and acquired full membership in the International Monetary Fund and in the International Bank for Reconstruction and Development. The new technocrats in power succeeded in transforming the earlier closed economy based on government-controlled foreign trade into a partially open economy with part of its foreign trade liberated from government controls. The enactment of the National Stabilization Plan in the summer of 1959 became the most significant economic act taken by a Francoist government during the entire period 1939 to 1959.

This Plan had its origin in a memorandum sent by the Spanish government to both the IMF and the OEEC on 30 June 1959. It enumerated proposed measures the Spanish government intended to take to improve the national economy. These measures were intended to achieve internal and external economic equilibrium and included fiscal and monetary reforms. Both international organizations gave their support to the contents of the document and to help Spain achieve the proposed goals they provided Spain with a loan of 546 million US dollars (Tamames, R., 1979, 429). The Plan was published in July. It pursued two main goals: first, it tried to establish the foundations of a process of balanced Spanish economic growth; and second, it purported to help the Spanish economy to integrate with greater ease into the global economy. Internal and external equilibria required price stability. Price stabilization was to be achieved by curtailing aggregate demand. In order to reduce such demand, the Plan called for the limitation of both public and private spending. The Plan enumerated a number of needed changes in monetary policy. The government was not to issue new government securities which could be immediately redeemed by their holders at the Bank of Spain. The redemption feature of existing public securities was an important cause of inflation because it allowed the unchecked expansion of bank credit. The Plan thus announced the limitation of bank credit extended to the private sector. Equally important, the Plan also announced that Spanish importers would be mandated to deposit in the Bank of Spain, previous to the act of importation, a sum equivalent to 25% of the value of their imports. Fiscal reforms centred on the reduction of public spending.

To the goals of containing the growth of aggregate demand, of attaining price stability and of reducing the country’s propensity to import, the National Plan of Stabilization added as an important government objective the achievement of external equilibrium. It announced the liberalization of Spanish imports of a number of commodities and revealed that state trading would be gradually delegated to the private sector. Bilateral trade was to be replaced by global trade. External equilibrium was to be attained through the enactment of a new tariff system, by liberalizing imports of capital and by establishing a realistic, single exchange rate for the peseta. In order to conform with IMF directives, a gold value of the peseta was defined as 0.0148112 grams of fine gold, a value which established an exchange rate of 60 pesetas for the US dollar. Multiple exchange rates governing both Spanish imports and exports disappeared. The new pesetadollar rate constituted a depreciation of the peseta intended to discourage Spanish imports and to boost the country’s exports.

The Plan of Stabilization attempted to boost the inflow of foreign capital into Spain by facilitating foreign investment in the country and by granting amnesty to all Spaniards who had illegally accumulated wealth abroad and who were willing to repatriate such wealth; capital held abroad by Spaniards could be brought back to Spain without fear of government prosecution. The framers of the Plan of Stabilization clearly understood that a massive entry of foreign capital into Spain was the most effective way of obtaining external equilibrium.

Although the leading Spanish decision makers of the 1960s did not hesitate to support liberalizing economic reforms, they remained reluctant to embrace a true market economy in which government dirigisme would either become minimal or disappear altogether. Given the fact that these men had careers anchored to the large apparatus of government intervention, that their power and prestige were tied to their ability to allocate resources and extend credit, their strategy was to liberalize Spanish economic activity while retaining significant government control over such activity. Though willing to allow a slow liberalization of Spanish economic life, they opposed any democratization of the existing political regime.

The government technocrats of the 1960s, men such as Laureano López Rodó, embraced ‘indicative economic planning’, as developed by the French, as a way to maintain dirigisme in spite of the trend toward economic liberalization. The formulation of three-year ind...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Graphs
• Tables
• Acknowledgements
• Introduction
• 1 The Spanish Economy Under the Franco Regime
• 2 Stimulants and Impediments in the Economic Boom of the 1960s
• 3 The 1970s
• 4 Economic Crisis in the 1980s: 1980–5
• 5 Economic Recovery During the Second Half of the 1980s
• 6 The Return of Economic Crisis and the Challenges of the Early 1990s
• Bibliography