Development in Developed World

By

Mei Kee Khoo

Dr. DeGregori

ECON 4383

September 30^th, 1998

First of all, we must defined the ‘economic development’. Economic development is promotion of more intensive and more advanced economic activity through such means as education, improved tools and techniques, more available financing, better transportation facilities, and creation of new businesses (Encarta 1997). Whenever we talked about developed countries, money, big buildings, high standard living will come across my mind. However, these countries too, went a lot of hardship before they got their ‘fruit’. In this paper, I am going to discuss the developments in Spain.

Let’s start with a little bit of Spain’s history. Spain was a major European power in the sixteenth and seventeenth centuries. The limits of the Spanish Monarchy extended from its territories in Italy and Central Europe to America. After 1560 they also included the Philippines and, for a few decades, the kingdom of Portugal with its own cast possessions. It was a world empire bigger than any before or since. For two centuries Spain counted among the world’s leading economic and political powers. Yet, it was not to last, and after 1700 its supremacy declined, first in Europe and later in America.

The Habsburg dynastic alliance was not to succeed because enormous though its financial and military resources appeared to contemporaries, they were never sufficient to meet requirements. This critical deficiency was due to three related factors. First, the military revolution of early modern Europe implied a massive increase in the scale, cost and organization of war. Second, the Habsburgs simply had too much to do, too many enemies to fight, too many fronts to defend. Finally, the Castilian government failed to mobilize available resources in the most efficient way and, by acts of economic folly, helped to erode its own power.

Although the American colonies remained untouched during the eighteenth century, in the first quarter of the nineteenth century Spain lost virtually all its overseas lands, retaining only Cuba, Puerto Rico and the Philippines, until they too were lost in 1898. After 1830 Spain’s international role declined, and the country began its long march from its status of Empire to its role as a secondary European nation.

For Spain, the nineteenth and twentieth centuries represent a continuous effort to transform its traditional economic and social structure into a modern, industrial one. The transition was slow and painful, and not without significant interruptions, and has only been completed in the last few decades. Although there were serious attempts to follow the industrial leaders, economic growth and modernization always lagged behind. Civil strife reflected both the attempts and resistance to this modernization. During the nineteenth there were three civil wars, in which the armed forces of the dynastic liberal parties confronted the army of the ‘carlistas’, who represented the traditional and most conservative forces within the country, followers of absolutism. In the twentieth century, the 1936-39 Civil War divided the nation once more, and its political, social and economic consequences went well beyond the three years and the conflict lasted. But if war was not absent from Spain, the country did avoid both of the two World Wars. After the defeat of the Axis powers in 1945, Spain’s economic and political isolation in Europe was greater than ever. The beginning of the Cold War made it easier for Franco’s Spain to become more integrated once more into the international economy. With his death in 1975, the gate to democracy, and finally membership of the EEC (1986), was open.

At the end of this millennium Span can be counted among the industrial members who form the exclusive club of development. In 1990 GDP per head was US$12,600 at current market prices. Nonetheless, this figure was 25% below the average income of the European Union. Amongst the member countries, it represents a mere 58% of that enjoyed by people in West Germany, 64% of France, 72% of Italy and 75% of the UK. With regard to the USA ad Japan, the percentages are 36 and 63, respectively. These significant differences in living standards between Spain and developed Europe reflect its different historical growth path.

Real GDP per capital growth in Spain was in the order of 1.2% p.a. between 1860 and 1990, a rate clearly below that estimated for the most advanced nations. After a negligible advance in income per head over the early nineteenth century, when the increase in the output of goods and services was cancelled out by population growth, the years 1960 to 1900 show a modest acceleration. This progress can be attributed to structural reforms, the construction of the railway system, and the adoption of new industrial technology imported from aboard. However, even in the early twentieth century, Spain was still an overwhelmingly agricultural society, with the land employing two out of every three workers, a proportion, which had varied little since the beginning of the previous century. Almost 50% of GDP was generated in the primary sector, while industry represented a mere 17%. After 1900, economic growth seems to have increased its pace and in the following thirty-five years growth approached 1% p.a. During the interwar years, Spain grew at the European rate. Why the economy started to perform better after 1900 is still not clear, but economic historians have shown that agricultural productivity improved, industrial output increased and diversified, the financial system reached all corners of the country, and commerce, both domestic and foreign, expanded. This growth was followed by a long period, from about 1929 until 1950, when the Spanish economy did especially badly. The Civil War and, more significantly, the autarkic policy carried out by the dictatorial authorities after their victory were a severe blow to the economy. Both private consumption and investment fell, and foreign trade was reduced to nil. After 1950, the economy grew rapidly until 1973, with GDP per head increasing by an annual 5%, faster than in France, Germany, Italy and the United Kingdom. By contrast, the opposite happened between the 1973 oil crisis and 1990, with annual growth in Spain being 1.8%, little above its long term trend of 1.2% (measured between 1960 and 1990). In sum, despite the obvious advances, and the recent catching up in the 1980s, which has served to shorten Spain’s distance with respect to the industrial leaders, it still remains true that the overall level of development is below that of the European Union.

Spain’s slow growth and retardation does not imply that the country has not seen some remarkable transformations. Population increased as mortality rates declined and modernization touched on every field of economic activity. By 1975, at the end of the Franco regime, industry and services together represented almost 90% of GDP, while agriculture contributed a mere 10%. In the same year, more than three-quarters of the population lived in urban areas, and of those remaining in the countryside, a relatively high proportion of the economically active population were nearing retirement age (Green, Joseph). The industrial level reached in 1975 by the Spanish economy contrasts strongly with the situation in 1950, before the industrial take-off and even more with the situation in 1900.

But the changes have taken place with a significant lag with respect to North Western Europe. Many of the transformations associated with an industrial and developed country were not completed until the second part of the present century. Until well into the twentieth century the country suffered from high levels of mortality, and excessively large agricultural change has been unevenly distributed between sectors and across the country. For long periods significant differences in performance between the ‘traditional’ and the ‘modern’ sectors persisted and, as has been well documented in a recent volume, regional disparities confronted an industrialized north (Catalonia and the Basque Country) with a poor and agrarian center and south.

It is likely that each period has different causes to account for the relative backwardness of the economy. Thus, if the lack of coal may have handicapped the nineteenth century industrial take-off which was heavily dependent on steam power, it posed much less of a problem after 1900, given the availability of other energy sources such as hydroelectricity. Tariff protection could have helped the first steps of some infant-industries, but the persistence of high barriers for long periods sheltering too many sectors of the economy may have been deleterious, especially during the interwar period and after. Franco’s inward-looking oriented industrialization of the 1940s and 1950s certainly hindered development, but the same political regime fostered rapid growth with an economic policy of liberalization and international integration after 1960. If weak migration in the nineteenth century explains why the agrarian sector was characterized by an excessive supply of labor, which in turn blocked the adoption and diffusion of farm machinery, it would be the rapid rural migration after 1950, which permitted swift gains in agrarian productivity. Fiscal and monetary policies were not always detrimental to growth, because they varied from one period to another or because sometimes they were entirely ineffective. Finally, if excess supply of cheap labor impeded the modernization of the countryside until recently, it also provided an excellent mechanism for the development of industry. The list of examples could be extended.

Another relevant point is that periods of expansion in Spain always coincided with years of prosperity elsewhere and, conversely, times of attrition in Europe were also dire times for the Spanish economy. A related argument is that Spain has usually grown faster when the economy has become more integrated and open to the international world; foreigners and capital have stimulated rather than hindered the domestic economy.

At the end of the nineteenth century mortality was still around thirty persons per thousand, and almost one in five infants died during the first year. The transition to a modern demographic pattern, characterized by low mortality, the end to seasonal distributions of births and deaths typical of the ‘acien regime’, secularization, and a high level of urbanization, is a relatively recent phenomenon. Thus, the slow and late demographic modernization confirms the general argument of the relative backwardness of Spain’s economy and society. Yet Spain’s population has grown steadily since the early eighteenth century. Furthermore urbanization grew significantly faster than the general population from at least the late eighteenth century. The important case study of the town of Cuenca sheds light on the considerable level of movement in population prior to modernization, with large numbers of people entering and leaving this small provincial town each year. The section also deals with the issue of human capital formation; literacy was lower in Spain than elsewhere, and thus low education levels may be another reason for the economic retardation of the country.

Any consideration of the performance of the Spanish economy has to include the agricultural sector. If the growth in labor productivity was small or even non-existent during the nineteenth century, important changes occurred during the first third of the twentieth century. In the section on agriculture, new estimates of output and productivity from the turn of the 1980 to 1936 which show a significant growth of labor productivity from the turn of the century. However, compared to northwestern Europe, productivity remained low, and much of the gains would be subsequently lost in the 1930 to 1950 period. Four major agricultural regions in Spain can be identified, along with a large number of the restricting factors responsible for the sector’s slow change. In particular the supply and demand for labor in the important region of Andalucia in the pre-Civil War period is shown. This region, which suffered from considerable rural poverty, was also the area where rural anarchism was greatest in Western Europe.

Mining played a strategic role, and its contribution to economic development has been thoroughly studies. In general, the best ores of lead, copper and iron were worked by foreign companies, which exported the raw materials. Spain benefited from the infrastructure provided from direct foreign investment, industrial employment and foreign exchange to finance the import of manufactured goods. After 1900 domestic capital bought out most of the foreign firms, but the share of mining in GDP fell and its importance as a factor of development petered out.

With regard to energy resources, coal was scarce and of poor quality, and oil resources are simple non-existent. That made Spain heavily dependent on imports of both sources of energy. Only hydraulic power was available in relatively large quantities, although geographically unevenly distributed. Whether the lack of energy was a limiting factor for growth remains an open question, albeit a crucial one in order to assess the natural endowment disadvantage, or otherwise, of Spanish industrialization. In an effort to lessen the country's dependence on imported oil, an attempt has been made to increase coal production and expand nuclear-power capability. This program has met with some success: nuclear power provided nearly 40 percent of Spain's electrical power in 1991, as compared with about 30 percent in the mid-1980s. However, Spain still relies on petroleum for most of its energy needs (Green, Joseph).

Government intervention in industry has been paramount, not only through the traditional mechanisms of taxes and tariffs, but also by means of regulations, planning and the creation of public enterprises. Banks absorbed large quantities of domestic and foreign capital, but only channeled funds to railways companies and not to industrial undertakings.

To summarize all the developments here is an imposing task beyond the purpose of these pages. Therefore, this paper is only covering the surfaces of the developments without going into too details. Overall, Spain really went through a lot to achieve whatever it already has today.

"Economic Development." Encarta 1997. CD-ROM. Redmond: Microsoft, 1997.

Green, Joseph. Spain Home Page. 23 Sept. 1998

< http://www.csudh.edu/global_options/375Students-Sp96/Spain/>.

Kindleberger, Charles. World Economic Primacy: 1500 to 1990. New York: Oxford University Press, 1996.

"Spain." Encarta 1997. CD-ROM. Redmond: Microsoft, 1997.