Last week I asked:
Why is Spain so much richer now than almost any country in Spanish America? Before you answer with great confidence, ponder this: According to Angus Maddison’s data on per-capita GDP in 1950, Spain was poorer than Argentina, Chile, Mexico, Peru, Uruguay, and Venezuela, and roughly equal to Colombia, Bolivia, Costa Rica, Cuba, Ecuador, Guatemala, and Panama. This is 11 years after the end of the Spanish Civil War, and Spain of course stayed out of World War II.
Via email, Penn’s Jesus Fernandez-Villaverde replied. The following is kindly reprinted with his permission.
By luck, the question is posted close to the 60th anniversary of the day that gives you a rather compelling answer (and one that is well accepted by most Spanish economic historians): July 21, 1959. I have an op-ed in El País, the largest Spanish newspaper. about this anniversary this Sunday (in my “other life,” I do Spanish Economic History).
On July 21, 1959, Franco’s government approved an executive order that implemented the “Plan de Estabilización” (the “Stabilization Plan”). The result of a memorandum of understanding with the IMF, the World Bank, and the OECD, the “stability plan” committed Spain to a rather standard program of fiscal and monetary stability, opening to international trade and foreign investment, and growing integration with international economic organizations. Simultaneously, the government had undertaken, in 1957, an administrative reform that enhanced state capability and an extremely efficient top civil service was established. Forget about the guy giving you a driving license at the local DMV; what matters is the quality of the senior permanent secretary of the Treasury, which has been outstanding since 1957 without interruption.
The “stability plan” broke an inward-looking development model with growing barriers to trade that had been followed since 1874. By 1959 Spain was poor for much deeper reasons than the 1936-1939 Civil War. Most recent releases of Maddison’s NIPA data for Spain, helped by the work of top researchers such as Leandro Prado de la Escosura show, that by 1929, Spain had fallen dramatically behind its European peers except Portugal and Greece.
The combination of macroeconomic stability, freer flow of goods and capital, and stronger state capability triggered several decades of fast economic growth. Most people would naively mention tourism. These observers forget that Spain became a magnet for the European car industry. In 2017, Spain produced more passenger cars than France or the U.K. and nearly as many as the U.S. (although the U.S. number is biased by the importance of pickup trucks in the U.S. production mix). Even more importantly, Spain is one of leading world producers of car parts.
Why did Spain become a magnet for the car industry? Good legal environment (the “Decretos Ford” or “Ford Executive Order” are so-called because they were designed to convince Ford to open a gigantic factory in Valencia), macro stability, and access to the rest of the European market.
Spain’s exports are rather diversified. Spain, for example, exports more airplanes and airplane parts than olive oil. Many of your readers probably fly in Airbus planes (American Airlines has plenty of them!): well, a big chunk of them are made in Spain.
A similar history can be told about the petrochemical industry. Today Spain exports more, as a percentage of GDP, than France or Italy.
To a considerable extent, the economic history of Spain since 1959 is a textbook example of modern economic growth: get a few institutions right and ride them into prosperity. European transfers after Spain joined the E.U. in 1985 are a rounding error. And joining the E.U. was the consequence of growth, not the cause.
Of course, there is the issue of high unemployment, but most foreigners forget that a 15% rate of unemployment in Spain is very different from a 15% rate of unemployment in the U.S. Roughly, and skipping some details, we are talking about many young people living at home with their parents that take 2-3 years after college before they find a job instead of a few weeks as in the U.S. due to our screwed labor market institutions. Not good, but not the end of the world.
Interestingly enough, Cuba had the same income per capita than Spain in 1959 and better literacy, education, and many other indicators. A few decades of ignoring markets and see what happens.
The critical question is, therefore, why did Spanish political-economic elites committed themselves to a market-oriented reform in 1959 and stick with it even during the transition to democracy in 1975, the arrival of the Socialist Party to government to 1982 (a surprisingly pro-market government), and the Euro crisis of 2008-2014 while most Latin American countries did not? Even today, a quick conversation with the political-economic elites of Madrid (the ones running the country) reveals a full conviction that this path has served Spain well (Bryan: the libertarians in Madrid are somewhat peripheral to that conversation, so their opinions are, to a very large extent irrelevant).
A full answer would require a long explanation, but the lack of a colonial inheritance (with all the racial and class divisions it creates) and the proximity to the core of Europe (France and Germany) are determinant factors.
Unfortunately, most research in Spanish economic history is not translated into English, but here’s good summary of the “consensus view” (which I agree with).
READER COMMENTS
Eustaquius
Jul 24 2019 at 11:06pm
Makes sense, Spain took advantage of market institutions and proximity to the larger European countries. I imagine that Franco also kept the unions in Spain under his control…
So, Spain grew and Latin America did not as much. But the colonial institutional legacy and the inequalities it created continued to play a role (as the post pretty much admits) and still do now.
Jesus Fernandez-Villaverde
Jul 26 2019 at 9:37am
Dear Eustaquius
Under’s Franco dictatorship, there were no free unions in Spain. The regime organized in 1940 a quasi-fascist, corporativist organization called the Spanish Labour Organization:
https://en.wikipedia.org/wiki/Spanish_Labour_Organization
that included both workers and firms.
Interestingly, most of the opposition to the market reforms in 1959 came from the Spanish Labour Organization. The fascist supporters of the regime (the so-called “azules” o “blues”; the regime had different groups of supporters that sometimes had quite diverse policy views) were very suspicious of markets (fascists all across Europe distrusted markets). However, Franco sided with the “technocrats” (Ullastres, Navarro Rubio) who designed and implemented the 1959 market reforms.
In the last years of the dictatorship, the Spanish Labour Organization was infiltrated by communist sympathizers and “free” workers’ commissions (theoretically illegal, but increasingly tolerated) were created:
https://en.wikipedia.org/wiki/Workers%27_Commissions
In fact, one of the very earliest workers’ commissions was organized a few meters away from were my grandfather lived 🙂
After 1976, trade unions were fully allowed.
RAD
Jul 25 2019 at 12:47pm
I wonder if the regional market size isn’t the key difference between Spain and Latin America. There is no doubt that market-oriented policies are a pre-requisite but even with market reform I think South America would be limited by geographic constraints. The same holds true for Africa.
Jesus Fernandez-Villaverde
Jul 26 2019 at 9:41am
Dear RAD
There is a follow-up entry where I address this exact issue.
Thanks
Todd Kreider
Jul 25 2019 at 1:48pm
Same mistake as a week ago. You need GDP per capita PPP to compare income levels of countries which Fernandez-Villaverde does not do. Once again, Spain was not poorer than Mexico, Venezuela or Brazil but was poorer than Argentina.
GDP per capita (PPP)
1960 v 2016, Maddison (wiki) 1950 not given:
Spain…………… $6,000……..$30,000
Mexico……………$5,600………$16,000
Venezuela……….$6,000………$15,000
Brazil………………$4,000……….$14,000
Argentina…….$10,000…………$19,000
Here is the Maddison data you want:
https://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_(PPP)_per_capita
Economists who work with trade like Paul Krugman understand the need to use PPP (Purchasing Power Parity) with these comparisons but econ bloggers like Tyler Cowen, Scott Sumner, Alex Tabarrok and Bryan Caplan do not, probably because they don’t usually study these topics.
Todd Kreider
Jul 25 2019 at 2:00pm
While the Maddison table at Wikipedia does not include 1950, the GDP per capita PPP for 1937 is given (in $2011):
Spain…………$3,100
Mexico………$3,000
Venezuela….$4,400
Brazil………..$2,100
Venezuela was richer than Spain in 1937 but would have been at about the same level as Spain in 1950, 13 years later.
Juan Carlos Guerrero
Jul 25 2019 at 6:03pm
Doesn’t it depend what you’re trying to compare? PPP may (arguably) be more relevant to quality of life, but not necessarily to productive capacity?
Jesus Fernandez-Villaverde
Jul 26 2019 at 9:21am
Dear Todd
If you read my entry, you will notice that I do not make any explicit comparison with Latin America except with Cuba. Instead, I compare the economic situation of Spain with its European peers.
However, since you ask this, let me address this concern in some more detail.
First, the standard source among academic economists for comparison of GDP per capita across time and space is the PWT version 9.1, according to the webpage: “a database with information on relative levels of income, output, input and productivity, covering 182 countries between 1950 and 2017.”
You can easily access, at
https://www.rug.nl/ggdc/productivity/pwt/
the series:
RGDPe
which records “expenditure-side real GDP at chained PPPs, to compare relative living standards across countries and over time”. Then, by simply dividing by population, you will get real GDP per capita at chained PPPs.
If you undertake such computation, you would see that Spain was, indeed, quite poorer in real GDP per capita at chained PPP than Venezuela, Mexico, or Uruguay in 1950 (and well- behind its European peers except for Portugal and Greece). In fact, nearly every single Spanish family has relatives that migrated to the Americas at that time due to the differences in income. Many of my own relatives moved to Cuba and Argentina (in the interest of full disclosure: Argentina’s numbers for 1950 real GDP per capita at chained PPP at the PWT are oddly low; I need to find out why).
Of course, Latin America is an extremely diverse region and comparing, for instance, Guatemala with Chile, is not very informative, as their ethnic background, colonial experience, and history since independence have been extremely different. Even Brazil is a world in itself, with Minas Gerais being a very different economy than Bahia (that is why Brazil’s real GDP per capita at chained PPP is not terribly informative). Nevertheless, you could safely argue that the most advanced economies in Latin America were ahead of Spain in 1950.
In 2017, the situation has dramatically reversed. Just to take Uruguay: an example of a country of mainly European origin, well-educated, and with excellent tourist attractions. While Uruguay’s real GDP per capita at chained PPP in 1950 was $6,258 vs. $3479 for Spain, today Uruguay’s real GDP per capita at chained PPP is $20608 vs. $37233 for Spain. In other words, Spain’s real GDP per capita at chained PPP multiplied by 10.7 while Uruguay’s multiplied by 3.29.
Venezuela’s case is even more dramatic (being the country with the largest oil reserves in the world). Its real GDP per capita at chained PPP in 1950 was $5869. Today is $7925. Even if you decide to ignore the last 10 years of Venezuela’s history and look at its real GDP per capita at chained PPP circa 2008, one still sees the dramatic underperformance of its economy. As a quick anecdote I always tell in class to my undergrads: in the 007 novels (not the movies), Ian Fleming explain in detail SPECTRE’s inner workings (which make some of the stuff in the movies easier to understand). In one of the novels (Thunderball, I believe, from 1961), it is explained that SPECTRE only deals with a small set of extremely sound currencies, including the Swiss Franc and the Venezuelan Bolivar. What a difference a few decades make!
One can think that explaining the reversal of fortune between Spain and the most advanced Latin American economy from 1950 to 2018 is trivially easy or one can think that explaining it requires serious research, but it is hard to deny that, since 1959, Spain is one of the most remarkable cases of convergence to rich countries in the data.
Mr. Econotarian
Jul 25 2019 at 6:38pm
It should be kept in mind that Spain had the same real GDP per capita in 2007 and 10 years later at 2017, with growth only coming back in 2013 (see FRED data). Growth was also very flat between 1975 and 1985.
Compare with Chile, flatlined until 1983, but then growing without much stop since then (see FRED data). Chile GDP per capita in constant 2010 USD is now $15,130 compared with Spain at $33,146.
Zhongfang
Jul 26 2019 at 9:40am
Happen to come across this piece. What interests me is when observing this statement “Interestingly enough, Cuba had the same income per capita than Spain in 1959 and better literacy, education, and many other indicators. A few decades of ignoring markets and see what happens.”… Hmm…
Among the author’s reasons for the success of Spanish car industry “Good legal environment, macro stability, and access to the rest of the European market“, which ones are missing for the “poor” Cubans? What is the role of decades of American interventions/sanctions and the exclusion of Cuba from the world’s market and technology spill-over? Economic institutions are probably not exogenous. Taking them out of the context of international politics would likely under-appreciate the benefit of Spain standing in the “right” side in the world politics (alas, American side). Just imagine what would happen in a scenario where the US, joined by all its allies, intervened in Catalan and used this as the reason to do the same things to Spain for decades as it did to Cuba…
Jesus Fernandez-Villaverde
Jul 26 2019 at 10:33am
Dear Zhongfang
The U.S. sanctions to Cuba are a red herring:
Cuba could always trade with Mexico, the rest of Latin America, Canada and, more importantly, the whole of the European Union. While trading with the U.S. would have been easier, it would also been easier for Japan to trade with China in the 1960 and 1970 than with the U.S. and that limitation did not hurt Japan that much. U.S. sanctions to Cuba were a self-defeating and misguided policy, but a rounding error in Cuba’s problems.
Cuba received, for decades, huge subsidies from the Soviet Union and more recently from Venezuela (the latter in terms of cheap oil). Those subsidies were, with near certainty, larger than the additional cost for Cuba to trade with the European Union than with the U.S.
Other Latin American countries (I use the example of Uruguay) have suffered from disappointing economic growth without the U.S. having much to do with it.
You ask:
“Good legal environment, macro stability, and access to the rest of the European market“ which ones are missing for the “poor” Cubans?
Well, to start with a good legal environment and a system of market prices. No entrepreneur with a minimum of common sense would ever open a car factory in Cuba, with or without U.S. sanctions.
“Taking them out of the context of international politics would likely under-appreciate the benefit of Spain standing in the “right” side in the world politics ”
Well that is exactly my point. As I say in my post, “Spanish political-economic elites committed themselves to a market-oriented reform in 1959”, which means picking the “right” side in the world politics.
If, in 1959, you pick the Soviet side, Maoist China, or the non-aligned countries s side you are demonstrating, as political-economic elite, a rather poor understanding of the world.
I truly never understood the argument of “this is just because you picked the right side”. Yes, “picking the right side” is what shows your intelligence, isn’t it?
Jesus Fernandez-Villaverde
Jul 26 2019 at 11:03am
I just remembered two cases that address the comment:
“Just imagine what would happen in a scenario where the US, joined by all its allies, intervened in Catalan and used this as the reason to do the same things to Spain for decades as it did to Cuba…”
more directly.
First, Western Sahara:
https://en.wikipedia.org/wiki/Western_Sahara#Stalling_of_the_referendum_and_Settlement_Plan
In the 1970s, the U.S. made very clear to the Spanish government that the U.S. administration did not endorse Spanish continuing occupation of the region. What did the Spanish government do? Drop Western Sahara as fast it could (not very nice for the locals, not our proudest moment).
Second, our nuclear program. See
https://www.amazon.com/bomba-at%C3%B3mica-espa%C3%B1ola-energ%C3%ADa-transici%C3%B3n-ebook/dp/B017XIOTB2/ref=sr_1_1?keywords=bomba+atomica+espa%C3%B1ola&qid=1564153209&s=gateway&sr=8-1
(sorry, only in Spanish). Franco’s regime came up with the rather stupid idea that we needed our own nuclear force. Quite a lot of money was invested in it. Once the Americans saw that the regime was serious about the nuclear bomb, it made it clear that the administration saw it with most displeasure. Quickly, the program was terminated.
The world is the world is. If the U.S. is the hegemon, the main role of a political-economic elite is to understand it and respond accordingly.
Blaming your problems to the fact that you did not follow the rules of the hegemon is both childish and self-defeating.
Had Germany happily accepted the U.K. supremacy in 1914, Germany’s 20th century would have been much better for everybody, starting with the Germans.
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