Spain - The Economy the Franco Era, 1939 75

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The franco era, 1939-75

Spain emerged from the Civil War with formidable economic problems. Gold and foreign exchange reserves had been virtually wiped out, and the neglect and devastation of war had reduced the productive capacity of both industry and agriculture. To compound the difficulties, even if the wherewithal had existed to purchase imports, the outbreak of World War II rendered many needed supplies unavailable. The end of the war did not improve Spain's plight because of subsequent global shortages of foodstuffs, raw materials, and peacetime industrial products. Spain's European neighbors faced formidable reconstruction problems of their own, and, because of their awareness that the Nationalist victory in the Spanish Civil War had been achieved with the help of Adolf Hitler and Benito Mussolini, they had little inclination to include Spain in any multilateral recovery program. For a decade following the Civil War's end in 1939, the economy remained in a state of severe depression.

Branded an international outcast for its pro-Axis bias during World War II, Franco's regime sought to provide for Spain's well- being by adopting a policy of economic self-sufficiency. Autarchy was not merely a reaction to international isolation; it was also rooted for more than half a century in the advocacy of important economic pressure groups. Furthermore, from 1939 to 1945, Spain's military chiefs genuinely feared an Allied invasion of the peninsula and, therefore, sought to avert excessive reliance on foreign armaments.

Spain was even more economically retarded in the 1940s than it had been ten years earlier, for the residual adverse effects of the Civil War and the consequences of autarchy and import substitution were generally disastrous. Inflation soared, economic recovery faltered, and, in some years, Spain registered negative growth rates. By the early 1950s, per capita gross domestic product (GDP) was barely 40 percent of the average for West European countries. Then, after a decade of economic stagnation, a tripling of prices, the growth of a black market, food rationing, and widespread deprivation, gradual improvement began to take place. The regime took its first faltering steps toward abandoning its pretensions of self- sufficiency and toward inaugurating a far-reaching transformation of Spain's retarded economic system. Pre-Civil War industrial production levels were regained in the early 1950s, though agricultural output remained below that level until 1958.

A further impetus to economic liberalization came from the September 1953 signing of a mutual defense agreement, the Pact of Madrid, between the United States and Spain. In return for permitting the establishment of United States military bases on Spanish soil, the Eisenhower administration provided substantial economic aid to the Franco regime. More than 1 billion dollars in economic assistance flowed into Spain during the remainder of the decade as a result of the agreement. Between 1953 and 1958, Spain's gross national product (GNP) rose by about 5 percent per annum.

The years from 1951 to 1956 were marked by substantial economic progress, but the reforms of the period were only spasmodically implemented, and they were poorly coordinated. One large obstacle to the reform process was the corrupt, inefficient, and bloated bureaucracy. A former correspondent of London's Financial Times, Robert Graham, described the Franco era as "the triumph of paleocapitalism--primitive market skills operating in a jungle of bureaucratic regulations, protectionism, and peddled influence." By the mid-1950s, the inflationary spiral had resumed its upward climb, and foreign currency reserves that had stood at US$58 million in 1958 plummeted to US$6 million by mid-1959. The standard of living remained one of the lowest in Western Europe, and the backwardness of agriculture and of the land-tenure system, despite lip service to agrarian reform, kept farm productivity low. The growing demands of the emerging middle class--and of the ever greater number of tourists--for the amenities of life, particularly for higher nutritional standards, placed heavy demands on imported foodstuffs and luxury items. At the same time, exports lagged, largely because of high domestic demand and institutional restraints on foreign trade. The peseta fell to an all-time low on the black market, and Spain's foreign currency obligations grew to almost US$60 million.

A debate took place within the regime over strategies for extricating the country from its economic impasse, and Franco finally opted in favor of a group of neoliberals. The group included bankers, industrial executives, some academic economists, and members of the semi-secret Roman Catholic lay organization, Opus Dei (Work of God).

During the 1957-59 period, known as the pre-stabilization years, economic planners contented themselves with piecemeal measures such as moderate anti-inflationary stopgaps and increases in Spain's links with the world economy. A combination of external developments and an increasingly aggravated domestic economic crisis, however, forced them to engage in more far- reaching changes.

As the need for a change in economic policy became manifest in the late 1950s, an overhaul of the Council of Ministers in February 1957 brought to the key ministries a group of younger men, most of whom possessed economics training and experience. This reorganization was quickly followed by the establishment of a committee on economic affairs and the Office of Economic Coordination and Planning under the prime minister.

Such administrative changes were important steps in eliminating the chronic rivalries that existed among economic ministries. Other reforms followed, the principal one being the adoption of a corporate tax system that required the confederation of each industrial sector to allocate an appropriate share of the entire industry's tax assessment to each member firm. Chronic tax evasion was consequently made more difficult, and tax collection receipts rose sharply. Together with curbs on government spending, in 1958 this reform created the first government surplus in many years.

More drastic remedies were required as Spain's isolation from the rest of Western Europe became exacerbated. Neighboring states were in the process of establishing the EC and the European Free Trade Association (EFTA). In the process of liberalizing trade among their members, these organizations found it difficult to establish economic relations with countries wedded to trade quotas and bilateral agreements, such as Spain.

Spanish membership in these groups was not politically possible, but Spain was invited to join a number of other international institutions. In January 1958, Spain became an associate member of the Organisation for European Economic Co- operation (OEEC), which became the Organisation for Economic Co- operation and Development (OECD) in September 1961, and which included among its members virtually every developed country in the noncommunist world. In 1959 Spain joined the International Monetary Fund (IMF) and the World Bank. These bodies immediately became involved in helping Spain to abandon the autarchical trade practices that had brought its reserves to such low levels and that were isolating its economy from the rest of Europe.

Spain traditionally paid close attention to events in France and was often influenced by them. In December 1958, the French government adopted a stabilization program in order to overcome a severe economic slump; this program included devaluation of the franc, tax increases, and the removal of restrictions on most of France's trade with OECD countries. The French action removed whatever doubts the Spanish authorities had harbored about embarking on a wholesale economic transformation. After seven months of preparation and drafting, aided by IMF and French economists, Spain unveiled its Stabilization Plan on June 30, 1959. The plan's objectives were twofold: to take the necessary fiscal and monetary measures required to restrict demand and to contain inflation, while, at the same time, liberalizing foreign trade and encouraging foreign investment.

The plan's initial effect was deflationary and recessionary, leading to a drop in real income and to a rise in unemployment during its first year. The resultant economic slump and reduced wages led approximately 500,000 Spanish workers to emigrate in search of better job opportunities in other West European countries. Nonetheless, its main goals were achieved. The plan enabled Spain to avert a possible suspension of payments abroad to foreign banks holding Spanish currency, and by the close of 1959 Spain's foreign exchange account showed a US$100-million surplus. Foreign capital investment grew sevenfold between 1958 and 1960, and the annual influx of tourists began to rise rapidly.

As these developments steadily converted Spain's economic structure into one more closely resembling a free-market economy, the country entered the greatest cycle of industrialization and prosperity it had ever known. Foreign aid played a significant role. Such aid took the form of US$75 million in drawing rights from the IMF, US$100 million in OEEC credits, US$70 million in commercial credits from the Chase Manhattan Bank and the First National City Bank, US$30 million from the United States Export- Import Bank, and funds from United States aid programs. Total foreign backing amounted to US$420 million. The principal lubricants of the economic expansion, however, were the hard currency remittances of 1 million Spanish workers abroad, which are estimated to have offset 17.9 percent of the total trade deficit from 1962 to 1971; the gigantic increase in tourism that drew more than 20 million visitors per year by the end of the 1960s and that accounted for at least 9 percent of the GNP; and direct foreign investment, which between 1960 and 1974 amounted to an impressive US$7.6 billion. More than 40 percent of this investment came from the United States, almost 17 percent came from Switzerland, and the Federal Republic of Germany (West Germany) and France each accounted for slightly more than 10 percent. By 1975 foreign capital represented 12.4 percent of all that invested in Spain's 500 largest industrial firms. An additional billion dollars came from foreign sources through a variety of loans and credit devices.

The success of the stabilization program was attributable to both good luck and good management. It took place at a time of economic growth and optimism in Western Europe, which as a result was ready to accept increased Spanish exports, to absorb Spain's surplus labor, and to spend significant sums of money on vacations in Spain and on investments in Spanish industry.

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