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Spain: the tough choices
ahead
Dani Rodrik
May 28, 2010
Widening external imbalances
And rapid structural change away
from tradable sectors
Structure of the economy (%of GDP)
80.00
70.00
Non-tradables
60.00
50.00
40.00
Tradables
30.00
20.00
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
10.00
An international comparison
GDP per capita (US$ at PPP)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
Spain
Germany
Finland
Israel
South Korea
…on industry share of GDP
Industry (% of GDP)
40
35
30
25
20
15
10
Spain
Germany
Finland
Israel
South Korea
What countries in Spain’s position
need to do
Reduce aggregate expenditures
1.
•
Private sector has already retrenched significantly
Boost competitiveness of tradable goods and services
(exports and import substitutes)
2.
•
Key: increase labor demand in tradables
The second is needed to moderate the adverse effects of
belt-tightening while accomplishing the needed
structural change.
Without it, the recession runs deeper, unemployment is
larger, and the fiscal hole becomes more difficult to fill.
Spain starts from a low point in
terms of competitiveness
Source: IMF
What about structural reforms?
What may be desirable in the medium- or longterm may not be particularly effective in the
short-run
 Structural reform may not be a good substitute
for policies that directly increase competitiveness

– Labor-market reforms
 Reducing cost of firing workers will not increase demand for
labor much when no-one wants to hire new labor to begin
with
 Decentralizing wage bargain may have little effect on the
level of wages

And it can eat up lots of political capital
How to boost competitiveness (1)

Increase productivity in tradables
– This reduces unit labor costs
– But: this is a medium- to long-term strategy
 It cannot happen quickly enough
– Recent productivity growth achieved through
labor shedding
 Which of course defeats the purpose
Spain’s productivity performance
Source: EIU
How to boost competitiveness (2)

Currency depreciation
– Gives quick boost to competitiveness, unless wages
and prices catch up
– It is the traditional remedy used by countries to
extricate themselves from crises of this type
– But Spain doesn’t have its own currency
 even a large depreciation of the Euro would be insufficient
since 70% of Spain’s exports go to other EU members
 Leaves exit from the eurozone as the only (unappetizing)
option
How to boost competitiveness (3)

A “fiscal” devaluation
– Raise import tariffs and apply export subsidies
– In principle, it mimics a currency devaluation
– But few successful cases
 South Korea and Taiwan during the 1960s and
1970s; China in 1990s
– And would violate EU and WTO rules in any
case
How to boost competitiveness (4)

A cut in nominal wages
– Reduces domestic costs and boosts external
competitiveness
– But needs to cover private sector
 Can’t be limited to public sector wages
– And it needs to be accompanied by similar cuts in the
prices of other services and non-tradables (e.g.
utilities, transport and logistics, housing, …)
 Otherwise the effect on competitiveness remains limited
 And workers bear unnecessarily large real wage cuts
How to boost competitiveness (5)

Industrial policy
– Targeted promotion of new industries
 Through subsidies, public loans, public-private collaboration
to remove identified bottlenecks
– All successful countries engage in industrial policies,
even if they do not call it that
– But takes time to implement and get results
– And it requires a lot of government capacity
– Unlikely to be effective on its own in a depressed
economic environment
– There is no successful example of IP in a high-cost
environment
The bottom line

Two unappetizing options
– Quit the eurozone and let the currency
depreciate
– Engineer an economy-wide reduction in
wages and prices of services
 Requires political leadership and a social compact