Spain

Upon arriving in the cities of Madrid or Barcelona, uninitiated visitors may be forgiven if they assume that the energetic pace of commerce, lively political scene, and vibrant cultural landscape resulted from an entirely peaceful pursuit of progress among citizens of a long-united nation.

Just over 60 years ago, a three-year civil war between the leftist Republicans and the rightist Nationalists ravaged the country. Only as recently as 1975, Spain was viewed as a backwater in Europe, held back by the isolationist and protectionism policies of Francisco Franco, who designated himself El Caudillo and ruled with an iron grip since seizing power in 1939.

Fifteen years since the accession of King Juan Carlos I and the restoration of democracy, Spain has evolved into a modern nation with a diversified, deregulated market economy that is completely integrated into the 15-member trade bloc known as the European Union (EU).

Spain's gross domestic product (GDP) reached $595 billion in 2000, reflecting an average growth of 4.2 percent from 1995 to 1999, or one percent above that posted by the 11 countries within the euro-zone during the same period. Currently, Spain is the fifth largest economy within the EU and in many ways, among the most modern.

Spearheading the country toward a new path: Spanish Prime Minister Jose Maria Aznar

Much of the credit for the health of the Spanish economy must go to the government of Prime Minister Jose Maria Aznar. Heading a coalition that included the Catalan Nationalists), Aznar was elected in 1996 and soon implemented reform measures to ensure that Spain joined the fist wave of countries for the single currency.

After 13 years of socialist programs, the need to develop a streamlined economy looked daunting. In fact, several observers believed that Spain would not meet the requirements in time. Sheer determination ensured that hurdles were overcome but not without some pain.

When Aznar came to power in 1996, the public deficit-GDP ratio stood at 6 percent. Within two years, the government brought down the figure to the required 3 percent. Last year, the ratio was expected to fall further 0.4 percent.

This year, the prime minister has vowed to lower the deficit-GDP ratio to zero-percent and report surpluses in the subsequent years.

Inflation was another obstacle to overcome. In the late 1980s, the difference between inflation in Spain and the first wave frontrunners reached as high as 6.2 percent. Due to the obvious danger that high consumer prices posed for competitiveness, Spain had to lower its inflation rate to 2 percent. That goal was also achieved.

For the Spanish currency, roller-coaster rates and uncertainty are certainly things of the past. Also, taxes have been slashed, with corporate taxes emerging as among the lowest in Europe at 24.11 percent compared to 38.53% in Germany.

Meanwhile, the government is committed to keep fiscal policy tight, ensuring that wage shocks or inflation not stunt GDP growth or heat up the economy to dangerous levels.

The best defense is good offense

With increased competition resulting from total integration ahead of the introduction of the euro in 2002, the government took steps to deregulate the economy and sell state-owned enterprises.

Aznar, who gained an outright majority upon winning a second term during in elections last year, stresses that deregulation will carry on. "We are going to continue with more liberalization, more competition. Spain is the most flexible nation in Europe and will continue in this direction."

Antoni Subira i Claus, Catalonia's minister of Industry, Trade and Tourism

The telecommunications, banking, energy, and professional services sectors have all seen radical changes. Mergers, consolidation, and a sell-off of state assets have spawned a string of strong Spanish corporations which have since closed the gap between top multinationals and rivals within the EU and elsewhere.

Meanwhile, the Spanish population has been reaping the benefits of de-regularization.

In the power sector, there has been an 11.7 percent decline in household electricity costs. Banks are providing customers with greater options at better rates. The telecommunications sector has been in the middle of a revolution.

Solid foundations

Hard industries such as manufacturing, already strong and well established in Spain have likewise benefited from the healthy economic climate. The chemicals, textiles, pharmaceuticals, machinery, food processing and the automobile sectors have seen continuous growth.

For instance, the automobile sector produces over 2.8 million units a year in Spain, placing the country as the world's fifth largest car producer behind Japan, the US, Germany and France.

Foreign Direct Investment (FDI) has helped to fuel the economy. FDI has remained steady at 2.0% of GDP per year (90% comes from the EU). Businesses continue to flock into the country because of the country's highly efficient labor force, lower unit labor costs, availability of cheap industrial and office space, and Spain's ability to integrate these facilities into the European and global supply chain

So, Spain has attracted a large number of Japanese investments. Consumer electronics, automobiles, chemicals and textile companies have all found Spain to be an excellent base and market for their operations, according to Kiyohiko Arafune, the Japanese Ambassador to Spain.

"Japanese investors have been attracted to Spain for many years because of the country's quality of labor, proximity to the rest of Europe, natural resources, and excellent living conditions," Arafune said.

Much of Japanese investment (80%) headed to the region of Catalunya, whose capital Barcelona eclipsed Madrid as the country's commercial center for many centuries. The Mediterranean region has used it autonomy to boost the commercial heritage and remain the wealthiest of areas within Spain.

Although the region makes up only 6.3 percent of the country's land area, Catalunya accommodates 15.5 percent of the population, generates 19.1 percent of GDP, produces 26.8 percent of exports, and attracts 38.8 percent of FDI.

Antonio Subira i Claus, Catalunya's minister of Industry, Trade and Tourism, attributes the popularity of the region among Japanese firms (current count: 2,200) to the province's established past as an industrial center.

"Japanese started to invest in Catalunya because it was the region in which the industrial revolution had already taken place: they found suppliers, customers, a skilled workforce and close links to the rest of the continental market," Subira explans.

Although the high standard of living and a selection of Japanese schools in Catalunya attracts the investors from Japan, the deciding factor comes down to the people, whom many recognize as skilled, efficient, and hardworking.

Another sign of Spain's success is not only its ability to attract inward investment. During the 1960s, Spain was said to be an exporter of labor and an importer of capital. The situation has turned around within only 15 years and the country has become an exporter of capital. FDI out of Spain has jumped from 0.2 percent of GDP in 1986 to 6 percent in 2000.
Kiyohiko Arafune, Japanese ambassador to Spain

Sixty percent of Spain's outward investment has gone to Latin America, with most of the capital going to the energy, telecom, and banking sectors. Last year, over 38 percent of FDI in Latin America came from Spain.

Meanwhile, Spain's role in global commerce has come full circle from the prosperous imperial age. In 1970, the nation's share of international trade amounted to 0.5%. Currently, the figure stands at over 2 percent and is expected to grow with full-blown integration within the EU.

However, challenges lie ahead.

The most serious threat undermining Spain's macro-economic prospects and competitive edge over its EU partners seems to be inflation. Brought down during the entry into the monetary union, inflation has crept up and now stands at around 3.5 percent, or 1.9 percent higher than the EU's three strongest members.

The government appears compelled to cut public spending to stabilize the inflation rate.

Another problem facing the government of Aznar is the country's perennially large trade deficit, which came up to 7 percent of GDP last year. Although a bulk of the deficit accounts for trade within the euro-zone, the continued weakness of the euro has not helped the countries trade with the non-euro economies.

Unemployment and EU parity

Yet, the amazing reminder of how far Spain has gone the past few years has been the unemployment. Just six years ago, the jobless rate was pegged at a jaw-dropping 24 percent. That number has since been brought down to 14 percent.

In fact, Spain has been undergoing a shortage of qualified labor and many analysts have said the country would be compelled to import qualified labor. Aznar has agreed with the assessment.

"We will have to positively integrate qualified immigrant labor into the country. Also, we will need to make reforms to the education system in order to build the skill base necessary for increased labor productivity," said the prime minister.

"Our objective is to achieve full employment in the next 3 years," he adds.

Determined to stay modern and forward-looking, Spain also managed to further reduce the income level disparity with the rest of the EU, which is currently only 18% below the EU average. Today, a vibrant professional class has emerged. Spanish bankers are as at home in Wall Street, the City in London and Frankfurt as they are in Madrid, Barcelona, or Bilbao.

Although predicted to slow down in the coming years, economic growth looks certain. Solutions exist to control inflation, stabilize the labor imbalance, and bring income levels to parity with the EU.

Another of the government's most daunting challenges is to balance the growing prosperity between the country's wealthier and poorer regions, without impinging on the demands for expanded autonomy for Catalunya and the Basque Region.

Aznar, who enjoys the trust and respect of the majority of the Spaniards, knows there is a lot of work to do. However, his confidence is borne out of the country's success and vision. To the world, his message is simple: "Spain is the future."

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