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Spain 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 a credi;
table 5.5
percent,
raised concerns over the existing imbalance between import
and
export growth.
Data as of December 1988
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