Following economic footsteps of Spain

Part 1

I just led a road show for Philippine top executives and entrepreneurs to meet their counterparts in Spain for possible joint investments and trade relations. It was exactly  60 years ago, in 1963, when I first visited Spain as a young research fellow  with a fresh doctorate degree from Harvard and ready to do some case writing for what then was a fledgling business school that was being helped by the Harvard Business School in faculty and curriculum development.  That business school, started in 1958, is now one of the most famous business schools in the world, the IESE Business School, and has been ranked by the Financial Times for six consecutive years as the best in offering executive education programs.  In 2023, the Financial Times ranked its MBA program as third best in the world, followed by its former mentor HBS as fourth best.

I am thankful to the founders of the IESE Business School for giving me the chance in 1963 to be a witness to the almost miraculous transformation of a poor and backward country like Spain into  an economic tiger, a little  before the East Asian economic tigers. In marking the route that the Philippine economy will take to go from  upper-middle income to high-income and eventually to First World status, there are two countries in my list as role models. They cannot be Singapore, Hong Kong, or Taiwan.  Their populations are too small compared to the Philippines.  The two countries with comparable demographics to the Philippines when they started their ascent towards high-income category are South Korea and  Spain.  In fact, in 1963 Spain and the Philippines had comparable populations, about 31 million. When some of my millennial and centennial friends ask me how to visualize the Philippines twenty years from now as a First World country, I tell them to travel often to these two countries, South Korea and Spain.  The most visible signs that will be obvious to them will be the outstanding quality of the infrastructures, e.g. bullet trains, humongous airports, abundant energy and water facilities, endless tollways and skyways, etc.  Because of their more recent rise to First World status, these two countries (together with large portions of China) make older industrialized countries in Europe and North America look tired and jaded.

Here, for a better understanding of the benefits of closer trade and investment ties with our former colonizer, Spain, let me present a brief history of the route that Spain  took from Third World to First World in a little over two decades, not very different from the trajectories of our East Asian neighbors. As I said, in 1963, Spain was very much a Third World Country with a per capita income of about $520.  At that time, this country in the Iberian Peninsula was still struggling to recover from the devastations wrought, first by the three-year Civil War that led to more than 300,000 dead and then immediately followed  by the tragedy of the Second World War.  Although with the astute maneuvering of Franco, Spain was able to avoid being directly involved in the war, the country still suffered from the scarcity of food and other basic items brought about the War.  To make matters worse for Spain, because its leader, General Franco, decided to give his moral support to the fascist coalition of Germany and Italy, the country was ostracized by the victors of the Second World and, therefore, had to depend exclusively on its own resources for the very difficult task of rehabilitating its damaged economy.

When I lived in Spain from September 1963 to April 1964, its population was almost identical to that of the Philippines, i.e. 31 million.  Its land area is 498,300 square kilometer compared to our 300,000 sq. km.  Today, Spain has a population of 47 million compared to our 117 million.  It suffered one of the largest declines in fertility rates in the whole of Europe.  The median age of Spain is 44.9 years compared to our 25.7 years today. The rapid ageing in Spain is opening many opportunities for the Philippines to provide it with much needed human resources in health care, hospitality and domestic services.  Spain’s per capita income today of $30,014 is that of a First World country compared to our close to  $4,000 which brings us to the level of a high-middle income economy.  But the question still remains:  how did Spain that was still a Third World country in 1963 become a European tiger in the last century?  The answer is not very different from the familiar story of the East Asian tigers like Singapore, Hong Kong, Taiwan and South Korea.
In a very comprehensive history of the Spanish economy in modern times by Sima Lieberman entitled “Growth and Crisis in the Spanish Economy 1940 – 93”,  we can find the answer.  The saga begins with the end in 1939 of the three-year civil war which was won by the Franco regime.  There is a strong similarity between what happened to the Spanish economy then and what happened to our economy after we obtained our independence from the United States.  Strong autarkic, inward-looking, protectionist  policies dominated the Spanish scenario in the period 1939 to 1959. Its agricultural sector, like ours, was unable to increase its output to satisfy the domestic demand for food.  The Government then appeared more interested in financing glorious and costly capital-intensive industrial projects than in raising and diversifying agricultural production.  The government’s effort to implement an import-substitution programme (sound very familiar) by raising the public deficit, its attempts to appeal to workers who had lost their independent trade union federations by granting them, significant salary and wage increases, and inelastic  foodstuff and productive input supplies inevitably led to a succession of waves of price inflation.  These inflationary pressures, coupled with a rising deficit of the balance of trade and the gradual depletion of the country’s foreign exchange reserves, finally prompted the  authoritarian regime of General Franco to significantly modify its economic policy by the end of the 1950s.

The National Stabilization Plan of 1959 announced the beginning of a decade of rapid economic growth, further boosted by increasing trade with booming Western European economies.  The average annual real growth of the Spanish GDP in the 1960s reached 7 %, never before attained by the Spanish economy.  Although there are contrary opinions, the rapid economic growth in the 1960s—as I witnessed it myself with my freshly acquired knowledge of development economics from Harvard—was mainly due to development plans intelligently crafted and efficiently executed by a very competent group of economists and public administrators appointed by Franco.  He finally learned how to surround himself with the best and the brightest in the important task of managing the national economy.  Actually, the first time I heard the word “technocrat” was in Spain during my stay there.

Thanks to these technocrats, a higher rate of growth of the national economy was achieved and external economic equilibrium was restored.  Internal price stability was a requirement in achieving these twin goals.  To contain inflation,  the economic managers limited public and private credit, ended governmental subsidies to the public enterprises and imposed ceilings on the growth of overall spending. A new, single dollar rate for the Spanish peseta was fixed so as to encourage Spanish exports.  Very importantly, existing restrictions on the entry of foreign capital were removed (like what happened last year in the Philippines when the amendment of the Public Service Act in the Philippines opened up many strategic sectors of the Philippine economy to 100% foreign equity).  The whole Stabilization Plan  finally put an end to Spain’s traditional  inward-oriented economic policies.  At long last,, Spain was ready to step away from high protection and autarky.  To be continued.