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Spain is often thought of as a land that carries an image of pride and privilege. But aside from its impressionable image, it is a struggling country. It is a place where pesetas (currency in Spain) can often be scarce and where the government fights to keep financial steadiness. Spain has given great effort to help support the people of the country. They have done this by using their money to create toll-free highways, fighting for worker's rights, deflate the public deficit, and increase wages. However, Spain is still a flailing capitalist economy that is far behind the leading West European countries' economies even though in the past decade it has made incredible strides toward progressing. Spain has its work cut out for them in the near future in order to stay close with the other West European economies. Although the inflation rate is low, interests rates are low as well. Also the government has continued to support privatization, liberalization and deregulation of the economy while introducing new tax reforms. Spain has a 20% unemployment rate. That is the highest unemployment rate in the EU. Spain’s diverse capitalist economy will be faced with difficult challenges in the next few years with monetary and other economic policies, and will need a stable government to become more competitive with an already ahead Europe economy. However, Spain has made a great deal of progress, considering its wavering economic past. World War II was the beginning of the distance between Spain and the rest of the European nations. As a result of Spain never entering into the war, the country never received the benefits from the European recovery plans, keeping it in a situation of complete isolation. Then following the Civil War in Spain, an inward-looking development model known as autarky, was adopted as a result to its isolation with its surrounding neighbors in Europe. This economic policy was based on the fact that the Spanish economy had the resources necessary to produce enough on their own without having to depend on other countries to satisfy all of society’s needs while working on developing the economy. However, because of the Spanish economy lacking sufficient raw materials, technology, and size for developing businesses large enough to be competitive and capable of making a good enough amount of capital to import the necessary things for growth, the plan ultimately failed. Then finally the Stabilization Plan of 1959 was designed to open the doors to the entry of goods and foreign capital. The Stabilization Plan was made up of the entry of capital into Spain through tourism, foreign investment, and remittances sent home by Spanish workers who emigrated to more developed European countries. Even though this new economic plan was unstable, it was definitely much more successful than the Autarky economic policy. Also known as a “stop-and-go” policy, it created a more serious use of capital than would have been expected by the physical work capital resources of the country. The work force significantly increased, with the loss of jobs in agriculture, which was the traditional method in which the Spanish earned money, and the growth of the tertiary part, which incorporated women into the workplace. Shipbuilding, steel, chemicals, textiles, and footwear were some of the main industries. Investment is being made in new manufacturing industries, such as information technology and telecommunications equipment. This sector utilized standard technology and based its competitiveness on its cheap labor and its capital on a cheap money monetary system. Eventually, as a result of Spain’s lack of adapting to the rest of the world’s technological advances, there was an economic crisis that broke out in the mid-1970’s. A dramatic rise in the price of oil had an unfortunate affect on Spain’s economic situation, and because it relies so much on oil and because there was a fall in world demand for steel and shipbuilding, Spain became less competitive with the new industrialized countries in South East Asia. As a result, the public deficit increased and there was a steep fall in commercial surpluses. Inflation then followed when the authorities attempted to make amends instead of adjusting the domestic prices and applying an extensive financial policy. The government financed these losses by returning to the currency reserves, therefore, putting Spain deep into debt. Finally in 1977, the Moncloa Pacts were adopted which lessened the value of the peseta. It was a moderately restrictive monetary policy, and an income policy with a commitment to begin structural reform. This was unsuccessful as the industry failed to familiarize itself to the new parameters of prices and demand. Spain went deeper and deeper into debt until 1982. To bluntly show the economic situation for Spain from 1975 to 1982, the Gross Domestic Product grew by an average rate of 1.5%, while the gross formation of capital decreased by an average rate of 2.5%. Spain’s political situation was revolutionized when the first socialist government took over in 1982. These unfortunate new leaders were handed down high inflation rates (14%), a deficit in the balance of payments on current account of four billions dollars, low growth rates, as well as a public deficit of almost 6% of the GDP. All this is while Spain still had a high and growing rate of unemployment. In an attempt to fight the unemployment, a gradual adjustment policy was created to reduce inflation, the public debt, the foreign debt, and unemployment. In this three-year period of change, authorities established the foundation for continued growth and prepared the Spanish economy for future entry into the European Economic Community, also known as EEC. With the final fall of international prices, primarily oil, money and the dollar, the international economy in general, and the economies of the industrialized countries and of Spain in particular, the country entered a favorable state of expanding growth. On January 1, 1986, Spain finally ascended to the EEC. From 1986-1990, the Spanish economy received an unprecedented financial growth after joining the EEC. This economic expansion created a great deal of employment because of a greater demand for labor relating to increased production and the increasingly elastic measures in the labor market. Unemployment decreased 4.2%, and this economic growth became Europe’s most rapid through these five years, and the public deficit decreased along with the rate of inflation. The gross formation of capital increased to an annual average rate of 14.1%, which doubled the average growth of investment in the OECD countries during this period. From 1985-1989, the gross formation of capital grew from 19% to 26% of the GDP. However, Spain’s economy became so content and motivated that its domestic demand increased to an annual rate of almost three points above production. Their inability to keep up with the demand therefore led to another jump back to high inflation rates. This surplus in demand over the national production created a growth in foreign purchases and a rise in domestic prices. Because the policies of supply and demand, certain measures have been taken. These measures include the dropping of the growth of demand and increasing the possible expansion of the economy. Since then, and in all regard to need, monetary and fiscal policy has been provided. To go with these policies of restrictive demand and more flexible supply, the government has tried to stimulate an income policy on several occasions. This has especially come into effect in the past five years. As Spain has been forced to live within its means and state spending has been slashed to control the rising budget deficit. The country is also the world's largest producer of olive oil, fourth largest of dried fruit and the sixth largest of citrus fruits. Spain's vineyards are the largest in the world and some 60% larger than France's, although, it is only the fourth highest producer of wine-grapes and ranks third in wine production. Other important crops include barley, wheat, maze, rice, potatoes, sugar-beet, peppers, avocados, tomatoes, tobacco, hops, oil bearing fruits and cork. Spain has over three million hectares of land under irrigation and employs widespread artificial watering which often is not cost effective. Spanish farmers have been particularly badly hit by falling prices and drought in recent years. However, tourism remains its most important industry, accounting for about 4% of the GDP and employing approximately 10% of the workforce. It contributes much needed support to the Spanish economy. Tourism provides jobs for 8.1% of the active population. In 1999 the number of tourist arrivals went up to an enormous amount. Also accounting for a large part of the workforce are chemicals and petro-chemicals, heavy industry, food and beverages, as well as being Europe’s fourth largest manufacturing country. Manufacturing contributed 17.4% of GDP and in 1997 the sector employed 19% of the labor force. Spain is one of the world’s largest exporters of passenger cars. In 1999 production of passenger vehicles reached an outrageous number, of which more than 80% were exported. The modern labor market in Spain has been characterized by the peak in the creation of new jobs from 1986-1990. It also has been categorized by the large reduction in employment in 1992 during the following economic deceleration. About two million new jobs were created during the economic expansion, which amounts to a growth rate of 3% per year. About a 1,100,000 people took advantage of this situation and entered the labor market during this period and 896,000 of them were women. Also during this period, the average wage increase was 7.4%, compared to an average inflation rate of 6.5%. However, during the 1991-1992 economic deceleration period, production grew by 1.75% in real terms while employment decreased by an average of 0.85%. Wages increased by an average of 8.5%, which goes to show a decline in job creation that goes with the increasing expense of the work factor and its replacement by capital. A fixed production factor was labeled to the high wage claims in 1990 which failed to have an immediate impact in the reduction of employment. This continued through 1991 and 1992, where high wage demands continued among the labor force, which forced companies to reduce the size of their staff. The development of wage increases is important to the Spanish government, and in an attempt to keep up with the European Community wages, a wage increase of 2% was set for public sector employees in 1993. The rate of unemployment still remains high as it has been for most of this century. At 21.3%, the unemployment rate is considerably higher than the average unemployment rate of the European Community, which is just above 10%. While governmental spending had tremendously increased between 1986-1990 to assist the slightly expansionist growth, spending slowed down in 1991 in order to balance the spending out when the growth was neutral, instead of expansionist or restrictive. In 1985, non-financial state spending was 21.6% of GDP while rising to 23.2% of GDP in 1989. It remained pretty much at more or less the same level up to 1991 when it was 23.7% of GDP. In 1986, the Spanish public administrations’ spending was roughly 3.5% of GDP, gradually increasing to about 5% of GDP in 1989. In the past decade, however, the figure has remained constant. Also, ever since 1986 the public investment spending in the European Community has been maintained at around 3% of GDP. To set Spain on the right expansionist track as far as the budget goes compared to the rest of the EU, a fiscal policy coordination agreement was constructed in the beginning of 1992. In an attempt to solve the problem of excess demand, a monetary policy which raised interest rates was produced to hinder investment demand was made to slow down the progress of Spain before it went deeper into economic recession. However, a new policy is being created that will force fiscal policy to play a more central role in the restraint of demand, therefore, leading to lower interest rates. The current structure of debt in Spain is quite biased towards the short term, which poses future difficulties for the Treasury financing in the long run. In the last years Spain has been forced to live within its means and state spending has been slashed to control the soaring budget deficit. Like many European countries, Spain has found that it can no longer afford to pay the high social security benefits that its citizens have become accustomed to in the last few decades and this continues to be one of the most pressing concerns of the current government. In modern market economies, progressive taxation and distribution of income in the form of services and benefits through welfare institutions are the two tools which are used to correct social inequalities. Spain was an exception to this rule all the way up until the eighties and made serious economic adjustments. In comparison to the European Community, the tax burden is below average as it has increased from 28.1% to 36.4% since 1986. The current tax system today consists of true taxes, dues and fees, and special levies. These serve to pay back any benefit as a result of public works or services. As far as the government’s involvement in credit and stock markets, administrative participation is limited to regulating the conditions for access by and permanence of regular operators and to monitoring the operations of financial enterprises, in agreement with the normal view in economically developed nations. Even though its unsteady past Spain has made leaps and bounds toward an economy that is competitive with the rest of the European world. With a strong new government and more macroeconomic reforms to keep inflation and unemployment down and while manipulating the interest rate, Spain could definitely be an important player in the European economy as well as the world economy. Bibliography: Word Count: 2351
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