Economic history of Spain

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The Economic history of Spain covers the development of the Spanish economy over the course of its history.

[edit] Ancient Era

Ruins of a Roman garum factory near Tarifa, Spain

The prehistoric Iberians and Celts were some of the earliest groups in what is now Spain. The Iberians developed agriculture and metal working. Celtic economy centered around cattle raising, like other Celtic societies. For sometime, many historians have suggested that the prehistoric Celts living in Spain should be blended together with the the prehistoric Iberians and be referred to as Celtiberians; however, in Spanish Celtic society this concept is widely regarded as insulting, bigoted, and purely speculative.

Europe's oldest city, Cádiz, began as the result of the ancient metal trade. The city of Tartessos had an impressive wealth of local metals and traded with the British Isles for tin. The Phoenicians saw Tartessos as a valuable trading partner and, around 1100 BC, founded their own city nearby, Cádiz.

The Carthaginians and Greeks also traded with Spain and established their own colonies on the coast. Spain's mineral wealth and access to metals made it an important source of raw material during the early metal ages.

The Romans governed all of the Iberian peninsula after the Second Punic War.

[edit] Middle Ages

While much of Europe fell into a Dark Age after the decline of the Roman Empire, those kingdoms in the Iberian peninsula that today are known as Spain maintained their economy. First, the Visigoths took over in the absence of Roman administrators and established themselves as nobility. Later, the Moors occupied parts of the Iberian Peninsula along side the Catholic kingdoms. After 800 years of warring, the Catholic kingdoms of what is today known as Spain, expelled all the Moors and any converted Muslim known as Moriscos from the Peninsula. Eventually, the Moors integrated into Arabs societies. The taking back of land and expulsion of the Moors is known as the Reconquista.

The Kingdom of Castile, united with the Kingdom of Aragon, established a merchant navy that rivaled that of the Hanseatic League. The reasons for this situation appear to have been rooted both in the structure of the economy and in the attitude of the Castilians. Restrictive corporations closely regulated all aspects of the economy-production, trade, and even transport. The most powerful of these corporations, the mesta, controlled the production of wool, Castile's chief export!

[edit] Union and Exploration

The Archivo General de Indias now holds all the records of the Council of the Indies and served as the center for commercial administration in the Spanish Empire after its completion in 1598 (Archives right, Cathedral left)

The Reconquista allowed the Catholic Monarchs to divert their attention to exploration. In 1493, Pope Alexander VI (Rodrigo Borgia, a Valencian) formally approved the division of the unexplored world between kingdoms of what is today Spain and Portugal. The Treaty of Tordesillas, which the kingdoms signed one year later, moved the line of division westward and allowed Portugal to claim Brazil.

In 1493, when Cristóbal Colón brought 1,500 colonists with him on his second voyage, a royal administrator had already been appointed for what the Catholic kingdoms referred to as the Indies. The Council of the Indies (Consejo de Indias), established in 1524 acted as an advisory board on colonial affairs, and the House of Trade (Casa de Contratacion) regulated trade with the colonies. The newly established colonies were ruled under the Kingdoms of Castile and Aragon, today known as Spain.

New discoveries and conquests came in quick succession. Vasco Nuñez de Balboa reached the Pacific in 1513, and the survivors of Ferdinand Magellan's expedition completed the circumnavigation of the globe in 1522. In 1519 and between 1531 and 1533 the Incas and the Aztecs were overthrown because the post-Crusades Roman Catholic conquistadors believed that the Incas' and the Aztecs' beliefs and practices were akin to devil worshiping. The ease with which the two ancient cultures were over thrown resulted from the fact that the Incas and the Aztecs were elitist cultures: i.e., with few at the top of their society and many at the bottom. Thus, there were too few at the top of their society who could outwit the sophisticated conquistadors.

[edit] Decline

Sixteenth-century kingdoms of a united Aragon and Castile was ultimately the victim of its own wealth. Military expenditure did not stimulate domestic production. Bullion from American mines passed through Aragon and Castile like water through a sieve to pay for troops in the Netherlands and Italy, to maintain the emperor's forces in Germany and ships at sea, and to satisfy conspicuous consumption at home. The use of precious metal brought from America and spent on Aragon and Castile military establishment quickened inflation, left the population without sufficient specie to pay debts, and caused goods to become too overpriced to compete in international markets.

American bullion alone could not satisfy the demands of military expenditure. Domestic production was heavily taxed, driving up prices for Aragon/Castile-made goods. The sale of titles to entrepreneurs who bought their way up the social ladder (a practice commonly found all over Europe), removing themselves from the productive sector of the economy, provided additional funds. The overall effect of plague and emigration reduced Aragon/Castile population from 8 million in the early sixteenth century to 7 million by the mid-seventeenth century.

[edit] Bourbon Reforms

Economic recovery was noticeable, and government efficiency was greatly improved at the higher levels during Charles III's reign. The Bourbon reforms, however, resulted in no basic changes in the pattern of property holding. The nature of bourgeois class consciousness in Aragon/Castille hindered the creation of a middle-class movement. At the instance of liberal thinkers including Campomanes, various groups known as "Patriotic Societies" or "Economic Societies" were formed to promote economic development, new advances in the sciences, and Enlightenment philosophy (See: Sociedad Económica de los Amigos del País). However, despite the development of a national bureaucracy in Madrid, the reform movement could not be sustained without the patronage of Charles III, and it did not survive him.

[edit] Napoleon and the War of Independence

Aragon/Castile's American colonies took advantage of the postwar chaos to proclaim their independence, and most established republican governments. By 1825 only Cuba and Puerto Rico remained under the Spanish flag in the New World. When Ferdinand VII was restored to the throne in Madrid, he expended wealth and manpower in a vain effort to reassert control over the colonies. The move was unpopular among liberal officers assigned to the American wars.

[edit] Primo de Rivera

An aristocrat, Miguel Primo de Rivera was appointed prime minster by the king, and for 7 years dissolved parliament and ruled through directorates and the aid of the military until 1930.

Protectionism and state control of the economy led to a temporary economic recovery. The precipitous economic decline in 1930 undercut support for the government from special-interest groups. He established no new system to replace parliamentary government. Criticism from academics mounted. Bankers expressed disappointment at the state loans that his government had tried to float. An attempt to reform the promotion system cost him the support of the army. This loss of army support caused him to lose the support of the king. Primo de Rivera resigned and died shortly afterward in exile.

[edit] Second Republic, 1931-1936

The republican government substituted the monarchy, inheriting the international economic crisis as well. Three different governments ruled during the Second Spanish Republic, failing to execute numerous reforms, including land reform. General strikes were common and the economy stagnated.

During the Spanish Civil War, the country split into two different centralized economies, and the whole economic effort was redirected to the war industry. According to recent research^[1], growth is harmed during civil wars due to the huge contraction on private investment, and it was the case of the Spanish divided economy.

[edit] 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 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, Francisco 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 held back 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 % of the average for West European countries. Then, after a decade of economic stagnation, a tripling of prices, the growth of a black market, 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 held back 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 % per annum.

The years from 1951 to 1956 were marked by substantial economic progress, but the reforms of the period were implemented irregularly, and were poorly coordinated. One large obstacle to the reform process was the corrupt, inefficient, and bloated bureaucracy. 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 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 food 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 Roman Catholic lay organization, Opus Dei.

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--see Glossary). 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. In 1959 Spain joined the International Monetary Fund (IMF) and the World Bank. These bodies immediately became involved in helping Spain 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.

In December 1958, after seven months of preparation and drafting, aided by IMF, 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 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 Export-Import Bank of the United States, 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 % 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 % of the GNP; and direct foreign investment, which between 1960 and 1974 amounted to an impressive US$7.6 billion. More than 40 % of this investment came from the United States, almost 17 % came from Switzerland, and the Federal Republic of Germany (West Germany) and France each accounted for slightly more than 10 %. By 1975 foreign capital represented 12.4 % 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 a little good luck and a lot of good management.

[edit] The Post-Franco Period, 1975-1980s

Franco's death in 1975 and the ensuing transition to democratic rule diverted Spaniards' attention from their economy. 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 % 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 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 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 high.

When the Socialist government headed by Felipe Gonzalez took office in late 1982, the economy, inflation was running at an annual rate of 16 %, the external current account was US$4 billion in arrears, public spending was large, 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 governments had not.

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 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 % of GNP, and it dropped to 4.5 % in 1986. Real wage growth was contained, and it was generally kept below the rate of inflation. Inflation was reduced to 4.5 % in 1987, and analysts believed it might decrease to the government's goal of 3 % in 1988.

Efforts to modernize and to expand the economy together with a number of factors fostered the remarkable economic boom of the 1980s. Those factors were the continuing fall in oil prices, increased tourism, and a massive upsurge in the inflow of foreign investment. Thus, despite the fact that the economy was being exposed to foreign competition in accordance with EC requirements, the Spanish economy underwent rapid expansion without experiencing balance of payments' constraints.

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 %; it then gradually resumed its slow upward ascent with increases of 1.2 % in 1982, 1.8 % in 1983, 1.9 % in 1984, and 2.1 % in 1985. The following year, however, Spain's real GDP began to grow by leaps and bounds, registering a growth rate of 3.3 % in 1986 and 5.5 % 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 % in 1988 and of 3.5 % 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 % in 1986 and by 5.2 % in 1987, was also expected to maintain its expansive rate, growing by 3.8 % in 1988 and by 3.7 % in 1989.

A prime force generating rapid economic growth was increased domestic demand, which grew by a steep 6 % in 1986 and by 4.8 % 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 % 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, raised concerns over the existing imbalance between import and export growth.

[edit] The Modern Spanish Economy

Growth of real GDP per capita in Spain from 1950-2000. Values in 1996 dollars.

The Spanish economy boomed from 1986 to 1990, averaging five percent annual growth. After a European-wide recession in the early 1990s, the Spanish economy resumed moderate growth starting in 1994. Spain's mixed capitalist economy supports a GDP that on a per capita basis is 80% that of the four leading West European economies. The center-right government of former President Aznar successfully worked to gain admission to the first group of countries launching the European single currency (the euro) on January 1, 1999. The Aznar administration continued to advocate liberalization, privatization, and deregulation of the economy and introduced some tax reforms to that end. Unemployment fell steadily under the Aznar administration but remains high at 10.4%. Growth of 2.5% in 2003 and 2.6% in 2004 was satisfactory given the background of a faltering European economy. The socialist president, Rodriguez Zapatero, has initiated economic and social reforms that are generally popular among the masses of people but that are anathema to conservative elements.

[edit] References

1. J and Imai, K. Measuring the Economic Impact of Civil Wars (2000)

This article contains material from the Library of Congress Country Studies, which are United States government publications in the public domain. This article contains material from the CIA World Factbook which, as a US government publication, is in the public domain.