Spain - The Economy the Post Franco Period, 1975 1980s

The post-franco period, 1975-1980s

Franco's death in 1975 and the ensuing transition to democratic rule diverted Spaniards' attention from urgent economic problems. The return to democracy coincided with an explosive quadrupling of oil prices, which had an extremely serious effect on the economy because Spain imported 70 percent of its energy, mostly in the form of Middle Eastern oil. Nonetheless, the centrist government of Adolfo Suarez Gonzalez, which had been named to succeed the Franco regime by King Juan Carlos de Borbon, did little to shore up the economy or even to reduce Spain's heavy dependence on imported oil. A virtually exclusive preoccupation with the politics of democratization and the drafting of a new political system prevailed.

Because of the failure to adjust to the drastically changed economic environment brought on by the two oil price shocks of the 1970s, Spain quickly confronted plummeting productivity, an explosive increase in wages from 1974 to 1976, a reversal of migration trends as a result of the economic slump throughout Western Europe, and the steady outflow of labor from agricultural areas despite declining job prospects in the cities. All these factors joined in producing a sharp rise in unemployment. Government budgetary deficits swelled, as did large social security cost overruns and the huge operating losses incurred by a number of public-sector industries. Energy consumption, meanwhile, remained excessive. The years of economic recession, beginning in 1975, were not solely attributable to the oil crisis, but they revealed, in the words of one Spanish economist, Eduardo Merigo, "an institutional structure that was creaking at the seams, unable to function in a country in which output had increased nearly five times in thirty years." These structural deficiencies made Spain more vulnerable than most other modern economies to the oil crises of the 1970s.

When the Socialist government headed by Felipe Gonzalez took office in late 1982, the economy was in dire straits. Inflation was running at an annual rate of 16 percent, the external current account was US$4 billion in arrears, public spending had gotten out of hand, and foreign exchange reserves had become dangerously depleted. In coping with the situation, however, the Gonzalez government had one asset that no previous post-Franco government had enjoyed, namely, a solid parliamentary majority in both houses of the Cortes (Spanish Parliament). With this majority, it was able to undertake unpopular austerity measures that earlier weak and unstable governments had been unable even to consider.

The Socialist government opted for pragmatic, orthodox monetary and fiscal policies, together with a series of vigorous retrenchment measures. In 1983 it unveiled a program that provided a more coherent and long-term approach to the country's economic ills. Renovative structural policies--such as the closing of large, unprofitable state enterprises--helped to correct the more serious imbalances underlying the relatively poor performance of the economy. The government launched an industrial reconversion program, brought the problem-ridden social security system into better balance, and introduced a more efficient energy-use policy. Labor market flexibility was improved, and private capital investment was encouraged with incentives.

By 1985 the budgetary deficit was brought down to 5 percent of GNP, and it dropped to 4.5 percent in 1986. Real wage growth was contained, and it was generally kept below the rate of inflation. Inflation was reduced to 4.5 percent in 1987, and analysts believed it might decrease to the government's goal of 3 percent in 1988.

Efforts to modernize and to expand the economy were greatly aided by a number of factors that fostered the remarkable economic boom of the 1980s: the continuing fall in oil prices, increased tourism, a sharp reduction in the exchange value of the United States dollar, and a massive upsurge in the inflow of foreign investment. These exogenous factors allowed the economy to undergo rapid expansion without experiencing balance of payments' constraints, despite the fact that the economy was being exposed to foreign competition in accordance with EC requirements. Were it not for these factors, the process of integration with the EC would have been a good deal more painful, and inflation would have been much higher.

In the words of the OECD's 1987-88 survey of the Spanish economy, "following a protracted period of sluggish growth with slow progress in winding down inflation during the late 1970s and the first half of the 1980s, the Spanish economy has entered a phase of vigorous expansion of output and employment accompanied by a marked slowdown of inflation." In 1981 Spain's GDP growth rate had reached a nadir by registering a rate of negative 0.2 percent; it then gradually resumed its slow upward ascent with increases of 1.2 percent in 1982, 1.8 percent in 1983, 1.9 percent in 1984, and 2.1 percent in 1985. The following year, however, Spain's real GDP began to grow by leaps and bounds, registering a growth rate of 3.3 percent in 1986 and 5.5 percent in 1987. The 1987 figure was the highest since 1974, and it was the strongest rate of expansion among OECD countries that year. Analysts projected a rise of 3.8 percent in 1988 and of 3.5 percent in 1989, a slight decline but still roughly double the EC average. They expected that declining interest rates and the government's stimulative budget would help sustain economic expansion. Industrial output, which rose by 3.1 percent in 1986 and by 5.2 percent in 1987, was also expected to maintain its expansive rate, growing by 3.8 percent in 1988 and by 3.7 percent in 1989.

A prime force generating rapid economic growth was increased domestic demand, which grew by a steep 6 percent in 1986 and by 4.8 percent in 1987, in both years exceeding official projections. During 1988 and 1989, analysts expected demand to remain strong, though at slightly lower levels. Much of the large increase in demand was met in 1987 by an estimated 20 percent jump in real terms in imports of goods and services.

In the mid-1980s, Spain achieved a strong level of economic performance while simultaneously lowering its rate of inflation to within two points of the EC average. However, its export performance, though increasing by .5 percent, raised concerns over the existing imbalance between import and export growth.

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