Economic Development in Spain, 1815–2017
- Leandro Prados de la EscosuraLeandro Prados de la EscosuraDepartment of Social Sciences, Universidad Carlos III de Madrid
- and Blanca Sánchez-AlonsoBlanca Sánchez-AlonsoSchool of Business and Economics, San Pablo CEU University
In assessments of modern-day Spain’s economic progress and living standards, inadequate natural resources, inefficient institutions, lack of education and entrepreneurship, and foreign dependency are frequently blamed on poor performance up to the mid-20th century, but no persuasive arguments were provided to explain why such adverse circumstances reversed, giving way to the fast transformation that started in the 1950s. Hence, it is necessary to first inquire how much economic progress has been achieved in Spain and what impact it had on living standards and income distribution since the end of the Peninsular War to the present day, and second to provide an interpretation.
Research published in the 2010s supports the view that income per person has improved remarkably, driven by increases in labor productivity, which derived, in turn, from a more intense and efficient use of physical and human capital per worker. Exposure to international competition represented a decisive element behind growth performance. From an European perspective, Spain underperformed until 1950. Thereafter, Spain’s economy managed to catch up with more advanced countries until 2007. Although the distribution of the fruits of growth did not follow a linear trend, but a Kuznetsian inverted U pattern, higher levels of income per capita are matched by lower inequality, suggesting that Spaniards’ material wellbeing improved substantially during the modern era.
In assessments of modern-day Spain’s economic progress and living standards, inadequate natural resources, inefficient institutions, lack of education and entrepreneurship, and foreign dependency are frequently blamed on poor performance up to the mid-20th century, but no persuasive arguments were provided to explain why such adverse circumstances reversed, giving way to the fast transformation that started in the 1950s.
There has been historiographical debates and controversies on several aspects of the economic developments in 19th century, but very few on the Spanish economy under Franco’s dictatorship. This article will address some of the major debates, many of them still lacking a consensus view. First, trends in output are described and their determinants investigated jointly with an analysis of Spain’s performance from an international perspective. Then, the focus is on how the fruits of economic progress were distributed over time. Finally, interpretations about the long-run performance of Spanish economic in the 19th and 20th century is dealt with.
Economic Growth Over Two Centuries, 1815–2017: Overview
Gross domestic product (GDP) multiplied 74-fold in Spain between 1815 and 2017, which implies an average cumulative rate of growth of 2.1% per year. As the increase did not take place at a steady pace, five main phases may be established: 1815–1850; 1850–1950 (with a shift to a lower level during the Civil War, 1936–1939); 1950–1974; 1974–2007; and 2007–2017. In the phase of fastest growth, the so-called Golden Age (1950–1974), GDP grew four and a half times faster than during the previous hundred years (and almost sevenfold than the early 19th century), and twice faster than over 1974–2007, while the recent Great Recession represented a fall in real GDP of 8% between 2007 and 2013. Only in 2017 the GDP level for 2007 was overcome (see Prados de la Escosura (2017) where a more detailed exposition is provided).
Changes in the composition of GDP by type of expenditure are revealing of the transformation experienced by the Spanish economy over the last two centuries. The share of total (private and government) consumption remained stable at a high level up to the late 1880s, and only fell below 85% of GDP after 1953, which initiated a sustained decline that reached a trough by the mid-2000s. Such a contraction in the share of total consumption conceals an intense decline in private consumption paralleled by a sustained rise in government consumption that resulted from the expansion of the welfare state and the transformation of a highly centralized state into a de facto federal state from the 1980s onward.
Investment oscillated around 5% of GDP in the second half of the 19th century but it doubled during the railways construction boom in the late 1850s and early 1860s. Since the 1900s a long-term rise has brought the relative size of investment to above 30% of GDP in 2006. Phases of investment acceleration are associated with those of faster growth in aggregate economic activity.
The integration of Spain into international markets also increased over time, but the increase did not follow a steady pattern and, from this, three main phases can be distinguished: a gradual rise in openness (i.e., exports plus imports as a share of GDP) since the 19th century that stabilized in the early 20th century at a high plateau; a sharp decline followed from the early 1920s to the 1950s, reaching a trough during the 1940s. Then, a cautious but gradual exposure to international competition took place since the 1950s, facilitated by the reforms associated with the 1959 Stabilization and Liberalization Plan, and accelerated after the end of Franco’s regime. It is worth stressing the correspondence between investment and imports trends, which suggests that economic growth was stimulated by international trade.
The changes in the composition of GDP by economic activity also reflect the deep transformation associated with modern economic growth. Agriculture’s share underwent a sustained contraction over time, except for the autarkic reversal of the 1940s. The evolution of industry followed an inverse U shape, expanding its relative size up to the late 1920s and resuming its relative increase since 1950, to stabilize at a high plateau, and, then, contract sharply from the mid-1980s. The construction industry remained mostly stable below 5% of GDP until the mid-20th century, exhibiting a sustained increase since the early 1960s that peaked during the mid-2000s, more than doubling its relative size. Services made a high and stable contribution to GDP, fluctuating around 40% up to mid-20th century, and expanded from less than one-half to three-fourths of GDP between the early 1960s and 2015.
Comparing the sectorial composition of GDP to that of labor may be illuminating. Agriculture’s share (measured in hours worked) exhibits a long-run decline from above three-fifths to less than 5% since 2006. Agriculture provided the largest contribution to employment up to 1964, when it represented one-third of total hours worked. The evolution of the relative size of services presents a mirror image of agriculture, which was the largest industry from 1965 onward, reaching three-fourths of the total hours worked by 2015. The steady expansion of industry, except during the Civil War reversal, overcame agriculture’s share by 1973 and peaked by the late 1970s, reaching one-fourth of employment, which then initiated a gradual contraction that cut its relative size by almost half by 2015. Construction, in turn, more than trebled its initial share by 2007, sharply contracting as the sector’s bubble ended during the Great Recession.
But to what extent a larger amount of goods and services affected individuals’ living conditions? GDP can be decomposed into GDP per capita and population. Since population trebled, real GDP per capita experienced a 19-fold increase between 1815 and 2017, growing at a cumulative annual rate of 1.5%. The implication is that output per person drives total GDP expansion (Figure 1). Such an improvement, though, took place at an uneven pace. After growing at a moderate 0.4% between the end of the Napoleonic Wars and the mid-19th century, per capita GDP growth raised to 0.7% per year over 1850–1950, doubling its initial level in hundred years. During the next quarter of a century, the so-called Golden Age, its pace accelerated more than sevenfold (at an annual rate of 5.3%), so by 1974 per capita income was 3.6 times higher than in 1950. Although the economy decelerated from 1974 to 2007, and growth per capita slowed down to 2.5% yearly, per capita GDP in 2007 more than doubled its level in 1974. The Great Recession (2008–2013) shrank per capita income by 11%, but, nonetheless, by 2017, it had recovered its level in 2007 and almost doubled the one enjoyed at the time of Spain’s EU accession (1985).
In comparative perspective, Spain’s GDP per capita followed a similar path to that of the western European nations, although its level has remained systematically lower. Moreover, the improvement in Spain’s GDP per capita did not fit a monotonic pattern, at odds with the steady progress experienced by the United Kingdom, the United States, and, to a lesser extent, France. It could be argued, then, that the roots of most of differences in GDP per person between Spain and advanced countries in the 21st century should be searched for in the early modern era. However, a closer look reveals that long-run growth before 1950 was clearly lower in Spain than in the advanced countries. Sluggish growth over 1883–1913 and not taking advantage of its World War I neutrality partly account for it. Furthermore, the progress achieved in the 1920s was outweighed by Spain’s short-lived recovery from the Depression that was brought to a halt by Civil War (1936–1939), and a long-lasting and weak postwar reconstruction.
Thus, Spain fell behind between 1815 and 1950 (Figure 2). The 19th century and the early 20th century witnessed sustained per capita GDP growth while paradoxically the gap with the industrialized countries widened over 1883–1913. The gap deepened further during the first half of the 20th century. This finding is at odds with the predictions of the convergence theory that posit that the more intense the growth, the lower the initial level of income.
The opposite happened between 1950 and 2007. The Golden Age (1950–1974), especially after 1960 (a common feature of countries in the European periphery such as Greece, Portugal, and Ireland), stands out as a phase of outstanding performance and catching up with the advanced nations. Steady, yet slower growth after the slowdown during the transition years to democracy (1974–1884) allowed Spain to keep catching up until 2007—a trend reversed by the Great Recession. On the whole, Spain’s relative position compared to other western countries has evolved along a wide U shape.
GDP per capita depends on the amount of work per person and the level of productive effort. GDP per capita and labor productivity (measured as GDP per hour worked) evolved alongside each other between 1850 and 2017, even though, as the number of hours worked per person shrank—from about 1,000 hours per person-year to less than 700—labor productivity grew at a faster pace. The main element behind the decline in hours worked per person is the reduction in hours worked per fully occupied worker, which has fallen from 2,800 hours per year in the mid-19th century to about 1,800 today. Thus, it can be claimed that long-term gains in output per capita are entirely attributable to productivity gains, with phases of accelerating GDP per capita, such as the 1920s or the Golden Age (1950–1974), matching those of faster labor productivity growth (Figure 3). A breakdown of the gains in labor productivity into the contributions made by the productivity increase within each economic sector and by the shift of labor from less productive to more productive sectors (i.e., structural change) indicates that structural change accounts for over a third of the aggregate labor productivity growth since 1850.
But what lies under the rise of labor productivity? Is it a more abundant use of capital broadly defined (i.e., encompassing physical and human capital) or a more efficient use of the available broad capital, namely, total factor productivity?—Here, physical capital is understood as the flow of productive services provided by an asset that is employed in production. Capital assets are produced goods that are not consumed but used for production (dwellings, infrastructure, machinery, transport material). Human capital is understood as the flow of productive services provided by the knowledge, skills, competencies, and attributes embodied in individuals, including schooling and skills acquired through work experience.
In Spain, labor productivity growth over the long run is accounted for, in similar proportions, by broad capital accumulation (physical and, to a lesser extent, human capital) and efficiency gains (Prados de la Escosura & Rosés, 2009). Furthermore, main spurts in broad capital accumulation and in efficiency gains tend to coincide, as can be observed during the years of the railways construction (1850s–1880), the electrification (the 1920s and 1950s), and the adoption of new vintage technology in the Golden Age (1950–1974) (Figure 4).
Nonetheless, a closer look reveals a clear divide before and after 1950, with capital deepening (namely, an increase in capital per hour worked) as the leading force over 1850–1950, contributing to two-thirds of labor productivity growth—except in the 1920s—and efficiency gains as the hegemonic force between 1950 and 1985 (and in the 1920s), contributing to two-thirds of labor productivity growth in the Golden Age (1950–1974) and one-half in the 1920s and during the democratic transition (1975–1985). Furthermore, the acceleration of labor productivity growth in the 1920s and the Golden Age was almost exclusively attributable to efficiency gains. From 1986 onward, broad capital accumulation became the main driver of labor productivity regrowth, while efficiency gains stagnated and even declined.
Thus, while in the 1920s and over 1950–1985 efficiency gains largely explained the labor productivity increase that accounted for the improvement in GDP per capita, during 1986–2007 the increase in GDP per capita was dependent in roughly similar proportions on the number of hours worked per person—that resulted from new employment opportunities—and on labor productivity which, in turn, derived from a more intense use of capital. Hence, a more extensive and not so intensive kind of growth characterizes the post-1986 period that corresponds to the time when Spain was a permanent member of the European Union.
How such a reversal, from efficiency gains to capital accumulation, in the source of labor productivity growth can be account for? An assumption is that, as economic growth took place, Spain became closer to the technological frontier, making further gains in efficiency more difficult. Moreover, structural change, namely, the shift of resources (i.e., labor) from lower labor productivity sectors to those of higher productivity (i.e., from agriculture to manufacturing) is a once and for all change that had largely taken place by the time Spain joined the European Union. Thus, Spain would have exhausted its catching-up potential, and efficiency gains slowed down, adjusting to the growth in total factor productivity in the most advanced countries.
However, a summary inspection of the evidence suggests that this has not been the case, as in terms of total factor productivity growth Spain stayed at the bottom among the Organisation for Economic Co-operation and Development (OECD) countries between the mid-1990s and 2007 (Corrado, Haskell, Jona-Lasinio, & Iommi, 2013). Thus, an alternative explanation is required. Comparative evidence indicates that firms’ expenditure on research and development are lower in Spain than in most OECD countries, as it is also the case in investment in intangible (intellectual property) and human capital. The context is further aggravated by the low degree of competition of products and factor markets. Furthermore, the re-allocation of resources toward services and construction has taken place in a context of lower investment and innovation that led to declining efficiency.
Income Distribution in the Long Run
How have the fruits of growth been distributed? Trends in aggregate inequality measured by the Gini coefficient are provided in Figure 5. The Gini coefficient measures the extent to which the distribution of income (or consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. A Gini of 0 represents perfect equality, while an index of 1 (100) implies perfect inequality (Prados de la Escosura, 2008).
The evolution of inequality presents the shape of a wide inverted W with peaks in 1916 and 1953. Different phases in the evolution of inequality can be observed. A long-term rise is noticeable between the mid-19th century and World War I. Then, a sustained reduction in inequality took place during the 1920s and early 1930s, stabilizing during the Civil War (1936–1939) and World War II. The decline in inequality was sharply reversed during the late 1940s and early 1950s, with a peak in 1953 similar to the one reached in 1918. A dramatic fall in inequality took place in the late 1950s and, again, in the early 1970s. Since 1973, inequality has stabilized at comparatively low levels, fluctuating within a narrow 30–35 Gini range.
In comparative perspective, Spain matched the evolution of OECD countries during the last century and a half, except for the autarchic period that followed the Civil War in which Spain’s inequality was way above the European average.
How can these inequality trends be interpreted? In the early phase of globalization, from the early 19th century to World War I, the fall in inequality during the phases of opening-up to international competition (the late 1850s and early 1860s, the late 1880s and early 1890s) and the rise in inequality (from the late 1890s to the end of World War I) coinciding with a return to strict protectionism, could be predicted within a Stolper-Samuelson theoretical framework which posits that protectionist policies favor the scarce factors of production (land and capital, in this case) while it penalizes the abundant one (labor). In the late 19th and early 20th centuries, this tendency would have been reinforced by the fact that tariff protection did not push out workers as in other protectionist European countries (i.e., Italy and Sweden). The depreciation of the peseta in the 1890s and early 1900s made more difficult the emigration decision as the cost of passage increased dramatically (Sánchez-Alonso, 2000a). This explanation fails, however, to explain the rise in inequality between the mid-1860s and the early 1880s that could be attributed to a rise in capital and land returns relative to wages associated to the railways construction and to the exploitation of the mining resources after its liberalization, and not least to the agricultural export boom.
The reduction in inequality during a period of globalization backlash between the 1920s and the early 1930s, would demand a different explanation as other forces conditioned the evolution of inequality. Accelerated growth, capital deepening, and structural change all helped reduce total inequality in the 1920s. Wage inequality rose with rural–urban migration and urbanization, given that urban wages were higher and with a larger variance than rural wages, but the gap between returns to property and labor declined. Institutional reforms that included new social legislation, especially the reduction in the number of working hours per day, and the increasing voice of trade unions, contributed to a rise in wages relative to property incomes (Cabrera & del Rey, 2002; Comín, 2002).
The fall in inequality during the early 1930s, i.e., in the years of increasing restrictions to commodity and factor mobility, is again at odds with the Stolper-Samuelson model. Forces pushing for redistribution were in place in Spain. On the whole, a reduction in the gap between returns to property and labor more than offset the rise in wage inequality. The Great Depression possibly had a negative impact on the concentration of income at the top of the distribution (i.e., the returns accruing to proprietors). Alvaredo and Saez (2009) observe, however, an increase in top income shares for 1933–1935 in Spain, which coincided with the post-crash recovery. Wages (in nominal and real terms) rose in a context of trade unions’ increasing bargaining power and labor unrest. In the early 1930s, a new legislation that tended to increase labor costs, threats to land ownership, and workers’ attempts to control factory engendered insecurity among proprietors which led to a severe investment collapse and provoked political polarization in Spanish society (Cabrera & del Rey, 2002; Comín, 2002).
The fact that the Civil War broke out after one and a half decade of inequality decline and the economic growth of the 1920s, which led to the alleviation of absolute poverty, demands explanatory hypotheses. Had the Civil War economic roots? Unfulfilled expectations to share increases in wealth by those at the bottom of the distribution during the II Republic (1931–1936) may contribute to explain the social unrest that preceded the Civil War. Furthermore, the shrinking gap between returns to property and to labor in a context of social unrest, including threats to property, during the early 1930s provides a potential explanation for the support of a non-negligible sector of the Spanish society to the military coup d’état that triggered the Civil War (1936–1939).
How can the rise of inequality during the autarchic years after the war be interpreted? Wage compression took place as a result of the re-ruralization of the Spanish economy (the share of agriculture increased in both output and employment) and the ban on trade unions. A parallel decline in the concentration of income at the top during the 1940s took place simultaneously (Alvaredo & Saez, 2009). Thus, in contrast with the experience of the 1930s, while inequality was falling within both labor and capital returns, polarization between property and labor caused a rise in total inequality. International isolation, resulting from autarchic policies, would intensify these trends, with inequality rising as scarce factors, land and capital, were favored at the expense of the abundant and more evenly distributed factor, which is labor.
A dramatic decline in inequality started in the late 1950s and reached into the early 1960s, that is, prior to the phase of liberalization and opening-up that followed the 1959 reforms. The spurt of economic growth in the 1950s brought with it improvements in living standards, urbanization, and an increase in the labor share within national income. Furthermore, populist policies by Franco’s Minister of Labor led to a substantial pay rise across the board in 1956 (Barciela, 2002). A careful investigation of the process of inequality reduction during the 1950s is warranted.
The opening-up to international markets in the 1960s and early 1970s favored labor as the abundant factor and, hence, contributed to reducing inequality, while stimulating growth and structural change that, in turn, played a non-negligible part in keeping inequality at moderate levels.
The rise in savings, helped by the financial development that went together with economic growth, facilitated access to housing ownership which, in turn, helped to reduce the concentration of property incomes (Comín, 2007; Martín Aceña & Pons, 2005). The diffusion of education surely played a role in the decline of inequality by reducing the concentration of human capital (Núñez, 2005). Moreover, the decrease in regional disparities, conditioned by technological catch-up, the generalization of basic education, and convergence in employment composition must have also impinged on income distribution (de la Fuente 2002, Martínez-Galarraga, Rosés, & Tirado, 2015). Furthermore, the increase in social expenditure in the late Francoism (1960–1975) must have had an effect on reducing inequality.
Increasing political participation after democracy was reinstated in 1977 and led to a progressive fiscal reform and to substantial increases in public expenditure on social transfers (unemployment, pensions), education, and health that had a strong redistributive impact. However, phases of declining and rising inequality have alternated since the restoration of democracy with the result that levels of inequality have remained within a 30–35 Gini range.
Thus, it can be argued that the social transfers and progressive taxation brought by the welfare state have allowed the contention of inequality levels within the 30–35 Gini range, while the “market” Gini (i.e., the measure of inequality before taxes and social transfers) increased. In fact, the evidence for the 21st century shows that, in the absence of social transfers, income inequality would reach similar levels to those of the early 1950s (Figure 6). A similar finding is obtained for OECD countries (OECD, 2016). Why Spain, alongside other OECD societies, has become so unequal before progressive taxation and social transfers demands careful investigation.
Note. Progressive redistribution is the difference between the market Gini (income distribution before taxes and social transfers) and the Gini (distribution of disposable income after taxes and social transfers).
As income distribution became more egalitarian and growth accelerated from the late 1950s onward, absolute poverty (i.e., those living on 2 US dollars a day, as measured today by the World Bank) was practically suppressed by the mid-1960s (Prados de la Escosura, 2008).
Assessing Spanish Economic Development
Spanish economic historians have traditionally focused their research in the 19th century and left aside the 20th century which has been more the field of economists. Economic history research has concentrated on specific periods such as the economic growth during the 1920s, the economic policy of the Second Republic (1931–1936), the Civil War, and the different phases of Franco’s regime. The absence of debates and controversies about the Spanish economy during the 20th century as a whole is striking.
The generation of economic historians publishing in the 1970s and 1980s focused their attention on the reasons why the Spanish economy did not industrialize in the 19th century while other European countries successfully did. Behind this reasoning lays an interest in understanding whether the Civil War and Franco’s dictatorship were caused by failure and economic backwardness in the long run. Although an increasing number of post-1980 Spanish economic historians had been trained as economists, Spanish applied economists were hardly interested in the long-run development.
Spanish political history has been turbulent both in the 19th and 20th centuries. After the Peninsular War, three civil wars occurred in the 19th century (the Carlist wars in 1830s, 1840s, and 1870s), as well as the Cuban war of independence (1898). In the 20th century the Civil War was the most decisive event (1936–1939). The monarchy collapsed twice, in 1868 and 1931, giving rise to a brief first republic in the 19th century and the second republic in the 1930s (1931–1936). Spain did not participate in the two world wars. After the death of dictator Franco (1975), the transition to democracy consolidated, adopting a fully democratic political system with the 1978 Constitution and joining the European Union in 1986. Spanish modern history began with the loss of the colonial empire and the collapse of the Ancien Régime and culminated in the early 21st century with an economic crisis (2008) that has had strong political and institutional consequences.
Growth and Backwardness, 1815–1936
During the 19th century Spain underwent a complex transition from a colonial empire under the Ancien Régime to a modern nation with a liberal system of property rights. This transition has created a negative view of post-imperial Spain, placing it among the peripheral European countries, and terms such as failure, stagnation, and backwardness are commonly used to describe its economic performance up to the Civil War (see O’Rourke & Williamson, 1997).
The inability of the Spanish economy to modernize in the same way as other Western European countries can only be understood, according to most historical interpretations, by a detailed study of a set of internal and external determinants.
The Peninsular War (1808–1814) had deep and negative short-run economic consequences in Spain and also sparked the fight for independence in Spanish America. Nonetheless, the Napoleonic Wars triggered a complex transition from an absolutist empire to a modern nation.
The liberal regime reforms, up to the mid-19th century, included a redefinition of property rights that implied that all citizens became equal before the law. The liberalization of commodity and factor (i.e., capital and labor) markets suppressed guilds, the Mesta, and mayorazgo, and brought with it the disentailment of land property, while the Code of Commerce, and new legislation and regulation on mortgages, patents, banking, and the stock exchange are introduced. Moreover, liberalism represented the parliamentary control of public revenues and expenditure. Needless to say, serious obstacles to reform emerged on the way, with civil wars and military takeovers as major setbacks that deferred the completion of the transition to the last quarter of the 19th century. In Spain, as in other nations, liberal reform was carried out with contradictory results in terms on economic modernization (Tedde, 1994). Neither information and transaction costs were reduced enough, nor were property rights clearly defined on the long term. The financial organization of the state did not respond to the needs of the new society. However, a glance at the post-Napoleonic Wars era reveals a distinctive behavior, when compared to the pre-war era, for any dimension of social and economic activity. The long-term consequences of liberal reforms were a more efficient allocation of resources and sustained economic growth despite social and political instabilities (Prados de la Escosura & Santiago-Caballero, 2018).
The government has also been held responsible for the economic backwardness in the 19th century. The diversion of capital away from industry and back into agriculture through land disentailment; the establishment of a system of ownership within an inefficient institutional framework; the application of budgetary policies conducive to rising interest rates; and the crowding out of private investment are all state implementations that have been mentioned by historians (Nadal, 1975; Tortella, 2000).
Agricultural backwardness is an essential component of the internal explanations of the Spanish economic performance in the 19th century. Natural resources and property rights are seen by Tortella (1994) as major obstacles to the development of Mediterranean-type agricultures such as Spain. On the one hand, the low productivity of agriculture, coupled with the maintenance of a large percentage of the labor force in this sector, is considered responsible for the low levels of per capita income and the narrowness of the market for consumer goods (Milward & Saul, 1977; Nadal, 1973). On the other hand, slow demographic expansion is linked to high mortality rates set within the context of agricultural backwardness (Nadal, 1984).
Quantitative evidence casts serious doubt on the argument that agriculture was key to the Spanish industrial revolution “failure” as Nadal (1973, 1975) forcefully argued (Prados de la Escosura, 1988; Simpson, 1995). Agricultural production grew in both absolute and per capita terms during the 19th century. However, when seen in the context of Western European nations, Spanish agriculture is not quite as buoyant: productivity experienced lower growth rates, and differences with Britain and France (already large by 1800) tended to widen during the 19th century, and there was no significant reduction during the 20th century (O’Brien & Prados de la Escosura, 1992). Differences in product mix and in output per hectare emerge as key factors of Spanish agricultural retardation. What share of the blame natural or social factors take is a question that still requires further research.
Not all interpretations blame agriculture exclusively on Spain’s economic backwardness compared to Western Europe. Economic historians have also stressed the sluggish industrial performance during the late 19th century (Carreras, 1984; Prados de la Escosura, 1988). However, performance in the early 19th century was more successful for Spanish industry, and especially for Catalan textiles (Rosés, 2003). Several scholars underscore the rent-seeking attitudes of the Spanish entrepreneurs who sought protection rather than facing their competition in the international markets (Fraile, 1991; Tortella, 2000).
Quantitative evidence casts serious doubt on the traditional interpretation of Spain’s industrial backwardness according to which domestic demand was the main obstacle to the growth of manufactures during the 19th century. The inability of industry to sell in the international market and the low level of industrial productivity seem enough to explain this phenomenon. In this context, the attitudes and strategies of the Spanish industrial entrepreneurs become especially relevant. In view of international competition, they redirected their efforts toward the domestic market in search of rents and government protection (Fraile, 1991). The low per capita income associated with a backward agricultural sector is no longer sufficient to explain the lagging Spanish industrial growth during the 19th century.
External forces have been emphasized in historical explanations of failure and retardation. The loss of Latin American colonies following wars against Britain and France, the Napoleonic invasion, and the re-orientation and gradual integration of the Spanish economy into a broader Western European economy over the 19th century are perceived to have been harmful to Spanish development (Vicens Vives, 1959). As a result of colonial independence, trade flows and government revenues declined. Domestic investment also fell, even though with colonial emancipation came a repatriation of capital. The manufacturing industry may have been worst hit because the colonies had provided it with a protected market. Financial, commercial, and transport services in cities like Seville and Cadiz which had been closely linked to the colonies also suffered.
There is no conclusive evidence to support the view that the loss of the empire was responsible for Spain’s economic retardation in the long run. Fontana (1991) finds direct links between Latin American independence, the fall of the Ancien Régime, and the Liberal Revolution in Spain. If this hypothesis is correct, then the loss of the colonies could have contributed significantly to the economic and social modernization of Spain. Despite the doubtless negative effects in the short run on capital formation, government revenues, trade in goods and services, and the manufacturing industry, the overall impact on GDP was much lower (less than 8% of GDP) than was estimated by historians, and was concentrated in particular regions (Prados de la Escosura, 1993). From the quantitative evidence available, it can be suggested that the loss of the colonies seems to have had a less profound and widespread impact upon the Spanish economy than the historical literature has suggested. The more competitive and flexible sectors of the economy eventually adapted to new circumstances; particularly commercial agriculture that oriented supply toward the growing markets in northwest Europe.
Regarding the shift from colonial to European markets, the fact is that the former already represented a smaller share before colonial independence. Furthermore, although foreign trade represented only a small part of Spain’s GDP, it acted as a significant and perhaps indispensable stimulus to economic modernization during the 19th and the early 20th centuries. Trade exerted moderate but positive linkages and externalities on the Spanish economy. Foreign demand induced more efficient allocation of resources, and the exploitation of their natural advantages through specialization in cash crops and minerals. This represented a positive development in a situation where trade provided a “vent for surplus” of Spain’s natural and human resources. The flexibility exhibited by changes in the composition of exports and imports, and the long-run evolution of Spain’s balance of payments, imply that historians who analyze Spanish trade in terms of mono export patterns and chronic debt crises experienced by Third World countries are transposing metaphors and concepts to a totally different world. Theories of dependency formulated for Latin America seem to have limited relevance for 19th-century Spain. Specialization along the lines of comparative advantage provided Spain both with absolute and relative improvements in welfare as measured by the real terms of trade. Favorable relative prices and employment opportunities are the key elements behind the observed and measured favorable trends.
Hence, the counterfactual hypothesis implicit in historiography of a more efficient growth path, independent from the international economy, does not seem plausible. There is no quantitative evidence to support that productivity in the export sector was inferior to productivity in sectors serving the domestic market. In addition, the domestic market does not seem to offer any equally efficient alternative allocation for production factors used in the export sector. On the contrary, it could be hypothesized that a larger foreign sector would have increased employment and productivity levels, resulting in higher real income. Consequently, trade emerges not as the hegemonic element in the country’s economic modernization, but rather as a small but indispensable stimulus of development.
Since the late 19th century restrictions on both domestic and external competition help explain sluggish growth during 1883–1920 despite the Restauración’s (1875–1923) institutional stability that should have provided a favorable environment for investment and growth (Fraile, 1991; 1998). Increasing tariff protection, together with exclusion from the prevailing international monetary system, the gold standard, may have represented a major obstacle to Spain’s integration in the international economy. Currency instability, following the abandonment of the Gold Standard, helped isolate Spain from international capital markets, especially from the inflows of international capital investment in the 1880s and 1890s (Bordo & Rockoff, 1996; Martín-Aceña, 1993; Tena Junguito, 1999). The Cuban independence in 1898 had little direct impact on Spain’s economy but a large indirect one that intensified protectionist and isolationist tendencies (Fraile & Escribano, 1998). Neutrality during World War I hardly brought any economic progress, and GDP per capita shrank, a result that challenges the conventional view of the war stimulus for growth through import substitution.
Although economic links between the metropolis and the last colony were already weak, Cuba’s war of independence caused substantial macroeconomic instability. Macroeconomic instability together with a sudden stop in international investment reduced capital inflows sharply leading to the depreciation of the Peseta. From 1895 (the beginning of the Cuban War) until 1905, the peseta depreciated by approximately 30%, due to a combination of fiscal disorder, monetary expansion, and a flexible exchange rate (Martín-Aceña, 1993; Prados de la Escosura, 2010) that, in turn, increased migration costs, reducing the outward flow of labor. Quantitative evidence shows that, in the absence of depreciation, Spanish emigration could have been more than 40% higher during the period 1892–1905 (Sánchez-Alonso, 2000a). During a period otherwise entirely favorable to international migration on account of low transport costs, higher demands for unskilled labor in New World economies, and large wage differentials between Europe and the Americas, emigration of labor remained low in Spain compared to other southern European countries like Italy. Spanish emigration was income-constrained and any potential emigrants could not afford the costs of external migration (Sánchez-Alonso 2000b). Internal migration remained low until World War I. The modest pace of industrialization was the main reason for low internal migration rates (Silvestre, 2005)
The 1920s represented the period of most intense growth prior to 1950. The hypothesis that government intervention, through trade protectionism, regulation, and investment in infrastructure, was a driver of growth has been widely accepted (Velarde, 1969). The emphasis on tariff protectionism neglects, however, the fact that Spain opened up to international capital during the 1920s, allowing the purchase of capital goods and raw materials, hence, contributing to growth.
Structural change and labor market integration accelerated during the 1920s. Low levels of internal migration during the 19th century were, according to Tortella (2000) and others, one of the reasons of agrarian backwardness and by extension of the Spanish economy. Internal migration reached a peak after World War I (Silvestre, 2005). The spectacular growth of the Spanish economy in the 1920s drove the development of industries, such as construction, with a greater pull for migrants. Urbanization rates also increased during the decade.
Substantial wage convergence across regions took place prior to World War I, despite low rates of internal migration. The process of wage convergence was interrupted by World War I, which produced a sharp increase in regional wage differentials. These increases proved to be temporary, however; wage convergence re-emerged in the 1920s, this time accompanied by internal migration and substantial re-allocation of labor from agriculture to industry (Rosés & Sánchez Alonso, 2004).
A major political change, from a monarchy to a republic, happened in 1931. The new political system coincided with the Great Depression. The Depression, measured by the contraction in real GDP per capita, extended in Spain, as in the United States, until 1933, with a 12% fall (against 31% in the United States). The Depression, with GDP per capita falling at -3.1% annually, was milder than in the United States, but similar in intensity to Western Europe’s average (Maddison Project, 2013), challenging the traditional view of a weaker impact due to Spain’s relative international isolation and backwardness. The Civil War (1936–1939) prevented Spain from joining the post-Depression recovery and resulted in a severe contraction of economic activity (nearly one-third drop in real per capita income) but did not reach the magnitude of the impact of World War II on main belligerent countries of continental Western Europe (Maddison Project, 2013). A consensus appears to exist in the literature pointing to non-economic causes of the Civil War. Expectations after the collapse of the monarchy in 1931 were not fulfilled, as proposal for land reform, industrial labor legislation, and welfare improvements were not completed or enforced, leading to social unrest, civil conflict, and political polarization (Domenech, 2013; Palafox, 1991).
Growth Under the Dictatorship, 1939–1975
Since 1939 Spain entered a long dictatorship that lasted until 1975. When Franco died, the Spanish economy had experienced a major transformation thank to high rates of growth during the 1960s and structural changes.
The weak post-Civil War recovery implied that the pre-war GDP per capita peak level (1929) was not reached until 1954 in contrast with the six years that, on average, took to return to the pre-World War II peak in Western Europe. Looking for an explanation of Spain’s idiosyncratic behavior, the hypothesis that the larger loss of human capital vis-à-vis physical capital contributed to the delayed reconstruction can be put forward. The destruction of physical capital during the Civil War was about the Western European average during World War II. However, the exile after the Civil War and, possibly to a larger extent, the internal exile resulting from the new regime’s political repression, meant a significant depletion of Spain’s limited human capital (Núñez, 2003; Ortega & Silvestre, 2006; Prados de la Escosura & Rosés, 2010).
The early years of the dictatorship—from the Civil War up to the early 1950s—represented a dramatic rupture with the economic policies prevalent in Spain from the mid-19th century. Economic policy during the 1940s was based upon the state’s direct intervention, indiscriminate import substitution, severe restrictions on imports and capital inflows, and a complex exchange rate system. The new authorities shared a strong anti-market attitude, and their economic policy often threatened private initiative and investment (Fraile, 1998). Severe market controls aimed at economic autarchy were implemented (Barciela, 2002). The new state-owned enterprises began by controlling “strategic” industries, seeking technical solutions to maximize the amount of production, and bypassing the opportunity cost of their decisions (Martín Aceña & Comín, 1991). Labor relations were strictly regulated.
The situation began to change in the 1950s when, in per capita terms, the Spanish economy grew at a similar rate as the Western European average, but with the significant difference that Spain started from a substantially lower level. Spain and Western Europe grew at 4.4% and 3.9% yearly during the 1952–1958 period.
However, countries that experienced a reconstruction process grew at a much faster pace. For example, Italy grew at 4.9% and Germany at 6.5%. It was during the last period of Franco’s rule (1959–1975) when per capita GDP growth reached an unprecedented intensity in Spain, not far behind that of 1950s Germany and significantly above Western Europe and the United States.
During the 1950s increasing confidence in the viability of Franco’s dictatorship after the U.S.–Spain military and technological cooperation agreements (1953) together with the regime’s moderate economic reforms favored investment and innovation, contributing to accelerated economic growth (Calvo-González, 2007; Prados de la Escosura et al., 2012). The institutional reform initiated with the 1959 Stabilization and Liberalization Plan, a response to the exhaustion of the inward-looking development strategy, set policies that favored the allocation of resources along comparative advantage and allowed sustained and faster growth during the 1960s and early 1970s. However, without the moderate reforms of the 1950s and its growth outcome it seems unlikely that the Stabilization Plan would have succeeded (Prados de la Escosura et al., 2012). Thus, the new available evidence blurs the view of a neat discontinuity between autarchic (1939–1959) and moderately free market (1959–1975) periods.
Franco’s regime also represented an exception from the point of view of Spain’s integration in the international economy, as it started with a dramatic closing down followed, after the Stabilization Plan of 1959, by an opening-up to a historical maximum. After establishing links with international economic organization, a gradual opening and factor mobility (capital inflows and labor migration to Europe) were achievements of the new pro-market orientation of the dictatorship. The lack of structural reforms affecting the tax system and labor and financial markets represented the main shortcomings of economic policy during the 1960s.
The Post-1975 Era
The oil crisis of the 1970s happened at the time when Spain transitioned from a dictatorship to a democracy (1975–1985). During the transition decade, per capita GDP growth fell to one-fourth of that achieved over 1959–1974. Was the slowdown exogenous simply as a result of the international crisis? Did it derive from the Francoism legacy of an economy sheltered from international competition? Was it caused by the policies of the new democratic authorities? Accession to the European Union (1986) heralded another long phase of per capita GDP growth that came to a sudden halt with the Great Recession (2008–2013). What explain Spain’s comparatively deeper contraction and weaker recovery? Answering these questions provides a research agenda for historians.
It is worth pointing out that the post-1975 era introduced a new pattern according to which phases of acceleration in labor productivity correspond to those of sluggish progress in GDP per person, and vice versa. Thus, periods of sluggish (1975–1985) or negative (2008–2013) per capita GDP growth were paralleled by vigorous or recovering productivity growth. However, during the “transition-to-democracy” decade, labor productivity offset the sharp contraction in hours worked –resulting from unemployment—with the consequence of preventing a decline in GDP per capita. During the Great Recession (2008–2013), however, the timid improvement in output per hour worked was not enough to offset the contraction in employment and, hence, output per person fell sharply, in a similar fashion to the contraction experienced during the Great Depression (1929–1933). Conversely, the years between Spain’s accession to the European Union (1986) and the eve of the Great Recession (2007), particularly since 1992, exhibited substantial per capita GDP gains while labor productivity slowed down. Thus, in the three decades after Spain joined the EU, in which GDP per capita doubled, growing at 3.0% per year, more than half was contributed by the increase in hours worked per person.
The opposite trends in GDP per capita and per hour worked since the mid-1970s can be attributed to the fact that the Spanish economy has been unable to combine employment creation and productivity growth, with the implication that sectors that expanded and created new jobs (mostly in construction and services) did not succeed in attracting investment and technological innovation.
Was the transition to democracy in Spain facilitated by the decrease in inequality after 1950? Prados de la Escosura (2008) suggests that this was the case, contrary to what happened in the interwar period. The elimination of absolute poverty and the growth of the middle had positive effect on the stabilization of democracy. Torregrosa-Hetland (2016) argues, however, that democracy brought about new distributive forces and the new political system did not turn out to disproportionately favor the less well-off. At least, it could not effectively counteract market forces toward growing inequality.
Since 1815, income per person has improved remarkably, driven by increases in labor productivity. Up to 1950 and since 1986—when Spain became part of the European Union—capital deepening has been the main driver behind long-run labor productivity growth, while efficiency gains (total factor productivity) led it in the 1920s and during 1953–1986. The re-allocation of resources from lower productivity sectors, such as agriculture, toward sectors with higher productivity contributed significantly to the acceleration of productivity growth. Exposure to international competition represented a decisive element behind growth performance, with sluggish growth and retardation associated to closing-up and accelerated growth and catching-up to openness. Spanish performance in Western European perspective confirms this assertion. Spain underperformed up to 1950 and, then, caught up with advanced countries until 2007, with the years 1960–1974 standing out for its remarkable performance and the transition to democracy (1975–1985) as the exception.
Income distribution did not follow a linear path. After an upswing in inequality up to World War I, a declining trend initiated in the interwar years Although it reversed in the post-Civil War autarchy, it resumed strongly in the late 1950s and early 1960s, stabilizing at a relatively low level in the last half a century. Higher levels of income per capita were matched by lower inequality, suggesting that economic growth percolated through to reach the lower income groups. Therefore, improvements in average incomes went along a more egalitarian income distribution.
Research on modern Spain’s economic history is clearly unbalanced. Economic history research has been focused overwhelmingly in the “long” 19th century reaching up until the Civil War. Old debates and controversies about the determinants of Spanish failure to industrialize are largely settled on topics such as the economic impact of the loss of the colonies in the early 19th century or the shared responsibility of agriculture and industry in Spain’s economic backwardness.
The absence of debate about long-run Spanish economic performance during the 20th century is striking. The Civil War has marked a dividing line in research that seems to prevent a global vision of the last century. The Francoist era continues to be analyzed chronologically, assuming a sharp discontinuity around 1960 while ignoring persistence within Francoism. New available evidence challenges the view of a neat cut-off between autarchy and moderately free market periods. A convincing explanation of why the historical determinants of Spain’s economic backwardness weakened or faded away from the 1960s onward is still lacking.
Moreover, although the political transition to democracy after 1975 was a success, and Spanish experience may be relevant to countries on their way to democracy and aiming to open up, while maintaining social and political stability, scholars are far from certain about the economic costs of the transition and whether it could have been achieved at lower economic cost.
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