Playing Cassandra: a course on reality

Published in Expansión

I witness, in some degree of amazement, how our government officials appear to be immersed in a binge of mutual congratulation and merry back-slapping in the belief that the crisis has run its course, mistaking the manna delivered by the ECB and the nerve-strained inflows of investment funds (which come and go in the blink of an eye depending on the swings and vagaries of fashion, headlines and market feelings) for the serious and stable capital investment we need to attract so as to substantially reduce unemployment and avoid a complete breakdown of our pension system, a bomb whose fuse has already been lit. Spain’s current unemployment rate reaches 18%, with an apparently perpetual 5% deficit and 100% of public debt on GDP and a serious problem of regional blackmail (give me more money or I will go independent) which continues to be relevant in spite of its stale, provincial and old-fashioned nature. The country is ranked 32nd by the Ease of Doing Business Index, 7 places below Portugal, 15 below Germany and 29 below Denmark, to mention only European countries. We are also a fairly uncompetitive country, ranked 33rd in the Global Competitiveness Index. Also, Spain continues to be seen as a corrupt country: we rank 36th in the Corruption Perception Index, far below Botswana. Finally, Spain ranks 43rd in the Heritage Foundation’s Index of Economic Freedom – a key variable in understanding the reasons for economic development (and underdevelopment). As the above data show, Spain is, in general, a country that is unfriendly to business, whether the companies in question are domestic or foreign. This explains our relative poverty and its symptoms: low salaries and high unemployment rates. This reality is evidenced in Spain’s average 17% unemployment rate over the last 40 years, a shocking figure more fitting to African countries and which, weirdly enough, we have come to accept as natural. Another important cause of our lower economic development is the high degree of legal uncertainty: regulations undergo constant changes at the pleasure of political whims (or in order to crudely cover up deficit-fighting incompetence), while the Administration enjoys a high and troubling level of arbitrariness in deciding upon said regulations. And then there is our painfully slow system of justice. As a result, the citizen-taxpayer and the entrepreneur find themselves increasingly helpless in facing up to a bureaucracy which can perform any sort of abuse in full impunity, a trend which has gained force in the last five years of fiscal bullying. Our businessmen and entrepreneurs are forced to survive as if they were Green Berets in hostile territory, under constant harassment by a guerrilla composed of nitpicking bureaucrats and politicians who are genetically incapable of understanding, respecting and facilitating the creation of entrepreneurial wealth (which in fact often seems to upset them). Of course, there are exceptions, but I frankly believe the generalization is not unfair at all.

The current positive economic data cannot overshadow the stubborn fact that Spain continues to face unresolved structural problems which require deep and politically unnerving reforms. Let us briefly examine our economic history of the last century in order to understand where we come from and what our current real situation is.

Between 1900 and 1950 per capita GDP in Spain barely budged. The 1950s, however, became a turning point. A group of “technocrats” were asked to join Franco’s government and started a decisive move towards free markets leaving ideological atavisms behind. Economic freedom always works. Indeed, between 1950 and 1974, and beautifully surfing the world’s growth wave, Spain grew more than it had grown in the previous two and a half centuries, enjoying the highest level of economic growth in all of its history: GDP rose at annual rates of 7% (almost 6% in per capita GDP terms), the highest level of economic growth in the West (and almost throughout the world, second only to Japan and Taiwan). The country thus became a developed nation within a single generation, ending 1974 with a 4% unemployment rate (with government employees amounting to less than a third the number we have in today’s Welfare State), a public debt of approximately 8% of GDP, no deficit, and a fiscal burden of one-half of what we currently bear. This unquestionably positive balance, however, bore latent weaknesses: scarcely competitive State-owned enterprises, a truly major dependency on oil, and a slew of rigidities, paternalism and protectionism which increased the fragility of the system should exogenous shocks arrive. And arrive they did: the two oil crises (1973/74 and 1979/80), which coincided with the country’s political Transition to democracy, became true earthquakes aggravated by the irresponsible action of trade unions, which – taking advantage of the weakness or the ideological complex of the successive democratic governments – made use of untamed labor conflict in order to impose abusive raises in real salaries (completely detached from productivity measures), which resulted in runaway inflation and unemployment. Almost 3 million jobs disappeared between 1974 and 1985, bringing unemployment rates from a historical minimum of 3% in 1973 to 21% in 1985. In spite of the praiseworthy efforts made by some finance ministers in different Administrations (belonging to all parties), the extremely difficult political problems at the beginning – when democracy was trying to establish itself, and later on the hegemony of socialist-leaning thinking, a growing demagoguery in political parties and possibly the lack of long term vision from the nation’s leaders, dragged out (and continue to do so) the necessary market-opening policies which, at the expense of a short-term sacrifice, could have lowered unemployment to European levels in the mid- and long term. As a result, Spain had to wait until 1989 in order to reach the relative (to Europe) per capita GDP levels it had in 1974: during those 15 years, economic convergence with Europe was a catenary curve which brought us back to the same starting point; we made headway in absolute terms, but not in relative terms. Access to the Eurozone and the resulting real-estate bubble (caused by the lowest interest rates ever seen in the history of the country) brought inertia to the economic growth of the last decade of the 20th century and delayed the systemic crisis looming during the mid-nineties by a couple of decades, but the 2008 crisis – in spite of the current tepid comeback – seems to show that the truce is about to come to its end. It is true that we at present enjoy a number of assets we lacked forty years ago, such as membership in a wide-ranging free-trade area and a much more open, competitive economy. But, on the other hand, we have used up lots of ammunition: the public debt has risen from 8% to 100% of GDP, the tax burden has doubled, the population pyramid has inverted itself and the new generations, I fear, lack previous generations’ ability to make sacrifices and show tolerance in the face of frustration. At the same time, the world economy is enormously fragile and severely hampered by the level of global debt and by imbalances resulting from the experimental, unprecedented, reckless monetary policies currently in vogue.

Therefore, pretending that we may be able to create the foundation of the economic welfare of our children applying two coats of paint to our rusty, obsolete economic model – the infamous aesthetic mini-reforms this government brags about – is, in my view, absolutely chimerical. Short-term complacency is harmful because it prevents awareness of the need to change course taking advantage of the current, short-term favorable economic winds. How? My next article shall include several proposals.

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