In many ways, these are the best of times in Spain: the economy has been expanding for a decade; the standard of living has surged; unemployment has plummeted, and economists predict solid growth for years to come.
Yet shadows are beginning to appear on the horizon, and they are ominous enough that economists and government officials are talking about the need for a fundamental reshaping of the national economy.
Among the threats is the recent emergence of foreign competitors, principally in Eastern Europe and Asia, who are drawing off investment by showing they can produce some of the same goods that Spain does, such as cars and household appliances, but at lower costs.
Further, the billions of euros that Spain has been getting each year from the European Union are expected to start drying up after 2007.
Perhaps most troubling, some economists and business leaders are beginning to worry that much of Spain´s economic growth, although impressive statistically, has been confined to a small number of industries that are unlikely to play central roles in a fully modernized Spanish economy.
“There is a difference between growing a lot and growing well,” Emilio Ontiveros, an economist at International Financial Analysts, an economic consulting firm in Madrid, said during an interview. “Spain has grown, but not well.” Economists are concerned that Spain has been so focused on raw growth that it has neglected the structural changes, like measures to promote technology and other advanced industries rather than manufacturing and construction, that are necessary to sustain the economy once it reaches full maturity.
“In the past, the political economy was left on autopilot,” Ontiveros said.
As long as the economy was growing, Ontiveros added, “there was a tendency not to worry about the reforms that might be needed.” As a result, Spain looks and acts like an advanced economy, but without all of the traits normally associated with one.
Its work force is relatively unskilled in information technology. Productivity is low. Exports are weak. Investment in research and development is lacking.
These elements in Spain´s economic mix have been largely unaffected by the development of recent years.
The same cannot be said, however, about labor costs, which have risen along with the economy. For years, Spain´s low labor costs were a boon to exports, and made the country an attractive place for foreign investment.
Now, Spanish wages are significantly higher than those of its competitors, especially since countries in Eastern Europe and Asia have begun producing many of the same manufacturing goods that Spain has traditionally exported.
“We cannot count on our wage advantage anymore,” said Alejandra Kindelan, the chief economist at Grupo Santander, Spain´s largest bank. Spain´s rising labor costs have contributed to a slowdown in the growth of exports and to a bulging trade deficit. “The main challenge right now is to be more competitive” in overseas markets, Kindelan said.
The problem for Spain, economists say, is that while it has progressed enough that wages are no longer a competitive advantage, it has failed to invest sufficiently in technology and other areas where it is likely to find new niches where it can compete internationally.
With prospects for domestic growth in many industries limited, Spanish companies have been increasingly looking abroad for investment opportunities. The country´s two largest banks, Grupo Santander and Banco Bilbao Vizcaya Argentaria, have recently moved to expand in Europe to complement their already substantial presence in Latin America. Several of Spain´s large companies, like the energy firm Endesa and the telecommunications giant Telefonica, have also established themselves in Morocco.
Besides making this transition away from the manufacturing sector and towards more advanced industries, Spain faces other challenges down the road.
Since joining the EU in 1986, Spain has received more than $85 billion in development aid and other support. That is likely to be cut soon. Prolonged economic growth means that Spain is a good deal richer than most of the 10 countries that joined the EU last year, and so the money is going to be redirected to help the newcomers. Spain is pushing for a gradual phaseout of the aid rather than its elimination all at once. The end to the aid could mean a drop of half a percentage point or more in the growth rate of the Spanish economy, according to some economists. In 2004, growth was 2.7 percent, and this year it is expected to be about the same, perhaps slightly lower.
Loss of the aid is also expected to dampen the boom in infrastructure that has been one of the engines of Spain´s economic expansion over the past 15 years. The highway network has been vastly improved and extended. Airports have been built. High-speed trains now connect Madrid with Seville in the south and soon Barcelona in the east.
Much of this work has benefited other pillars of the Spanish economy, like agriculture and fishing. But some economists say that the loss of EU assistance is in no way fatal. “I´m sure Spain will be able to grow without this support,” said Kindelan of Santander.
In fact, despite the challenges, analysts say that many industries, including the crucial tourism sector, are poised to continue growing. And there is broad agreement among economists that the current government, led by Jose Luis Rodriguez Zapatero of the Socialist Party, understands the scope of the problems and is committed to carrying out many of the necessary changes.
“The government is being careful not to be alarmist, but it is suggesting that we are entering a stage of transition,” said Jose Manuel Campa, a professor of finance at the IESE business school in Madrid. “The government is starting to say that an era is ending and that the current model may be exhausted.” Last month, the government laid out a plan for broad changes, including incentives for small businesses and a liberalization of the labor market. Spain has one of the lowest rates of business creation among developed economies and a rigid labor market, whose restrictions on firing employees are among the toughest in Europe.
One obstacle to achieving reform, according to economists, is that the economy has been doing well for so long that the public may not feel that change is necessary. “There is a general satisfaction with the economy,” Campa said. “People are more willing to support radical changes when times are difficult than when things are going well.” But Campa said that business leaders are beginning to express concern.
“Just in the last several months, polls show that businesspeople are beginning to worry that the economy may start weakening,” he said. Such concern may add impetus to the government´s push.
“This is far from an irreversible situation,” Ontiveros, the economist, said. But if it fails to act, “Spain runs the risk of building a large economy that is not developed enough to compete in the information economy of the future.”