The Spanish Economy in the 1990s

The Spanish Economy in the 1990s

This volumes provides a detailed and comprehensive assessment of the performance of the Spanish economy in the 1990s and examines Spain’s future prospects versus European Economic and Monetary Union. It analyses recent structural changes in the Spanish economy and macroeconomic performance, as well as developments in government policy. The book also contains in-depth empirical studies of recent reforms in the labour market, changes in industry and the process of privatisation. This is an extremely valuable work for all those with an interest in the Spanish economy and European economics. Professor H.M.Scobie is Director of the European Economics and Financial Centre, London (PO Box 2498, London, W2 4LE). Among her recent books are The Italian Economy in the 1990s (Routledge, 1996) and European Monetary Union: The Way Forward (Routledge, 1998).

The Spanish Economy in the 1990s

H.M.Scobie** in collaboration with A.Gonzalez-Romero†, J.E.Gradolph-Cadierno†, J.L.Calvo*, M.J.Lorenzo*, and R.T.Guneratne** **European Economics and Financial Centre, London † Spanish Ministry of Industry and Energy * Department of Economics Universidad Nacional de Educatión a Distancia, Spain

European Economics and Financial Centre

London and New York

First published 1998 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2003. Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1998 H.M.Scobie All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Scobie, H.M. The Spanish economy in the 1990s/H.M.Scobie; European Economics and Financial Centre. p. cm. Includes bibliographical references and index. 1. Spain—Economic conditions—1975– I. European Economics and Financial Centre. II. Title. HC385.M655 1998 ISBN 0-203-29894-2 Master e-book ISBN

ISBN 0-203-26519-X (Adobe eReader Format) ISBN 0-415-15207-0 (hbk)

Contents

List of figures List of tables

vii ix

1

Executive summary

1

2

Economic performance

2

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 3

Introduction Output of the economy The recession of 1992–3 Industrial production The labour market Investment activities Fishing Tourism The external balance European Monetary Union prospects Monetary policy Fiscal policy

2 3 5 5 6 6 8 8 9 13 15 18

Highlights of the 1997 Budget

20

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

20 22 23 24 25 27 28

Introduction Spanish economy in 1996 and outlook for 1997 Outlook for 1997 The main challenge of the Spanish economy Prices stability Unemployment reduction Reduction of the public deficit and stabilisation of the debt The necessary reduction of the structural component of public debt 3.9 Maintenance of the public debt 3.10 External sector and exchange stability 3.11 Operation of the economic policy for 1997 v

29 30 32 33

vi

Contents

3.12 Spanish contribution to the general budget of the European Community and the European Community Fund of Development in 1997 3.13 Transfers from the general budget of the European Community to Spain in 1997 3.14 State deficit and its financing in 1997 4

5

6

35 36 39

The labour market

42

4.1 4.2 4.3 4.4 4.5

42 43 47 50 52

Introduction Evolution of employment according to sex and age Analysis by sector Analysis by region Conclusions

Industry

66

5.1 5.2 5.3 5.4 5.5

66 68 73 87 92

Introduction Industry and services Growth and cyclical evolution of the industrial sector Structural change in Spanish industry Conclusions

Privatisation 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 Index

Introduction Meeting EMU conditions Programme of privatisation Structure of shareholding Groups of shareholders Shifts in privatisation policy Regulation Reorganisation of the state holding companies Privatisation strategies Possible state companies for privatisation Other prospective privatisations

98 98 98 99 101 101 102 103 104 106 108 131 134

Figures

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15

Growth of GDP at market prices GDP growth, 1990–96 A comparison of the structure of GDP between 1985 and 1995 Unemployment rate Industrial production index Industrial growth rate Fixed investment growth Exports and imports, 1991–5 Current account balance A comparison of Spanish trading partners Capital account balance Financial account balance Growth in exports General government deficit as a percentage of GDP General government debt as a percentage of GDP A comparison of German and Spanish yield spread Ten-day repurchase rate (per cent change annually) Ten-day repurchase rate (per cent change) Evolution of employment: total employment Variation in employment by sex: aggregate Variation in employment by age and sex: age 16–19 years Variation in employment by age and sex: age 20–24 years Variation in employment by age and sex: age 55 and over Variation in employment by age and sex: age 25–54 years Agriculture (variation rates) Industry (variation rates) Construction (variation rates) Services (variation rates) Aggregate (variation rates) Andalusia, variation in employment Aragón, variation in employment Asturias, variation in employment Balearic Islands, variation in employment vii

2 3 4 5 6 6 7 10 10 11 11 12 13 14 14 16 16 17 42 43 45 45 46 46 47 48 49 49 50 53 53 53 54

viii

4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 5.1 5.2

Figures

Canary Islands, variation in employment Cantabria, variation in employment Castilla-La Mancha, variation in employment Castilla y León, variation in employment Catalonia, variation in employment Community of Valencia, variation in employment Extremadura, variation in employment Galicia, variation in employment Madrid, variation in employment Murcia, variation in employment Navarra, variation in employment Basque Country, variation in employment La Rioja, variation in employment Evolution of industrial production in Spain and EU, 1980–95 Indicator of industrial climate and variation rate of the index of industrial production in Spain, 1976–95 5.3 Industrial gross value added and gross fixed capital formation, 1980–95 5.4 Industrial gross value added and industrial employment, deviations from the trend, 1977–95 5.5 Evolution of labour productivity and salaries in industry, 1981–95 5.6 Contribution of apparent consumption and foreign sector to the growth of industrial production, 1992–5 5.7 Share of Spanish exports in EU exports, 1986–94 5.8 Share of world exports by broad cluster 5.9 Cost competitiveness compared to the EU, 1985–95 5.10 Price competitiveness compared to the EU, 1985–95 5.11 Direct foreign investment in Spanish industry and economy, 1986–94 6.1 Government revenue from major state privatisations 6.2 Telefonica’s profit growth 6.3 Telefonica productivity: basic telephone line in service per employee, 1980–95 6.4 Endesa’s net profits, 1991–5 6.5 Repsol (Chemical) operating profits/losses 6.6 Iberia profits and losses, 1983–96

54 54 55 55 55 56 56 56 57 57 57 58 58 68 74 74 75 76 77 78 79 82 83 85 100 109 111 118 122 126

Tables

2.1 GDP at market prices 2.2 Capital goods and construction investment and government consumption 2.3 Tourism statistics (’000) 2.4 Nominal and real effective exchange rate index annual data, 1991–6 2.5 Economic position of Spain vis-à-vis the Maastricht criteria, 1994–7 2.6 International interest rate comparisons, April 1996 3.1 Spanish economy, 1996 3.2 Necessity for financing and national debt classification by agents 3.3 Ratio of gross public debt against GDP 3.4 Spending of the EFOAG Guarantee in Spain 3.5 Transferences received and Cohesion Fund 3.6 Transferences of the structural actions to the central state administration, 1997 3.7 Other Community transferences to Spain 4.1 Overall employment by sex and age: absolute values 4.2 Employment by sex and age: variation rates 4.3 Employment by sex and age: share 4.4 Branches of activity: absolute values 4.5 Branches of activity: variation rates 4.6 Branches of activity: share 4.7 Autonomous Communities: absolute values 4.8 Autonomous Communities: variation rates 4.9 Autonomous Communities: share 5.1 Sectoral breakdown of gross domestic product, 1980–95 5.2 Sectoral breakdown of employed population, 1980–95 5.3 Productivity and relative prices, 1980–95 5.4 The industrial cycle, main magnitudes, 1981–95 5.5 Revealed comparative advantages of Spanish manufactures, 1980–94 5.6 Direct foreign investment, 1988–94 5.7 Sectoral structure of gross value added in Spanish manufacturing industry, 1980–94 ix

4 7 9 13 15 17 22 29 31 36 37 38 38 60 61 62 63 63 63 64 65 65 69 70 71 72 81 86 89

x

Tables

5.8 Sectoral structure of employment and growth of productivity, 1980–94 5.9 Sectoral structure of exports and degree of openness, 1980–94 6.1 Government revenue from major privatisations in Spain, 1992–7 6.2 Major privatisation issues in Spain, 1990–97 6.3 Prospective privatisations

90 93 99 99 107

1 Executive summary

This study examines Spain’s structural changes in the 1990s tracing the economic developments, as well as the measures that were introduced in this period together with their implications. The study examines the macroeconomic performance of the economy, highlights the progress made in labour reform, analyses the changes in industry and evaluates the privatisation programme in Spain. The Spanish government’s major objective is that Spain is among the first entrants in the European single currency. The Spanish economy has performed remarkably well since its entry into the European Union (EU). Among the successes of the real side economy are the following: • Registered unemployment has fallen to its lowest level in fifteen years. In the first quarter of 1997 the level of unemployment stood at 3.44 million or at 21.5 percent as measured by the National Statistics Institute. • There was an 8.4 per cent rise in investment in 1995—with a 7 per cent and 11 per cent rise in capital goods and construction investment respectively. • Inflation has fallen to a 28-year low of 2.5 per cent. • On the external side, the current account has moved from a deficit in 1992 of Pta2,161 bn to a surplus of Pta158 bn in 1995. The current account has remained in surplus in 1996. • There was a 4.6 per cent rise in the industrial production index in 1995.

1

2 Economic performance

2.1 INTRODUCTION Spain has undergone a process of restructuring in the 1990s which has compared favourably with the rest of its European partners. The country’s economic policies in the 1990s have focused primarily on the following main areas: • • • •

labour market reform; reduction of the fiscal deficit; structural reforms within the service sector; structural reforms within the public sector.

The need for a change in economic policy became apparent in 1992. Following the slowdown in the Spanish economy, which effectively started in 1991, the recession of 1992–3 hit the industrial sector hard. Its added value fell by more than 5 per cent and 500,000 jobs were lost. Unemployment peaked in 1994— reaching a high of 24.2 per cent.1 The economic downturn in some of the sectors subsequently reversed itself. Manufacturing, construction and service sectors all showed signs of recovery in 1994 and 1995, in contrast to the severe decline experienced in 1993. However, the sector ‘agriculture, forestry and fishing’ continued to perform poorly, with gross domestic expenditure falling for this sector by 6.8 per cent and 11.1 per cent during 1994 and 1995

Figure 2.1 Growth of GDP at market prices (per cent change year on year) Source: Instituto Nacional de Estadística, Boletin Mensual de Estadística

2

Economic performance

3

respectively. The net effect was nevertheless positive and the overall Spanish economy started to recover in 1994 following the recession of the earlier years. (See Figure 2.1.) The recovery in Spain was driven by the growth in exports and the improvement in tourism. Subsequently, the number and value of acquisitions by foreign companies in Spain increased as a consequence of an improved level of confidence in the Spanish economy. The factors that led to the Spanish recovery from the mid-1990s were: • upturn in tourism; • restructuring of industry; • devaluation of the peseta. 2.2 OUTPUT OF THE ECONOMY From Spain’s entry into the European Economic Union in 1986 until 1991 on average it enjoyed faster economic growth than its European partners. However, during 1992–3 Spain suffered its most severe recession for many decades with gross domestic product (GDP) falling for six successive quarters from the second quarter of 1992 to the third quarter of 1993, dropping 1.1 per cent in 1993. The subsequent recovery has been stronger than expected and the Spanish economy now stands as the fifth largest in Europe. (See Figure 2.2.) The upswing in the Spanish economy after 1993 was propelled by a rise in domestic demand and exports. The economy was helped by increased competitiveness owing to four devaluations of the peseta in 1992, 1993 and 1995. Spanish GDP grew from 2.1 per cent to 3 per cent between 1994 and 1995, signalling the end of the recession. (See Table 2.1.) GDP growth reached some 2.3 per cent in 1996 and the budget for 1997 assumed further upturn to 3 per cent during 1997, due partly to a rise in investment and exports (see Figure 2.3). The Spanish government’s EMU convergence efforts will continue to reduce the government deficit and this should curb the high growth rates which were seen in the late 1980s.

Figure 2.2 GDP growth, 1990–96 (per cent change quarterly) Source: Instituto Nacional de Estadística, Boletin Mensual de Estadística

4

The Spanish economy in the 1990s

Table 2.1 GDP at market prices (Pta bn)

Source: Instituto Nacional de Estadística (INE), Boletin Mensual de Estadística

A comparison of the structure of GDP between 1985 and 1995 shows that there has been a noticeable structural shift within the economy. The service sector has increased its share of GDP from 57 per cent in 1985 to 62 per cent in 1995. Two important industries within the sector are banking and tourism. The former is in a particularly healthy position—with Spain’s top banks registering competitive profits in relation to its international competitors. Construction accounted for 9 per cent of GDP in 1995 compared to 7 per cent of GDP in 1985. The construction sector was at the forefront of the economic boom of the late 1980s and increased its share of GDP despite the recession of 1992–3. The two major sectors which have declined between 1985 and 1995 are ‘fishing and agriculture’ and ‘industry’. Fishing and agriculture accounted for 6 per cent of GDP in 1985. However, this figure has been halved to 3 per cent in 1995. Farming production has been severely affected by the drought in the 1990s. This was especially harsh in 1995, though the situation improved in 1996 with heavy rainfall occurring early in the year. ‘Industry’ has been the other sector to experience a decline in its share of GDP from 30 per cent in 1985 to 26 per cent in 1995.

Figure 2.3 A comparison of the structure of GDP between 1985 and 1995 Source: Instituto Nacional de Estadística, Boletin Mensual de Estadística

Economic performance

5

2.3 THE RECESSION OF 1992–3 The recession of 1992–3 was the deepest that Spain had experienced in thirty years. The weakness of the Spanish economy was mainly due to the European recession and was very comparable to the average EU experience. In the 1990s there was a tightening of fiscal policy in Spain. However, monetary policy at the beginning of the 1990s was tight at first and then relaxed. This combined tightening exacerbated the recession, with GDP falling by as much as 1.6 per cent in 1993 (see Table 2.1). During the recession of 1992–3, there was a plunge in investment and a steep rise in unemployment. Unemployment was especially high in the industry and construction sectors where it rose by 41.3 per cent in two years. The total unemployment rate rose to 22.7 per cent in 1993, which was the highest in the EU. (See Figure 2.4.) There was, however, an amazing change in the external sector in late 1993, instigated by devaluation of the peseta. This led to a flourishing export growth and initiated a fall in import growth. By 1994 the export revival started to pull the economy out of recession. The impact of devaluation was most apparent in the industrial sector, where production grew by 7 per cent in 1994 and by another 4.6 per cent in 1995. 2.4 INDUSTRIAL PRODUCTION After Spain entered the European Community, Spanish industry struggled to compete on the European level. Many firms were taken over by large international corporations, enticed by access to European markets and cheaper Spanish labour costs. (See Figure 2.5.) In the second half of the 1990s Spain no longer represented a cheap wage economy. In contrast, it has evolved into an economy which has a competitive industrial sector, even though many of its firms have international parent companies. The automobile industry is noticeably stronger, with Spain becoming the third largest producer of vehicles in Europe after France and Germany and the fifth largest in

Figure 2.4 Unemployment rate (per cent) Source: Banco de España, Boletin Mensual de Estadística

6

The Spanish economy in the 1990s

Figure 2.5 Industrial production index Source: Instituto Nacional de Estadística

the world. However, it is worth noting that these automobile producers in Spain are owned by foreign companies. The index of industrial production recorded a fall for three consecutive years from 1991 to 1993. As Spain came out of recession, this trend was reversed in 1994 and 1995 and the index grew at 7.33 per cent and 4.65 per cent respectively. Industrial production fell by 2.7 per cent in the first six months of 1996, compared to the same period in 1995. However, the figures for July 1996 confirmed the forecasts of second-half growth. They also indicated an improvement in consumer confidence and an upturn in industrial business confidence, which fell sharply in the year to April 1996. (See Figure 2.6.) 2.5 THE LABOUR MARKET A detailed account of the developments and structural reforms of the Spanish labour market in the 1990s is given later in the study (see Section 3). 2.6 INVESTMENT ACTIVITIES On entry into the EU, Spain experienced a surge in domestic investment as a consequence of deregulation of overseas investment inflows. From 1985 overseas

Figure 2.6 Industrial growth rate (per cent) Source: Instituto Nacional de Estadística

Economic performance

7

Figure 2.7 Fixed investment growth (per cent change annually) Source: Instituto Nacional de Estadística

investments in Spain were only required to be reported to the Ministry of Economy to be approved. The exceptions were investments in strategic industries such as banking and insurance, mass media, defence, oil refining and exploration, public services and mining. Additionally, in 1988, laws were relaxed for Spanish nationals investing abroad. Spanish fixed investment grew by 86 per cent during 1985–91, which compares favourably with the EU-wide experience where on average investment increased by only 35 per cent for the same period. This factor significantly improved performance of GDP. (See Figure 2.7.) However, the investment surge of 1986–91 was not related to any large increases in labour efficiency. Output per person rose by 1.3 per cent a year compared with a 1.9 per cent rise for the EU. Investment in Spain fell by 4.2 per cent and 10.6 per cent respectively in 1992 and 1993. The fall in investment during the recession period of 1992–3 was twice the EU average fall. Gross fixed capital formation subsequently rose by 8.4 per cent in 1995, with respective increases of 7 per cent and 11 per cent in ‘construction’ investment and in ‘capital goods’ investment. Investment in capital goods has expanded mainly because of a need to purchase new productive equipment, improvements in foreign economies and strong company accounts and profits. Growth in construction, in early 1995, was because of civil engineering works launched in earlier years. However, private residential investment was the main contributor to construction growth. (See Table 2.2.) Table 2.2 Capital goods and construction investment and government consumption (real rate of change)

Source: Instituto Nacional de Estadística

8

The Spanish economy in the 1990s

2.7 FISHING Spain is Europe’s main fishing country, with the largest fishing fleet of approximately 20,000 boats, concentrated mainly around the ports of Galicia. There is also a substantial industrialised and deep-sea fishing fleet located at Vigo which is Europe’s leading fishing port. In 1996 Spain had the highest consumption of fish in the EU at an average of 43kg per head per year. In 1994 Spain had a sizeable deficit of Pta222 bn in fish which showed the huge demand for the product. This also highlights the comparative advantage that Spain’s EU partners had when it entered the EU. In 1985 the deficit was only Pta18 bn in comparison. Spanish fishing landings fell in 1991 by 10.9 per cent and continued to fall by 6.9 per cent in 1992 to 790,000 tonnes. However, it should be noted that the fall in fish landings and rise in imports can be attributed partly to Spanish fishermen unloading their catches in the UK from where they are shipped back to Spain. Even though the terms for Spain’s EU entry in 1986 were generally acceptable, Spanish fishing endured hardship because other EU countries required additional shielding from the strong Spanish fleet. In 1994 there was disagreement between Spanish fishermen and UK and French boats over their use of oversized drift nets. Spanish fishermen continued to use the conventional tuna line rods while shipping for tuna stocks in the Atlantic. In 1995 Spain was also involved in a row with the Canadian authorities over the fishing quotas off the coast of Greenland. Further developments occurred in 1996 when Spain was completely harmonised into the EU fishing policy and given rights to fish in former protected waters off the UK and Irish coasts. 2.8 TOURISM Tourism is very important to the Spanish economy and a key earner on the balance of payments. Spain was the foremost popular holiday destination during the 1960s and 1970s. In the mid-1980s Spain witnessed increase in prices, increase in competition from various other holiday destinations, unsatisfactory publicity for resorts and a shift in consumer preferences. The Spanish economy recognised that it had to make significant strides to improve the standard of holiday resorts and to curb the environmental havoc caused during earlier decades. The number of tourists visiting Spain increased in the first half of the 1990s due to an improvement in infrastructure and devaluation of the peseta. The industry has also been helped by the unstable political situations in former Yugoslavia, Algeria and Turkey, which have resulted in an increase in income. In addition, Spain’s international standing was helped by its hosting of the Olympic Games in Barcelona and Expo’92 in Seville. The staging of these events required much organisational effort and financial expense, the rewards of which are to be realised in the long run. In order to face up to competition, the tourism sector has had to modernise and offer a better quality service, one of the main sources of income in Spain. The

Economic performance

9

Table 2.3 Tourism statistics (’000)

Source: Banco de España, Boletin Estadístico (EIU)

restructuring of the service sector has brought a major improvement in the standard of motorways, airports and telecommunications. Nevertheless, the fall in the value of the peseta in 1992–3 created the amazing upsurge in tourism that became visible from 1993 and produced the record tourist figures and receipts in both 1994 and 1995. (See Table 2.3.) 2.9 THE EXTERNAL BALANCE Spain’s entry into the EU and the consequential removal of trade restrictions led to a rapid rise in foreign trade. However, an adverse effect was that imports increased at a greater rate than exports, which led to a trade deficit. This was mainly due to a high demand for foreign goods by Spanish consumers and the strong peseta that resulted in a lack of competitiveness in Spanish exports. 2.9.1 Trade balance Spain’s current account moved from being in surplus in 1986 to a deficit in the first four years of the 1990s. The impressive performance in the 1993 current account was partly the consequence of the Spanish recession, but it also reflected the 20 per cent devaluation of the peseta in 1992 and 1993. The combined effect of these two events led to a remarkable 68 per cent fall in the current account deficit in 1993 to Pta695 bn or 1.1 per cent of GDP. (See Figure 2.8.) The upswing in the Spanish economy in 1994 caused a small increase in the deficit to Pta913 bn or 1.4 per cent of GDP. However, in 1995 the current account recorded a surplus for the first time since 1986 of Pta158 bn or 0.2 per cent of GDP. In 1995, the automobile production sector was Spain’s main exporter, representing 24.2 per cent of all exports followed by the chemical sector at 9.4 per cent. An astonishing 78 per cent of the 2.13 million automobiles produced in Spain were exported in the same year. The automobile sector is one of a small number which produces a trade surplus along with other industries such as footwear, ceramics and fresh fruit and vegetables.

10

The Spanish economy in the 1990s

Figure 2.8 Exports and imports, 1991–5 Source: Banco de España, Boletin Estadístico

The biggest contributor to the trade deficit is without doubt the energy sector where Spain relies on oil imports valued at Ptal trillion or 1.4 per cent of GDP. A surprising aspect of the current account in 1995 and 1996 has been that the trade sector deficit and the service sector surplus have equated. The upturn in the current account during this period was due mainly to a steep rise in the surpluses from services and transfers and a significant fall in the deficit on income from investment. The fundamental impact of the fall in the value of the peseta has faded, but small current account surpluses seem set to continue into 1997 and 1998. (See Figure 2.9.) A significant structural change has developed in the international trading arrangements of the Spanish economy. The USA and UK have become less important as destinations of Spanish exports. Spain’s three main markets are now Germany, France and Italy, accounting for 45 per cent of all exports. The EU represented 73.3 per cent of all Spanish exports in 1995 and 65.4 per cent of all imports. This shows the growing harmonisation of the Spanish economy with the rest of mainland Europe. Spain also made considerable strides in non-EU countries between 1990

Figure 2.9 Current account balance Source: Banco de España, Boletin Económico

Economic performance

11

Figure 2.10 A comparison of Spanish trading partners Source: Banco de España, Boletin Económico

and 1995. Exports to Japan rose by 145 per cent, by 250 per cent to newly industrialising countries (NICs) and by 184 per cent to Latin America. (See Figure 2.10.) 2.9.2 The capital account The new capital account essentially consists of capital transfers to and from the EU, since operations in the sale of patents and intellectual rights are not so prominent in Spain. Between 1991 and 1994, the capital account was in surplus and relatively stable at approximately Pta350 bn. However, it rose from Pta347 bn to Pta737 bn in 1995. The significant factor affecting this change was the increase in transfers from the EU, especially the European Regional Development Fund (ERDF), the Cohesion Fund and guidance funds from the European Agricultural Guidance and Guarantee Fund (EAGGF). (See Figure 2.11.)

Figure 2.11 Capital account balance Source: Banco de España, Boletin Económico

12

The Spanish economy in the 1990s

Figure 2.12 Financial account balance Source: Banco de España, Boletin Económico

2.9.3 The financial account From 1985 the removal of legislation relating to capital flows brought about a sizeable inflow of investment in Spain, which was aided by a strong upturn in Spanish company profit margins. Spanish profit margins were 65 per cent higher in 1994, compared with the period 1974–86. This compares favourably with the EU where profit margins rose by only 30 per cent for the same period. (See Figure 2.12.) The ERM crisis of 1992 led to a decrease in optimism in the Spanish economy, causing a steep decline in net capital inflows. The crisis persisted into 1993 with Spain experiencing its deepest recession in thirty years. There was a net outflow of capital from Spain of Pta47 bn which excludes changes in reserves in 1993. Foreign investors resumed their involvement in Spanish markets in 1995, recording a net financial inflow of Pta729 bn. The exchange rate problems of 1995 led to Spain becoming an overall exporter of capital after including reserves which fell by Pta856 bn in 1995. The make-up of capital inflows has altered considerably since Spain joined the international bond markets and abandoned capital regulations in 1991. Foreign investment in Spanish bonds was Pta519 bn in 1990, but rose to an incredible Pta6.16 trillion by 1993. 2.9.4 The behaviour of the peseta In June 1989, the peseta entered the exchange rate mechanism (ERM) and declared a central parity band of ±6 per cent against each of the currencies within the ERM. The original central rate against the D-Mark was Pta65, with a ±6 per cent fluctuation. Spanish interest rates led to a massive influx of foreign capital, causing the peseta to become one of Europe’s most robust currencies. The adverse effect of this was the erosion of Spanish competitiveness. (See Table 2.4.) In 1992 Spain remained within the ERM while sterling and the Italian lira had to exit following speculative attacks on these currencies. However, the peseta was

Economic performance

13

Table 2.4 Nominal and real effective exchange rate index annual data, 1991–6

Source: European Monetary Institute, Progress towards Convergence 1996

devalued four times and the band was widened to ±15 per cent. The four devaluations were: • • • •

September 1992 by 5 per cent; November 1992 by 6 per cent; May 1995 by 8 per cent; March 1995 by 7 per cent.

After the last devaluation in March 1995, the peseta’s central parity stood at 85.1 per D-Mark with a band of ±15 per cent. The peseta has traded close to this level since the record low 93.5 per D-Mark in March 1995. The devaluations of the peseta have made Spanish products much more competitive and have contributed significantly to economic growth during 1993– 4. The upturn in Spanish competitiveness is evident in the impressive growth in exports. (See Figure 2.13.) 2.10 EUROPEAN MONETARY UNION PROSPECTS It seems possible that Spain will join the first EMU wave in 1999, mainly as a result of an improvement in the economy. Spain should pass the Maastricht test and be in a good position provided there are no major problems to convergence. The Treaty is set out in a way that permits a great deal of flexibility and allows freedom in interpretation of its clauses for the creation of EMU.

Figure 2.13 Growth in exports (constant 1986 prices) Source: Banco de España

14

The Spanish economy in the 1990s

Figure 2.14 General government deficit as a percentage of GDP Source: EMI Annual Report 1995

There is a question of whether the government can adhere to its targets when addressing regional funding and tightening the social security budget. In an attempt to achieve a general government deficit of 3 per cent of GDP by 1997, Spain has tightened its budget policy which should take off 0.7 per cent of GDP in 1997. The major sectors affected will be construction, with civil works expenses experiencing a large fall. However, the Maastricht Treaty has a provision which allows member states to qualify if they can demonstrate that the ratio of general government debt to GDP is falling to the 3 per cent reference value. (See Figure 2.14.) The ratio of general government debt to GDP grew beyond the single currency criterion of 60 per cent in 1993. However, the 1997 budget forecasts a small decline in total public debt levels, from 67.5 per cent of GDP in 1996 to 67.2 per cent in 1997. If this estimate is correct it should be adequate to comply with the Maastricht target for public debt, which permits member states to join the EMU if they can show evidence that the ratio has been falling towards 60 per cent of GDP level. (See Figure 2.15.)

Figure 2.15 General government debt as a percentage of GDP Source: EMI Annual Report 1995

Economic performance

15

Table 2.5 Economic position of Spain vis-à-vis the Maastricht criteria, 1994–7

Note: * Estimate Source: European Monetary Institute

The Maastricht criteria have set a moving target for inflation. In order to qualify, inflation should be no more than 1.5 per cent above the three lowest EU inflation rates. Spain’s inflation has declined below 3 per cent for the first time in nearly twenty-eight years. Headline inflation fell from 3.2 per cent in December 1996 to 2.9 per cent in January 1997. The government forecasts inflation to fall to 2.6 per cent by the end of 1997 and this should be low enough to meet the inflation target. (See Table 2.5.) The Maastricht criteria also require that long-term interest rates should not be more than 2 per cent higher than the average of the three EU member states with the lowest long-term interest rates. Long-term interest rates for Spain were on a downward trend until the beginning of 1994, but consequently increased drastically to attain a peak of 12.3 per cent in March 1995. However, bond yields have declined considerably since then and the differential against member states with the lowest yields has closed significantly. There has been a narrowing of the Spanish yield curve spreads compared to the German spreads which reflects the market’s perception that Spain is in a good position to join the European single currency in 1999. (See Figure 2.16.) The Maastricht Treaty also stipulates that the currency of the member states should be within the ERM band of the EMS for a minimum of two years without devaluating. Spain has been a member of the EMS since 1989 with the last devaluation taking place in March 1995. In 1994 Spain also complied with the criterion that member states must have independent central banks. In addition, it must be noted that the decision on whether a member state can join the EMU is made by the European Council, on the basis of qualified majority votes. The combined voting strength of the Club-Med countries (i.e. combination of Italy, Spain, Portugal and Greece) adds to a total of 28 votes which is three votes more than the number required to block any decision. Thus, voting power can be used in a direction to suit the countries concerned. 2.11 MONETARY POLICY Spanish monetary policy is geared principally towards curtailing inflation, but it has to consider the government’s exchange rate goals. A major milestone in 1994

16

The Spanish economy in the 1990s

Figure 2.16 A comparison of German and Spanish yield spread

was the granting of independence to the Bank of Spain (the central bank). The main responsibility of the independent bank is the development and implementation of monetary policy, without interference from political forces. The year 1995 was the first full year in which the Bank of Spain implemented its monetary independence, with the beginning of a new plan based on the principle of direct inflation targeting. The Bank of Spain has proved considerably successful in its ability to meet its inflation goals since its independence. (See Figure 2.17.)

Figure 2.17 Ten-day repurchase rate (per cent change annually) Source: Banco de España

Economic performance

17

Figure 2.18 Ten-day repurchase rate (per cent change) Source: Banco de España

Between 1991 and 1995 Spanish interest rates were on a downward trend. However, with falling Spanish inflation and lower German interest rates, the firmness in the peseta has allowed lower Spanish interest rates. The Bank of Spain reduced its key intervention rate by a quarter point to 6 per cent in January 1997. This is the lowest figure on record, and was the ninth reduction since December 1995, when the rate was 9.25 per cent. It is expected that the intervention rate will continue to decline in 1997 to 5 per cent. (See Figure 2.18.) The differential between the Spanish and German discount rate fell to 4.25 per cent in late 1996, from an end of 1995 high of 6.25 per cent. However, this figure is still higher than the 3 per cent levels witnessed in 1994. It is very likely that Spain will join the European single currency in 1999 and that the interest rate differentials with Germany will disappear by that stage. (See Table 2.6.) Table 2.6 International interest rate comparisons, April 1996

Sources: *Banco de España Annual Report 1995; **EMI Annual Report 1995

18

The Spanish economy in the 1990s

2.12 FISCAL POLICY The primary concern of Spain’s 1997 Budget is to meet the Single Currency Convergence Criteria. Of these goals, the most serious is the cutback of the public sector budget deficit to 3 per cent of GDP. Strict spending is therefore the distinctive feature of the 1997 budget. The government is forecasting that the deficit can be cut to 3 per cent of GDP level. This will be achieved by reducing spending while at the same time having stable growth of the economy, particularly capital investment and private sector consumption. The savings will be achieved partly by freezing the wages of 2 million publicsector employees and through reduction of the acquisition of goods and services by 6.3 per cent in nominal terms. Financial support to public-sector organisations will also be cut by 29 per cent or Pta121 bn, which is 0.15 per cent of GDP. The government has also abolished the usual convention of meeting the aggregate deficits of public-sector entities such as RENFE (national railways), RTVE (national broadcasting group) and AIE (newly created state holding for industrialised companies on the road to privatisation). This will eliminate Pta500 bn from the budget account in 1997. These public entities will have to cover their losses by issuing debt, which the government will guarantee. Personal income tax and social security proceeds are anticipated to increase by 6.8 per cent and 6.7 per cent respectively, and value-added tax (VAT) proceeds by 8 per cent. These estimates seem hopeful and are dependent on projected GDP growth of 3 per cent and private consumption growth of 2.7 per cent. The government anticipates revenue from privatisation to be at least Pta450 bn in 1997. Of this revenue 50 per cent will be employed in cutting down government debt and the other 50 per cent is intended to assist public-sector investment. The tax regime at the end of 1996 is as follows: • corporation tax: 35 per cent for resident firms, 25 per cent for non-resident firms; • personal income tax: minimum rate 20 per cent, maximum rate 56 per cent; • VAT: standard rate 16 per cent, items such as food and housing 7 per cent. The 1997 budget was also supplemented by an assurance that there would be changes in the pension system, which the government agreed with the trade unions and the employers’ confederation (CEOE). The changes satisfy more of the trade unions’ requirements than the employers’. The basic aspects of the changes are that by law pensions will be linked to the estimated yearly rate of inflation. If the inflation rate is not correct a repayment will be made. The funding of the contributory public pension arrangement will be split from the rest of social security. This arrangement is presently in surplus and a stand-by reserve will be created for unforeseen financial problems in the future. The upturn in government accounts after 1993 was essentially due to the tightening of fiscal policy. Moderate economic growth meant there was little assistance from cyclical effects between 1994 and 1995, and the performance of

Economic performance

19

interest rates provided no assistance in particular to debt servicing costs. The growth rate of nominal GDP exceeded revenue with improvements in government finances completely due to cuts in spending. Total government spending decreased from a high of 48 per cent of GDP in 1993 to 44 per cent in 1995. This compared favourably to mainland Europe where the fall was from 52 per cent to 50 per cent as a whole over the same period. The government goal has been to decrease the government deficit from 6.2 per cent of GDP in 1995 to 4.4 per cent of GDP in 1996 and 3 per cent of GDP in 1997. Although tax revenues are expected to rise due to the upturn in economic growth, it is unlikely to have a large enough effect in 1997. However, there should be help from falling interest rates and revenues from privatisations. NOTE 1

The figure of 24.2 per cent is measured by the ‘Employment Survey’ EPA (Encuesta de Poblacíon Activa) published by the Spanish statistical office. Their measure is based on quarterly surveys of the labour market. This is the most commonly applied measure of unemployment. However, registered unemployment for 1994 is 17.3 per cent. The latter is the less frequently applied measure.

3 Highlights of the 1997 Budget Translated from the Spanish Treasury Document Presentación del Proyecto de Presupuestos Generales del Estado 1997 Ministerio de Económia y Hacienda

3.1 INTRODUCTION The Spanish economy and society are at a historic moment in time, when an opportunity to achieve two major objectives has been presented—to take advantage of the economic recovery which will create a great deal of employment, and to achieve the integration of Spain into the Economic and Monetary Union within the time limit established by the European Union. The economic policy is directed at significantly reducing unemployment. It includes, unavoidably, a higher rate of growth. However, the real challenge is not only to achieve a higher rate of growth, but also to assure the maintenance of the growth process. This implies that economic policy must achieve two complementary objectives. On the one hand, it is necessary to create a stable macroeconomic environment, but on the other hand, it is essential to adopt a structured programme of measures, which is aimed at increasing the productive capacity of the economy. A stable macroeconomic environment is imperative for sustained growth and employment creation. This path will help Spain establish itself among the most prosperous group of countries. This will also lead to European Monetary Union and complete a process that started almost forty years ago with the Treaty of Rome. The Government Budget for 1997 clearly reflects a new direction in economic policy, which contributes to the Spanish economy’s modernisation. Freezing public spending where possible, coupled with a significant reduction in the public deficit, implies that fiscal pressure will not be increased. This is the clearest indication of the Government’s desire to improve its credibility substantially and increase the agents’ social well-being and economic confidence. In this sense, the 1997 Budget will decrease interest rates and lead to a recovery in investments and employment in the economy. The reduction in interest rates facilitated the reduction in the interest differential, which exists in relation to our Community partners. This not only reduces the interest burden of the State, but also speeds up the flow of investment and protects the recovery in consumer expenditure. The Government Budget for 1997 is supposedly a step forward in the 20

Highlights of the 1997 Budget

21

modernisation of the public sector, which assures an improvement in efficiency of basic public services, such as health, education and employment training, justice, social security and pensions. All these services, essential for Spanish people’s well-being, receive a preferential treatment from the Government Budget for 1997. The public sector cannot remain impassive to the challenges of a global economy and must respond to the growing demands of the public. The first element of modernisation is the incorporation into the Government Budget of austerity, strictness and control over the new budget procedures, which assure the elimination of a significant deviation between the final budget and the figures initially approved. The credibility attached to the strict measures controlling spending and the elimination of fiscal pressure and reliability of the budget procedure given to the Government Budget must raise the confidence of the economic agents, domestically and internationally. In the domestic market, the public sector makes an important contribution to growth through the promise that there will be no rise in future taxes. The confidence of international financial markets will depend upon the decrease in interest rates and stability of our currency. The Government Budget was a decisive contribution to the necessary task of reducing inflation in the Spanish economy, through strict spending, the reduction of the deficit and the renunciation of all fiscal pressure which have a negative effect on the price formation procedure. Additionally, the measures contained in this Government Budget are aimed more at those sectors in the economy which have been particularly protected from external competition and, consequently, have had a more inflationary characteristic. This reduction in inflation, along with the deficit and public debts, has an important effect on the GDP, which guarantees that Spain will be part of the group of countries that will pass to the third phase of the Economic and Monetary Union on 1 January 1999. The success of Spanish integration into Economic and Monetary Union is a way of clarifying the economy’s future and assuring that our country achieves the same welfare levels that other more prosperous countries are enjoying. The prime concern of Spanish society is unemployment. Progression towards the final aim of increasing the growth potential of the Spanish economy is the only way to stimulate the creation of jobs and it is seen as a way of making progress in the real convergence process with Europe. If we give our backing to the private initiative that it necessitates, along with the introduction of systems that facilitate the participation of them in the public promotion of investments, it will help to keep investment flowing into our economy, and this will result in job creation and an increase in private consumption. Similarly, the adjustment in spending that this budget proposes allows the liberation of reserves to fund programmes which supposedly promote productive sectors. There is a special emphasis on the importance given to political initiatives promoting employment, encouraging research and development and the internationalisation of the economy.

22

The Spanish economy in the 1990s

3.2 SPANISH ECONOMY IN 1996 AND OUTLOOK FOR 1997 The year 1997 is decisive for the Spanish economy, due to the fact that at the beginning of 1998 the decision will be taken as to which countries will be able to pass into the third phase of the creation of the European Monetary Union. This Union will take place on 1 January 1999 with irrevocable fixing of the exchange rate parities which should culminate in the year 2002 with the setting in circulation of the ‘Euro’ and the loss of legal tender status for the national currency. Therefore, research into the macroeconomic aspects of the Spanish economy during 1996 and the outlook for 1997 is extremely important. (See Table 3.1.) The Spanish economy has been affected by deceleration suffered by the European economies during 1995 and in the first six months of 1996. Nevertheless, this reduction in the growth rate has been less noticeable in the Spanish case, where growth rate in 1996 is expected to be 2.3 per cent, as opposed to the 1.5 per cent for the whole European economy. Germany and France have been suffering the greatest economic weaknesses. Similarly, as is happening in other European countries, the consumer’s confidence has suffered. In 1996 Spanish private consumption will grow by 2 per cent, which is a slight increase compared to the year before, and a rate slightly lower than the GDP’s growth rate with its contribution to the growth of GDP being 1.3 points. For investment in machinery, equipment and other goods, a slight deceleration of 7.7 per cent is expected, although it will go on being the most dynamic component of demand, keeping a similar pattern to the GDP during the year. In view of the strong growth of companies’ savings over the last few years, and with the consequent financial draining of companies, the deceleration of investment in machinery, equipment and other goods has been associated with the lack of growth demand

Table 3.1 Spanish economy, 1996

Highlights of the 1997 Budget

23

and delayed effects of the rise in real interest rates that took place only the year before. The investment in building and other construction will grow at a rate of around 0.5 per cent, owing to the behaviour of civil construction and due the fact that residential construction has continued to show a certain vitality. Altogether, gross capital formation will grow by 4.4 per cent; the year before it grew by 9.0 per cent. Government consumption will register a growth rate of 0.3 per cent, which means a notable deceleration as opposed to the year before, when Government consumption grew by 1.3 points. Regarding the external balance, in 1996 it is hoped that there will be no contribution from this to the growth of GDP. The goods and service exports will grow at 7.5 per cent, following the deceleration which started in 1995. In the same way, the importing of goods and services will reduce its growth rate from 8.8 to 7.3 per cent, because of lower activity, slack capacity and maintenance of relative prices of imports in relation to domestic production. During 1996, the GDP increase has passed through a notable deceleration of inflationary tensions that, in terms of the Consumption Prices Index, from December to December, will be almost one percentage point, from 4.3 to 3.4 per cent. In terms of private consumption, the decreasing path of inflation can be seen with an increase of 3.4 per cent for 1996. This will give rise to a 1/2 point decrease in inflation differential among the three European countries with the lowest inflation. Regarding employment, the expected increase is 1.4 per cent, once the statistical effect has been deducted. It assumes the up-to-date sample section of the new population distribution which was collected in the 1991 census. The active population, similarly corrected for the statistical effect, will undergo a 0.5 per cent increase. As a result, the unemployment rate will fall to 22.6 per cent of the active population. 3.3 OUTLOOK FOR 1997 The prospects of growth for the Spanish economy in 1997 are around the 3 per cent mark. This forecast is sustained over the base of the acceleration of economic activity during the last part of 1996, which will continue into next year. The highest growth rate in the economy will result from the change in expectations of economic agents, which are due to the Government’s determination to carry out the structural changes, the fall in inflation and interest rates, and the high rate of saving in families and companies. During the preceding months the long-term interest rate differential has been recorded. It fell to its historical minimum value, below 1.8 per cent, during September. The 1997 Budget will promote growth and employment. The change in expectations of economic agents and the higher employment creation expected in 1997 will lead to accelerating growth in private consumption to around 2.7 per cent, three-tenths lower than the expected change in GDP. The Government’s consumption will have a negative growth of 0.3 per cent because

24

The Spanish economy in the 1990s

wages of personnel working in public administration were frozen and a rigorous contraction policy and cessation in current goods and services were introduced. These measures have an aim of contributing to the necessary fiscal consolidation. This public sector austerity, along with improvements in price stability, will help cut the nominal and real interest rates. Together with an improvement in expectations and a higher rate of growth in the internal and external demand, this will stimulate the investment in equipment goods (in which we expect an increase of 12 per cent). Investment in buildings and other constructions is expected to increase to around 3.2 per cent due to domestic investment, ground liberalisation policy and civil building investment. As a result of the growth in world trade acceleration, owing particularly to the recovery in the main Spanish, German and French markets, exports will increase their growth rate to around 8.5 per cent. Similarly, imports will also accelerate their growth rate to around 8.7 per cent. This will be helped by higher domestic activity levels. However, given the forecasted change in relative prices, imports are not expected to be as strong as in the last business cycle. The balance of net exports, in real terms, will result in a slightly negative contribution to the growth of GDP. Together with income and transfers balance, they will give rise to a financing capacity similar to 1996, 1.1 per cent of GDP. The balance of the current operations with the rest of the world will be slightly positive and is expected to be around 0.4 points of the GDP and the net capital transfers are expected to be around 0.8 points. Similar to the year before, the surplus of the current account is explained by the positive evolution of tourism which will compensate for the deficit in the commercial balance. With respect to prices, the aim is for the growth of the Consumption Prices Index, from December to December, to be around the 2.6 per cent mark, allowing for the fulfilment of the convergence criterion of prices agreed in the Maastricht Treaty. The severity and discipline, which is introduced in the Government Budget for 1997, will help price stability. However, the attainment of the inflation objective must incorporate very moderate wage behaviour. As regards employment, according to the Active Population Survey (EPA), ignoring the statistic effect, updating of the sample section must incorporate the new population distribution of the 1991 census showing that the growth in the number of employed will be 2 per cent. This means, an increase in the average annual number of employed people of almost 240,000. Nevertheless, the active population will record a slight increase in its growth rate. As a result of this expected behaviour in employment and the active population, the unemployment rate will decrease by a percentage point from the current 21.5 per cent of the active population. 3.4 THE MAIN CHALLENGE OF THE SPANISH ECONOMY The 1997 Budget has a decisive importance to the economic policy of the Government. The Government’s most important aim is to establish the economic conditions which allow an increase in the potential of the Spanish economy’s

Highlights of the 1997 Budget

25

growth rate and to assure a higher capacity to create stable employment. Over the medium term, this strategy is planned to have positive effects in maintaining the economic growth process, allowing real convergence with the most developed countries. This strategy is based on the adoption of macro- and microeconomic measures which will allow a decrease in the basic imbalance and improve the efficiency of the economic system. Additionally, the present macroeconomic conditions and the vital aim of meeting the nominal convergence criterion strengthen the need to design the economic policy to ensure the correction of the macroeconomic inequalities and allow our country to pass to the third phase of the European Monetary Union. A fundamental element of this policy is to increase national savings through fiscal disciplines that were introduced in the government budget. As the public savings increase, it aids the decrease in real interest rates. There is an inverse relationship between the weight that investment has in the GDP and the long-term real interest rate. This is true for the whole host of developed countries. The fall in public savings, which was not compensated for by increments in the private savings, over the last two decades, is associated with increases in the real interest rates. As a result, during the 1980s and 1990s the weight that investment had in GDP decreased, in relation to the two previous decades. This reduction of the interest rates is crucial in raising the accumulation of physical capital, which is a determining variable of growth. 3.5 PRICES STABILITY The stable prices pose a challenge which must be overcome by the anti-inflationary policy of the Government. This will support its credibility when introducing necessary flexibility measures in different markets. The benefits of this policy are unquestionable in the short and medium term. The elimination of the uncertainty associated with this policy will decrease the risk bonus in our economy even more, allowing additional falls in the interest rates which will encourage investment and, for that reason, employment. Besides, lower inflation will improve the acquisitive capacity of citizens, which will increase the international competitiveness of our economy. This will also reduce the burden that the state must take on in the future. During the 1990s, the Spanish economy has managed to reduce the inflation rate significantly. In terms of the Consumption Price Index, the average growth rate of this index has decreased 3 percentage points since 1990. In spite of this, the inflation differential among the three countries of the European Union with the lowest inflation rate continues to be higher than the convergence criterion for inflation, decided in the Maastrich Treaty. In 1996, the Consumption Price Index, from December to December, will increase by 3.4 per cent, which means a reduction of 1 percentage point as compared to December of last year. Change in inflation over the year was disrupted by events of a temporary nature which has prevented a clear direction of movement for inflation to be assessed. Indeed, the British ‘Mad Cow Disease’, the unusual cases

26

The Spanish economy in the 1990s

of food consumed without having been processed, caused the disappearance of the stair effect of the VAT increases in January 1995 and the reduction of the licensed tax for vehicles of a fixed cylinder capacity. These all have an effect on the index that shows a different profile from the one which would be found in the presence of a more stable nucleus of inflation. Looking at the changing behaviour of inflation, there was a decrease observed, since the beginning of 1993, which crept out in the middle of 1994. During the first half of 1995, there occurred a new outbreak of inflationary tensions, as a result of a great change in economic activity and notable increases in industrial wholesale prices. Later, the minor pressure of demand and the more favourable change in cost have, since the middle of 1995, allowed prices to follow the process of decrease which started in 1993. In 1996, this process was reemphasised over the last months, until it reached a growth rate below 3.6 per cent. It is expected that it would go on like that, although in a more attenuated way, during the last months of the year. In this way, the inflation differential among the three countries of the European Union with the lowest inflation has decreased significantly during the first part of the year, placing it at 2.8 points in July as opposed to 3.5 points at the end of 1995. The decrease in inflation that is occurring during 1996, although very encouraging, is not enough. Looking to 1997, the inflation differential should not be higher than 1.5 points, which is not only a challenge of great importance but also a priority of economic policy. It is going to be difficult to ensure the maintenance of the economy’s growth, as this process needs to bring the ‘per capita’ income rate near the average of the European Union. Bearing in mind the expected inflation of the member countries of the European Union for 1997, the inflation rate for the Spanish economy (measured by the increase of the Consumption Price Index, from December to December) cannot be higher than 2.6 per cent. This objective is only the first step, which shows the unwavering intention of the Government to distance itself from the inflationary culture which was present during the last decade in Spanish society. The design of the economic policies of the Government is based on the austerity of fiscal policy with the structural reform measures directed towards the deregulation and liberalisation of the goods and services markets. It is complemented by a suitable policy for the protection of competitiveness, as well as the policy of administered prices, orientated to achieving this aim. Nevertheless, the reduction in the inflation rate of the Spanish economy needs the collaboration of all the economic agents and especially in relation to their participation in the price and wages determination process. In this sense, it is obvious that during 1997, along with the policy of freezing wages in the public sector, the wage increases in the private sector of the economy will be very moderate, not exceeding in any circumstances the growth forecasted by the Consumption Price Index.

Highlights of the 1997 Budget

27

3.6 UNEMPLOYMENT REDUCTION The negative behaviour of the labour market in the last two decades is responsible for an increment in the unemployment rate. This was only interrupted in the second half of the 1980s by the high proportion of long-term unemployment which constitutes the main inequality in the Spanish economy because of the implications for the welfare state. Consequently, its reduction is the main aim of economic policy. Although an increase in the unemployment rate has been a common feature in many developed countries over the last two decades, that increase has been significantly higher in the case of the Spanish economy. Bringing this down to the levels in other countries is one of the main obstacles to bringing ‘per capita’ income nearer the rates of the countries surrounding us and particularly those of the European Union. The Spanish economy’s productivity rate has progressed towards the average in the Community, thus bridging the gap that existed at the beginning of the 1960s. Nevertheless, that convergence in productivity has not been reflected with the same degree of convergence in GDP per capita. Between 1975 and 1985, this suffered backward movement of around 9 percentage points compared with the Community average, going from 81 to 72 per cent. The modest results achieved in terms of ‘per capita’ income convergence over the last two decades are due to the exclusive behaviour of the Spanish labour market, especially between 1975 and 1985. During these years, the important increase in the unemployment rate was said to be more than 17 percentage points and the decrease in the activity rate made up for the positive effects of the GDP per capita. In 1985, the unemployment rate was 21.5 per cent of the active population and, in spite of the intensity of economic expansion during the second part of the 1980s, unemployment did not decrease below 16 per cent. During the last economic recession the unemployment rate increased significantly again. It increased by almost 9 percentage points in only three years. As a result of this, the unemployment rate was 24.2 per cent in 1993, a figure which is the highest in recent years. This behaviour seems to suggest that Spanish unemployment is known for having a high component of a structural nature and this is because it shows a high sensitivity to the cyclical position of the economy. The disruptions in demand are inadequate to explain the behaviour of Spanish unemployment because strong growth recorded until the 1980s was due to the growth of the structural component. Nevertheless, recession at the beginning of the 1990s has not been accompanied by an increase in this component. Since then, it seems to have shown a certain stability. The growth in the unemployment rate which was recorded in that period was due to the cyclic component. This cyclical growth is not less worrying, especially since Spanish unemployment is known to have a high rate of persistence, and temporary increments of unemployment have taken a long time to disappear. The consolidation of the economic expansion, which is expected for 1997, without doubt, will be moulded into a cyclical unemployment decrease. Hence, one of the biggest challenges facing the Spanish economy in the near future is the decrease of its structural component.

28

The Spanish economy in the 1990s

Consequently, the reduction in unemployment requires an expansion of demand and also the adoption of deep changes in macro- and microeconomic characteristic of the supply side. The demand policy must assure a stable macroeconomic environment, aimed at maximising the growth potential of Spanish economy. In this sense, deep changes in fiscal policy contained in the budget must improve the expectations of economic agents which will in turn expand demand in the private sector. On the other hand, supply policies must be orientated to increasing the flexibility of the economy with a double objective—to facilitate its adaptation to different disturbances that it can suffer, and to increase the capacity of employment creation. These reforms must be referred to the regulators environment of labour relations, and should reach all the goods and services markets. The reforms, which started in 1996, and those which will take place slowly during the next couple of years, include the reform of the public sector, hence, resigning themselves to constitute the main instrument that will facilitate the reduction of the structural nature of unemployment. 3.7 REDUCTION OF THE PUBLIC DEFICIT AND STABILISATION OF THE DEBT Over the last two decades the Spanish public sector has undergone a deep transformation, notably in the change from a fundamentally regulated economic sector to one that supplies an ample range of public goods and services. During 1975 and 1995 public spending has doubled its share of GDP, increasing from 24.9 per cent in 1975 to 47.1 per cent in 1995. The most important increase of this period occurred in territorial administration. This was a result of the development taken on for the Autonomous Communities. On the other hand, social security spending increased from 9.7 per cent of the GDP in 1975 to 19.1 per cent in 1995. Finally, government spending in 1975 was equal to 5 per cent of GDP, but in 1995 this percentage was 14.7 per cent. Similarly, during this period the Spanish system changed considerably. It has seen a substantial increase in fiscal expenditure, giving rise to an increase in public incomes, which went from being 24.9 per cent of the PIB in 1975 to 40.5 per cent in 1995. Nevertheless, public incomes have not reached the level of the expansion growth of spending. Hence, since 1976 the public accounts have been characterised by a persistent public deficit which has resulted in an increase in the public debt to GDP ratio. This raises further problems for the growth of interest burden to the economy. During the 1990s, since the peseta came into the European Monetary System, a great deterioration of public finances has occurred. This forced an intense process of draining in the last stage of the European Monetary Union. The public deficit, in 1990, was 3.7 per cent of the GDP and has now exceeded the 6 per cent mark in the last three years. This deterioration in the budget balance has taken place solely as a result of current spending, which has increased its portion of GDP from 36.9 per cent in 1990 to 41.2 per cent in 1995. In addition, the proportion of capital spending has decreased by 1 per cent. The income has stayed around 40 per cent of GDP level.

Highlights of the 1997 Budget

29

The predicament of the public finances in the last couple of years is especially worrying due to the high proportion of structural deficit and also due to notable increases in the public debt to GDP ratio. 3.8 THE NECESSARY REDUCTION OF THE STRUCTURAL COMPONENT OF PUBLIC DEBT One of the main limitations that fiscal policy must face is the high proportion of the structural component of deficit in the public Administration Budget. This component of the deficit is an adequate reference point when we want to evaluate the importance of the budget imbalance, because it is independent of the change in economic activity. This shows the part of the public deficit which must be corrected using discretionary performance and hence it must change the public income and spending programmes. In Table 3.2, public deficit has been modified into its structural and cyclical components by applying the OECD methodology. It can be observed that the structural component of the public deficit reached a minimum value in 1983, owing greatly to the discretional increase in incomes, which implied the introduction of VAT. During 1988–91, the fiscal policy was known for a strong procyclical orientation that considerably worsened the budget imbalance. During those years, income and public spending were tied to the cyclical evaluation of the economy, which showed a strong growth phase under the guise of cyclical characteristic surpluses. Nevertheless, the consequent reduction in the public deficit was not translated into an equivalent in the deficit, because that effect was compensated for by the discretional increases in public spending programmes, specially after 1989. Consequently, the years of high economic expansion were not used to correct the budget imbalance, but, on the contrary, the fiscal and budget measures which were adopted worsened the situation of the public finances. After the deceleration and recession of the Spanish economy, the fiscal policy which was initially adopted in 1992 was strongly restricted. However bad, this was Table 3.2 Necessity for financing and national debt classification by agents

Notes: GDP rates (or percentages) are calculated according to the deduced GDP from regulations 89/130/EEC; Euratom (Guideline GDP) 1996, 1997, Convergence Program updating objectives. Source: Department of Economy and Treasury

30

The Spanish economy in the 1990s

not followed in the subsequent exercises in which the lack of discretional measures that corrected the budget imbalance made the structural deficit grow notably so that by 1995 it was supposed to be 6.3 points of the GDP. The reduction in the public deficit to 3 per cent of the GDP in 1997 was achieved through the adoption of measures included in the government budget for 1997, which will reduce the structural component. 3.9 MAINTENANCE OF THE PUBLIC DEBT Over the last ten years, the debts of the entire public administration have experienced huge growth. In terms of GDP it has been 22.1 per cent, increasing from 43.7 per cent in 1985 to 65.8 per cent in 1995. Although the actual rate of the increase in public debt to GDP ratio is relatively moderate, in relation to one of the countries of the European Union, the high growth recorded in the last few years is worrying for two reasons: the Spanish economy no longer satisfies the sole nominal convergence criterion that it fulfilled in the past years; also, the increment in the debt ratio shows the unsustainability of fiscal policy which has grown recently. Table 3.3 shows the decomposition of that growth into its different explanatory elements: primary balance, net variation of financial activity and an increase of debt owing to the existence of the medium price of the debt being higher than the economy’s growth. As we can see in Table 3.3 the 7.2 per cent growth which took place between 1985 and 1995 for the ratio of public debt is explained by the net variation of financial activity which, in that period, was supposed to be 16 per cent of GDP. The primary balance explains 22 per cent while the other 5 per cent is explained by the variation of the real interest rates and the growth rate of the economy. This reduction in debt had not occurred in a regular way during the years being considered. In the last four years, the ratio of debt over GDP has increased 20 points from the 22.1 recorded since 1985. This has basically been due to the negative real growth of GDP and the real average cost of debt. During the period 1985–91, the real growth of the Spanish economy was higher than the real average cost of the reduction in the debt, which contributed to a decrease in the debt ratio of 5.8 points of the GDP. Nevertheless, the sum of the primary balance and the net variation of financial activities induce a growth of 7.9 points, so the ratio of public debt over the GDP recorded a growth of 2.1 points in the period 1985–91. As long as the economic expansion was weakening between 1985 and 1991, the negative difference between the real cost of the contraction of the debt and the real growth of GDP was decreasing until it was positive in 1992. In this way, in the period 1992–5, this effect explains a 35 per cent growth in the debt ratio recorded. Nevertheless, the net variation in financial activity has made an important contribution to the huge increase which took place in 1993, since the restrictions concerning the maintenance of overdrafts and credit presented to the Bank of Spain were to come into force in 1994. This caused the Treasury to carry out an overfinancing policy of the public debt. In 1995, the difference narrowed between the growth of GDP and the real interest

Notes: A positive sign of primary balance means deficit and a negative sign means surplus. The sum of the columns (1) to (3) is equal to the annual increase of the debt rate. (*) The mentioned maintenance factor is the effect of the public debt rate on GDP which is due to the difference between the real interest rate and real increase in the rate of the economy. For stabilising the public debt rate on GDP, it is necessary that the above mentioned maintenance factor is the balance of the primary amount and the net variation of financial assets. Source: Ministry of Economy and Treasury

Table 3.3 Ratio of gross public debt against GDP

32

The Spanish economy in the 1990s

rate of the debt. Since 1992 the fiscal policy has been following an untenable path. The corrections required are an important consolidation effort orientated to stabilise the ratio of public debt in 1997, as it is the aim of the convergence programme. In this context of growth and in the absence of monetary financing, in order to stabilise the ratio of debt over GDP, it is necessary that the sum of the primary balance and the net variation in financial activity was equal to the growth of debt—due to the excess in the real interest rate over the real growth of GDP. The reasonable foresight of GDP growth of 3 per cent in 1997 and the expected rise in the interest rate would allow the percentage of debt over GDP to decrease in 1997 for the first time since 1988. Consequently, the correction of the imbalance is necessary to be able to make a suitable policy of public spending assignment which nowadays is strongly conditioned by the high weight reached by the interest burden. If it is not like that, the growth of the debt stock, with the consequent effect of refeeding of public deficit, will impede assignment of a spending level suitable to policies such as public inversion, education or research. These policies form the foundation for long-term economic growth and, therefore, the possibility of bringing per capita income closer to the levels of most developed countries. Besides, the reduction in the public deficit must be achieved by working over this structural component, which will allow one to amplify the handling edge needed by the budget policy to counteract the effects of the economic cycle. In this way, the opportunity to close the balance between income and public spending must not be lost again as happened in the second half of the 1980s, resulting in negative consequences from which our economy is still suffering. The past experience shows that the cyclic reduction of the deficit is not able on its own to generate a budget balance; that is why discretionary measures which act over the structural component of the deficit must be used. 3.10 EXTERNAL SECTOR AND EXCHANGE STABILITY One of the basic characteristics of the Spanish economy has been the progressive opening towards the exterior. In this process, the Spanish adhesion to the European Union had a really different impact on the imports and exports because while the percentage over the GDP of the former increase in a notable way, the ratio of the exports remained almost unaltered between 1985 and 1990. Therefore, the commercial liberalisation and tariff (customs) disarming, prerequisite for the integration of the Spanish economy within the European Union, is usually considered to be a major factor contributing towards the deterioration of the external sector. Nevertheless, the intense economic growth recorded by the Spanish economy in those years seems to have been an equally important element in the explanation of the external imbalance. A second outstanding characteristic in previous years has been the intense fluctuations recorded in imports and exports of goods and services. The growth rate of imports decreased from 16.9 per cent recorded in 1989 to 5.4 per cent in 1993. It increased to 11.1 per cent in 1994, and then decreased to 9.1 per cent in

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1995. It is possible to offer a reasonable explanation of these changes if, in addition to traditional variables which are usually regarded as determinants of exports and imports of goods and services, income and relative prices are also considered as a measure of the cyclic position of the economy. In this way, the reduction of the external imbalance in the last two years has been due to the economic recession which started at the end of 1992, an international problem, and also because of the devaluation of the peseta inside the European Monetary System. A variable which is closely connected with the evolution of the external sector is the exchange rate, which is also related to the creation of the European Monetary Union. Next year is going to be decisive due to the fact that at the beginning of 1999 the fixed exchange rates are to be adopted. From that year, the exchange rate will not be able to play a compensating role in the differential of prices with the others, as has happened recently. It necessitates that the Spanish incorporation into the European Monetary Union must be accomplished with a stable exchange rate, which does not differ significantly from the one considered as a balance. Recent history shows the existence of differences between both, which in some periods can have a negative consequence on the Spanish macroeconomic results. With the first energy crisis started a period of relative appreciation of the peseta which remained until the devaluation in December 1982. It was followed by two years of the highest relative depreciation of the last decade. The important capital entries that were recorded during the years following incorporation into the European Union conditioned the instrumentation of the monetary policy in these years. During this time the monetary aggregates moved from the established aims and the process of deflation that had occurred until then ceased, which led to the deterioration of the credibility of the economic policy. The unsuitable co-ordination between monetary and fiscal policy needed to correct this situation meant the entry into the exchange mechanism of the European Monetary System. This took place during a period of high appreciation of the peseta, which reached a value of nearly 20 per cent in 1992. This situation led to the devaluations of September and November 1992 and May 1993. In 1994 the problem was reduced and since the last devaluation of March 1995, which had transitory effects, the exchange rate has been placed on a more stable path. During the next year 1997, powerful national demand can have slightly negative effects over the goods and services import and export balance. 3.11 OPERATION OF THE ECONOMIC POLICY FOR 1997 The state budget for 1997 has been established with strong intentions of achieving the huge growth in economic activity and the employment rate. This in turn will enable us to achieve real convergence with the most prosperous countries of Europe, bringing about improvement in the level of social wellbeing and nominal convergence with the Monetary Union on the subject of prices and public deficit.

34

The Spanish economy in the 1990s

Therefore, the economic policy must form the foundations to harmonise the relationship between the imbalance in inflation and the public deficit and allow for a sustained economic growth with zero inflation in the medium term. At the same time, this growth will help to reduce the public deficit in the future, allowing the real interest rates to be lowered. This means attempting to break the vicious circle of reducing the deficit and inflation which would allow the reduction of interest rates, improvement of future conditions and investment opportunities, and altogether a greater level of economic growth and a reduction in unemployment. In this sense, the Bank of Spain is the institution responsible for defining and executing monetary policy, its medium-term objective being to set the inflation rate below 3 per cent in a stable way in 1997. To achieve its aim, this institution is acting through the instruments that it controls, basically, the interest rate. So, the reduction of the interest rate during the year will only be successful as long as the central bank positively assesses inflation and considers feasible the fulfilment of its aim. In accordance with the described goals, the fiscal policy, on the other hand, is orientated to incorporate the public deficit, as can be seen in this budget. This policy must exert expansion effects because, as has been stated, the condition of the imbalance in the budget will allow an evaluation of reducing inflation and real interest rates. It will stimulate reactivation of the private sector, lowering the investment rate and consumption by improving expectations, which should bring about a higher level of employment. The experience of some European Union countries during the 1980s corroborates the expansive effects that the fiscal adjustment policies can generate. The policy of controlling the deficit that the Danish government followed in 1982 and the fiscal adjustment introduced in Ireland in 1987, accompanied by other measures, led to important growth in investment and private consumption. The reduction in the public deficit that is found in this budget is as a result of containment in structural spending, although it can be expected to aid the recovery of the economy. The economic expansion expected for 1997 will make possible a favourable rise in public incomes. The effort of the public sector in reducing the deficit was further affecting structural spending. The general budget for 1997 aims to strengthen well-being and solidarity, in order to increase the level of cover and quality rates, as well as introducing social protection and improving efforts of war against the black economy. In this sense it has been defined as one of the priorities of the public spending policy. The development of a viable system of social protection with economic growth requires the introduction of available resources, optimisation and rationality in their assignment and control of spending. In this sense, Toledo’s Pact will bring a greater certainty when put into practice for the public system of pensions. The attainment of this economic policy requires, in any case, the collaboration of all the agents. The favourable conditions that the described policies will bring must be translated into an active and decisive response by the private sector in order to take advantage of the expansive momentum of the present economy. They need to make the effort

Highlights of the 1997 Budget

35

to keep wages moderate, which constitutes a sign of solidarity. Co-operation with the unemployed, i.e increasing the probability of finding a job, and compromise with the civil servants, whose wages are frozen in this budget, are also required. The economic policy of adjustment is displayed in the strength of this budget and partly arises from the time taken to implement the European Monetary Union. As is known, all adjustment processes imply some costs. It is necessary, in this case, to share those costs with the aim of minimising their impact over the different agents. Finally, to complete a global view of the economic policy, it is obligatory to highlight the important paper showing how structural policies play a part in the described adjustment. Those policies, stimulated by the new Government since taking power, are necessary conditions to reduce uncertainty in the markets and to achieve the expected stability and make possible the dynamic and flexible answer of the agents. The potential growth shown by the Spanish economy needs the liberalised impulse of the structural policies and elimination of restrictions in order to introduce economic expansion, which is a basic aim of the economic policy mentioned above. 3.12 SPANISH CONTRIBUTION TO THE GENERAL BUDGET OF THE EUROPEAN COMMUNITY AND THE EUROPEAN COMMUNITY FUND OF DEVELOPMENT IN 1997 Section 34 of the budget brings together two things—the Spanish contribution to the general budget of the European Community (BGCE) in relation to its own resources, and the contribution to the European Fund of Development (FED) through which it is channelled. The total amount of the inscribed credits in section 34 is Pta937,478.7 million, with an increment of 9.7 per cent and Pta17,740 million, corresponding to the contribution to the FED, which has increased 61.3 per cent with respect to the last year. The contribution of Spain to the Community budget in 1997 has been worked out in accordance with the preliminary sketch of the budget reduced by Ecu2,000 million to take into consideration the relations achieved in the last cabinet meeting on 25 July. The quantity of the GDP resource in the Community budget is determined by the difference between total Community spending and the rest of the incomes, since this is the component which balances the budget. In 1997 the GDP resources represented an important increase because they absorbed not only the increase in Community spending but also the decrease in VAT resource. This amount is divided between the member states, in proportion with their own GDP. The contribution that corresponds to Spain in this resource in 1997 is Pta340,096.44 million, which is an increase of Pta97,033.7 million—39.9 per cent with respect to the initial budget of 1996. The contribution of Spain to the FED in 1997 was Pta 17,740 million, which worked out to be an increment of 61.3 per cent with respect to the Pta 11,000

36

The Spanish economy in the 1990s

assigned in the budget of 1996. It is necessary to bear in mind that although the contribution to the FED expected in the proposed budget of 1995 was Pta18,880 million, the resolution of the cabinet council on 28 December 1995 declared the non-dispensability of Pta7,880 million in order to adapt the budget credits to the payments that it was going to request from the Community during 1996. It must be said that the contribution to the FED in 1996 is going to be exceptionally low—the lowest since 1991 because it has been delayed until 1997, due to the introduction of the VIII FED and also because of the large contributions made in 1995. 3.13 TRANSFERS FROM THE GENERAL BUDGET OF THE EUROPEAN COMMUNITY TO SPAIN IN 1997 3.13.1 Spending of the EFOAG Guarantee The European Fund of Orientation and Agrarian Guarantee—Guarantee Section (EFOAG Guarantee) is the financial instrument that the European Community possesses to apply the Common Agricultural Policy. This includes not only the Guarantee Policy of the Agrarian Markets, which is financed exclusively by the European Community, but also the accompanying measures—structured policies and a certain number of specific actions—which are financed by the Spanish administration. The aid that the EFOAG Guarantee will give to Spain during 1997 is expected to be Pta884,568 million, of which Pta850,000 million correspond to the guarantee policy of Agrarian markets and Pta34,568 million correspond to accompanying measures. Of previous amounts, the European Community will discount Pta33,464 million, which correspond to liquidation of the 1993 accounts and payment of the third annuity of the additional milk burden. So in net terms the transference that will be received from the Community will be Pta851,104 million. It is observed that an increment of 25.7 per cent in respect of the Pta677,050 million is expected to be received, in net terms, in 1996. The reason for the high increase is that the Community gave in advance an amount of Pta106,000 million in 1995, relative to the payments of part of the aid per hectare which should have been met in 1996. Besides the discounts practice in 1996, corresponding to the liquidation of 1992 accounts and the second annuity of the additional milk burdens, it will achieve an amount of Pta47,830 million. Table 3.4 shows the spending of the EFOAG Guarantee in Spain since 1987. Table 3.4 Spending of the EFOAG Guarantee in Spain

Note: 1996–7 in terms of expected cash Source: Ministry of Economy and Treasury

Highlights of the 1997 Budget

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3.13.2 Structural actions Structural actions include all those proceedings which have a tendency to decrease the economic and social imbalances which exist among the different zones of the Community, protecting economic and social cohesion. The impulse of these structural actions has been one of the priorities of the Community over the last year. In contrast to what happens with the EFOAG Guarantee, the structural actions are financed between the European Community and different national administrations. The instruments that the European Community can use to carry out its structural policy are, basically, the structural funds and the Cohesion Fund. 3.13.3 Structural Funds At the Council of Europe in Edinburgh in December 1992 the endowment of the structural funds for 1993–9 was decided and a distribution of the global amount for member states was established. The assignment of the structural funds for 1994– 5—including Ecu 1,318 million of the Aim 2 for 1997–9 recently approved—goes to Ecu343,70.3 million in agreement credits, of which Ecu31,700.6 million correspond to the Marks of Commune banking and Ecu2,669.7 million correspond to Community Initiatives. Table 3.5 shows the transference of structural funds between 1987 and 1997. In 1996 receipt is expected of a total amount of Pta666,839 million coming from the different structural funds, while the estimation for 1997 is Pta670,000 million, representing an increase of 0.5 per cent. The budget reflects in its incomes only the transferences of structural funds for cofinanced actions with the central administration. Table 3.6 shows the amounts corresponding to 1997. 3.13.4 Cohesion Fund It is estimated that in 1997 the Community will transfer an amount of Pta175,600 million to the Cohesion Fund, with an increment of 5.7 per cent to the amount Table 3.5 Transferences received and Cohesion Fund

Note: 1988–94 data in terms of cash Source: Ministry of Economy and Treasury

38

The Spanish economy in the 1990s

Table 3.6 Transferences of the structural actions to the central state administration, 1997

expected to be received in 1996. The State Administration will come in with Pta131,800 million, Pta30,700 million for the Autonomous Communities and the rest channelled into the local Corporation and other economic agents. 3.13.5 Other transferences The budget of the European Community finances a series of other actions in different areas, such as culture, tourism or research. Some of these measures, especially in the research area, go directly to the beneficiary while others are channelled through the state budget, being labelled among the incomes as ‘Other Transferences’. In 1997 an amount of Pta2,235 million is expected to be received. In the same way, from the operative budget of the Coal and Steel Economic Community (CSEC), aid is received for the restructuring of the iron, steel and coal sectors. The CSEC channels this aid directly to the companies, although a small amount—relative to the anticipated amount provided by the state for the CSEC companies—is collected by the state. In 1996 Pta2,800 million is expected to be received and will be channelled through the state budget; the rest will be transferred to the CSEC companies. In 1997 the CSEC aid, which amounts to Pta4,745 million, will be completely transferred to the companies. Table 3.7 shows the changes in ‘Other Transferences’ including the 10 per cent of the spending in traditional own resources, which is Pta 12,667.1 million. Table 3.7 Other Community transferences to Spain

Source: Ministry of Economy and Treasury

Highlights of the 1997 Budget

39

3.14 STATE DEFICIT AND ITS FINANCING IN 1997 3.14.1 Treasury financing strategy for 1997 According to the budget for 1997, next year the net financing that the Treasury must obtain will be Pta2,846.7 thousand million. This means a budget deficit of Pta2,008.8 thousand million, plus a net variation of financial activity of Pta837.9 thousand million. In 1997 the Treasury will have to launch a Ptal 1.06 million bill to refinance the amortisation of the debt in pesetas and foreign currencies without considering the amount that will be launched after 4 September of the current year, in instruments expiring during 1997. While the expiry of the Treasury represents almost 64 per cent of the total, the amortisation of negotiable instruments in medium and long bonds and state securities only represents 26 per cent. On the other hand, the greatest concentration of the expiry, over 72 per cent of the total amortisation, occurs in the first half of the year and is distributed in a balanced way between the two terms of which it is composed. 3.14.2 Aims of the Treasury’s financing policy The last aim of the Treasury’s financing policy is to obtain the necessary resources to cover the effective necessity of the state’s contraction of a debt with a lower cost. In the attainment of this aim, however, the Treasury must face a series of restrictions. Some of these are of a more temporary nature, influenced by the place where their activity occurs, that is to say, the financial markets situation. Others are imposed because of the necessity of achieving intermediate aims which can sometimes be in contradiction to the latest aim of minimising the cost of the contraction of debt in the short term. As a result, the acquisition of the main aim is the long term and requires the satisfaction of the following additional and often interrelated aim: keep a stable domestic demand and minimise the negative impact of the state’s financing over the rest of the agents. 3.14.3 Remaining stable Since 1995, with the purpose of achieving a certain regularity in the financing of medium- and long-term instruments, the Treasury assumed the obligation of announcing the aim of launching a monthly auction for each of the state bonds and securities. This aim is determined by information that the Treasury receives from the market creators on the expected demand for each instrument and refers, altogether, to the auction of bonds in five years and securities in fifteen years, on the other hand. In this case, the Treasury announces two amounts: the amount that the issue of both instruments is expected to achieve and the amount at which most of them will be launched. Proceeding in this way, the agents should be told the two prices before the auction. Afterwards they can put in their requests. This will allow the Treasury to achieve the maximum of not only the risk bonus but also the quantity of issues in the following months.

40

The Spanish economy in the 1990s

3.14.4 Keep a suitable grade of liquidity in the markets Sometimes the permanent nature that characterises the Treasury financing, that is, not financing the temporary imbalance in the public accounts, but contraction of debt, has increased during the previous years. In this case, those instruments should be emitted which allow a cheaper financing in the short term and cannot be compatible with the latest aim which consists of achieving in a regular way the financial resources at the lowest cost. As a result of the liberalisation of capital activity the markets to which the Treasury has recourse have undergone deep changes which are important to institutional investors. It changes the condition strongly against the Treasury financing plans. The necessity to have access to markets in a regular way requires them to provide an adequate grade of popularity and liquidity, especially in the medium and long term, which institutional residents, non-resident investors and the futures markets use as a reference. Consequently, even when it could be cheaper in the long term to get financing, the Treasury is obliged to provide the liquidity levels that the market demands. 3.14.5 Create a stable domestic demand With the aim not only to remain stable, but to increase the stability of demand, the main proceedings of the Treasury in 1997 will be orientated to continue the publicity campaign on TV, press and radio, to increase the activity of the direct market, telephone service for free information, elaboration of mailing and to set in motion, in close collaboration with the Bank of Spain, a system of direct sale which facilitates entry to the particulars of the debt market. 3.14.6 Minimise the negative impact of state financing on other economic agents It is true that in special circumstances the appeal of the Treasury to external savings, through the issues in foreign currency or pesetas which have been acquired for foreign investors, allows relief of the pressure exerted over the internal capital markets. This is a more stable and reliable procedure to alleviate state deficit, so as not to interfere with the financing of the rest of the economic agents. The rigorous and austere character of the budget for 1997, coupled with the endorsement of actual and future credibility, that is to say, coupled with the renunciation of spending in the sector to which they belong, will allow the reduction of the state ratio over the GDP. The fiscal and financial measures approved by the government in June, orientated to increase the activity of savings and efficiency in the assignment of the financial resources, constituted one of the first steps in this direction.

Highlights of the 1997 Budget

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3.14.7 To smooth the outline of the maturity of the state’s debt The progressive growth of debt issues in the medium and long term, necessary to keep an adequate grade of debt and liquidity in the secondary market, brings the inconvenience of specifying the orientations of these values in time. On the other hand, to facilitate the negotiation of the values and, in particular, the operations of temporary session repos, it was decided years ago to replace the half-yearly interest coupons of bonds and state securities for a single annual coupon. So, it is produced as a concentration of payments for interest which conditions the annual evolution of the cash deficit of the state. This effect will be worst with the negotiation of the ‘strips’ of public debt. For the strip market function, it will be necessary to coincide the debt payments of different issues, so that the nominal balance of coupons has the same expiry date which would be long enough to allow negotiation. To soften the expiry outline, the Treasury takes into account two things when fixing the expiry dates of the coupons of the new references of debt: first, the annual evolution of the state incomes with the aim to coincide those dates with the months in which incomes for VAT, society, etc., will take place, aiming that the expiry will take place on the last day of the month because that is the day on which the tributary income occurs; second, to carry out re-buying in the secondary market of those values which are going to expire in the following months.

4 The labour market

4.1 INTRODUCTION The first half of the 1990s marked a highly significant change in the structure of the Spanish labour market. The growing predominance of employment in the tertiary sector, a process that had begun previously, was accompanied by a sharp increase in the presence of women, especially those in the middle age band, and by readjustment in geographical terms. It is the aim of this chapter to analyse these changes in detail. In aggregate terms, the evolution of the labour market in Spain during the period indicated was marked by two sub-periods (see Figure 4.1). The first of these, from 1990 to 1994, was characterised by being a period of recession in terms of employment level, with a continuous loss of employment at a mean rate of 169,731 jobs per year.1 As a result of this, the five-year period closed with around 850,000 jobs fewer than those existing at the beginning of the decade. Nevertheless, this loss was almost offset by the strong growth in employment recorded in the two-year period from 1995 to 1996.2 Indeed, these years show a continuous gain in employment at a mean rate of 308,343 jobs per year, with a subsequent final gain of over 600,000 jobs. These two different periods add up to a general loss of Spanish employment in the 1990s: in 1996 there were 231,968 jobs fewer than in 1990.

Figure 4.1 Evolution of employment (variation rates): total employment 42

The labour market

43

Among the multiple factors that go towards explaining the evolution of employment in the 1990s, the following deserve special mention: • the opening up and internationalisation process of the Spanish economy, which speeded up considerably after Spain joined the EC in 1986; • the trend towards a tertiary sector dominated economy, in which the evolution of industry and agriculture played a very negative role; • the development of the regional Autonomous Community model of state; • the investment process in infrastructure pursued during these years; • the positive effect of the increase in the presence of women in the Spanish labour market, and the negative effect of male job loss during the period. The structure of this chapter is as follows. In the second section we analyse the changes that have taken place in the labour market in Spain according to the sex and age of people in employment. The third section studies these same changes but from the perspective of branches of production activity. The fourth section analyses geographical redistribution in accordance with data from regional Autonomous Communities that make up the Spanish state. The fifth section presents the main conclusions of the study. 4.2 EVOLUTION OF EMPLOYMENT ACCORDING TO SEX AND AGE The role played by women in the labour market has undergone a radical change during this last decade in Spain. In particular, the magnitude of the growth in women’s labour activity in recent years, and above all the speeding up of this process during the stages of economic recovery, has been a determining factor in the evolution of the Spanish labour market. Considering the whole period 1990–96, we can conclude that the net destruction of 1.85 per cent recorded in overall employment (an average of around 33,138 jobs each year, or 231,968 in absolute values) was due exclusively to loss in male employment (see Figure 4.2).3 On the contrary, female employment showed considerable growth during the 1990s.

Figure 4.2 Variation in employment by sex (variation rates): aggregate

44

The Spanish economy in the 1990s

Indeed, as compared with the reduction in male employment at a mean annual rate of 6.2 per cent (an average of more than 76,000 jobs per year; 533,365 jobs less in 1996 than in 1990), female employment grew to a mean annual rate of 7.5 per cent, which means that at the end of the period analysed female jobs have increased by 301,393. Furthermore, in each of the two sub-periods differentiated in the introduction it can be observed that, although the overall trend is the same for both sexes in the sense that both reduced their employment in the first sub-period and increased during the second, the size of the changes and the evolution in each labour group differs notably. While male employment fell by 835,518 jobs (9.7 per cent of the existing male jobs in 1990) between 1990 and 1994, the fall in the level of female employment was much smaller: they lost 13,125 jobs, 0.3 per cent of those existing in 1990. Thus, according to this information, 98.5 per cent of the total fall in employment in these years could be explained by losses in male employment. During the expansionary period (1995 and 1996), the growth in female employment, 7.9 per cent of that existing in 1994, was almost double that recorded for male employment, which amounted to 4 per cent. However, the net gain in absolute terms was approximately the same for both groups (around 300,000 jobs). The different evolution followed by male and female employment changed the distribution by sex of overall Spanish jobs: women increased their share by 3 points, in 1996 reaching almost 35 per cent of total employment.4 To sum up, the data shown so far leave no room for doubt over the extremely important role played by the entry of women into the Spanish labour market as a determining factor of the trends observed in overall employment figures. In particular, the data allow us to outline the more dynamic character of female employment and its greater resistance to the economic recession. More specifically, while male employment showed a negative trend from 1990 to 1994, recovering in 1995 and 1996, the trend for female employment was positive throughout these years, excluding 1993. When examining the role played by men and women in the Spanish labour market, we do, however, observe important qualitative and quantitative differences according to age. First, for both sexes, breakdown of the data referring to overall employment by group reveals differential behaviour of the groups at the two extremes (young people between 16 and 24 years and people over 55 years). Over the whole period, 1990–96, the share of these groups in the labour force suffered a significant reduction in favour of the intermediate group (25 to 54 years of age).5 In the case of those under the age of 20, considering both sexes as a whole, it can be observed that their share in overall employment decreases in these years to almost half, from 4.4 per cent of the employed population in 1990 to 2.6 per cent in 1996. This decrease, which represents a loss of 234,317 jobs for persons under the age of 20 of both sexes (115,472 males and 118,845 females), reveals the fact that

The labour market

45

Figure 4.3 Variation in employment by age and sex (variation rates): age 16–19 years

people have begun to join the labour market at a later age in Spain, mainly as a result of the prolongation of voluntary education and access to university, abandonment of agricultural activities and growth of the tertiary sector, and improvements in the standard of living. However, we cannot rule out that these data could be related to the greater impact of unemployment on this particular group. (See Figure 4.3.) As well as this youngest group, people between 20 and 24 years of age also suffered a great reduction in their share of the labour market during the 1990s. The loss in absolute values for both sexes was 263,907 jobs (180,235 males and 83,672 females), which means that only 10 per cent of overall Spanish employment in 1996 belonged to that group. This same group represented almost 12 per cent in 1990. (See Figure 4.4.) The biggest reduction in the employment share is related to the oldest group (55 years and over). They lose 2.5 points, falling from almost 15 per cent in 1990 to 12.2 per cent in 1996. That implies a reduction of 337,557 jobs for this group (18.3 per cent of employment in 1990). This reduction is especially important in the case of men, since they lose more than 20 per cent of the employed people in 1990 (281,925 jobs). For women the destruction of employment is also important

Figure 4.4 Variation in employment by age and sex (variation rates): age 20–24 years

46

The Spanish economy in the 1990s

Figure 4.5 Variation in employment by age and sex (variation rates): age 55 and over

in relative terms (11.3 per cent), but not in absolute values (55,632 jobs). (See Figure 4.5.) The age group where the greatest changes are undoubtedly observed, both in absolute and relative values and for both sexes, is that corresponding to the central band, between 25 to 54 years of age. In aggregate terms, this group experienced continuous growth in its share of overall employment, rising from 69 per cent in 1990 to 75 per cent in 1996. However, when we differentiate by sex, we observe that this increase is concentrated almost exclusively in the population of employed women, whose share in these years not only reveals a continuously growing trend, but also rises from 21.3 per cent of overall employment to more than 26 per cent in 1996. This enlargement in the share results from an increase of 559,488 new female jobs during the period, explained by the fact that variation rates are positive for all years and greater than 5 per cent in 1995 and 1996. Therefore, this group of intermediate age women was also able to create employment during the recession period and to profit from the expansion in a better way than any other group. In the case of men we observe much more modest figures, with a rise in its share of 1 percentage point, and only 44,278 new jobs for the whole period. Moreover, they follow the two sub-periods model, destroying employment from 1990 to 1993, and creating new jobs from 1994 to 1996. (See Figure 4.6.)

Figure 4.6 Variation in employment by age and sex (variation rates): age 25–54 years

The labour market

47

In short, in accordance with the information available we can state that the reduction of 1.8 per cent in the overall employed population between 1990 and 1996 is basically due to the oldest and the youngest groups of both sexes. On the contrary, the only group that created employment during the period was women of intermediate age. These women were also able to create jobs in the period of recession that spread from 1990 to 1994. Additionally, they took better advantage than any other group of the expansion period in 1995–6. Therefore, we can state that the entry of women into the labour market during these years not only definitively shaped employment trends in aggregate terms, but also constituted an important structural change in the Spanish labour market. 4.3 ANALYSIS BY SECTOR The evolution in the number of people employed in the first half of the 1990s continued the radical change in the make-up of the Spanish economy in respect of branches of activity. The result of that evolution left Spain as a country with a predominantly service economy, an agricultural sector in strong recession and a reduced industrial sector. In this sense, the period between 1990 and 1996 represented a continuation of the advance of the tertiary sector in the economy. The data referring to employment variations in the period under study, contained in the Appendix, confirm the comments made in the previous paragraph. Thus, employment in the agricultural sector fell by over 27 per cent between 1990 and 1996, a reduction of 403,437 jobs in the sector, which means a loss of over 3 per cent in its share of the Spanish economic fabric, leaving it at 8.8 per cent of overall employment in 1996. The process of job destruction in Spanish agriculture seems to respond to a pattern of necessary employment readjustment. During this period an important part of the excess workers in the sector was eliminated. This statement is based on the fact that variation rates are negative for every year, as can be seen in Figure 4.7, which implies that the agricultural sector could not even take advantage of the

Figure 4.7 Agriculture (variation rates)

48

The Spanish economy in the 1990s

growth process experienced from 1995. But at the same time, since the variation rates are decreasing, Spanish agriculture seems close to the end of its adjustment process, coming to a steady static situation in this sector. So, the destruction of employment in this sector in the future should be small. A similar phenomenon to that occurring in agriculture, but to a lesser extent, also took place in industry, where the number of people in employment fell by 487,333 from 1990 to 1996, a loss of 16.4 per cent over the period as a whole, and there was a reduction in the share of overall employment of 3.5 per cent, down to a little over 20 per cent in 1996. The evolution of industry does not fit well with the behavioural model of two periods (1990–94 recession; 1995–6 expansion) for the whole economy: industry followed the general destruction of employment from 1990 to 1994, since industrial jobs were reduced by more than 500,000 people (16.9 per cent of 1990 jobs were lost in 1994), with negative variation rates for each year, especially 1993, when the loss was over 9 per cent. On the contrary, while 1995 and 1996 implied an important recovery for the whole Spanish economy, this was not the case for industry. This sector had positive but very small variation rates in those years, and only around 17,000 industrial employments were created. The situation described for 1995 and 1996 shows the difficult situation of Spanish industry. In the recession period almost all sectors, except services, lost employment, and industry did the same. But when the expansion period came, Spanish industry could not take advantage of the growth experienced by the whole economy, and employment in this sector was only maintained. Therefore, the Spanish industrial sector raises two different problems: first, its share in employment seems small (around 20 per cent); second, it cannot profit from the growth periods of the economy, so its importance will continue to decrease. (See Figure 4.8.) The construction sector, contrary to what happens with industry, follows the same trend as the overall Spanish economy. Thus, while employment decreased from 1990 to 1994, with an accumulated reduction of 13.25 per cent (161,742 jobs), 1995 and 1996 show important growth, with variation rates of 7 per cent in

Figure 4.8 Industry (variation rates)

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Figure 4.9 Construction (variation rates)

1995 and 2 per cent in 1996. These two sub-periods sum up to a general loss of 62,485 employments from 1990 to 1996, only 5 per cent less than those existing at the beginning of the decade. At the same time, its share in overall employment continues to be the same (around 9.5 per cent). (See Figure 4.9.) The sector that makes the difference to Spanish employment in the 1990s is services. In absolute terms this sector created 72,290 new jobs during the period analysed (10.5 per cent of those existing in 1990), and has only negative variation rates in 1993. On the contrary, in the expansion period that began in 1995 its growth rates were very high, around 4 per cent increase in both years. The fact that the services sector created employment during almost all the years, together with the destruction of jobs in other sectors, adds up to an important increase in the share of services in Spanish employment overall. This share raises around 7 percentage points during the decade, reaching 61.7 per cent in 1996. (See Figure 4.10.) The evolution of the different sectors of the Spanish economy allows us to obtain the aggregate (see Figure 4.11). In Figure 4.116 we can observe how Spain goes through two economic phases during the first six years of the 1990s: there is continuous employment destruction from 1990 to 1994, reaching 848,655 job losses. All economic sectors, except services, are responsible for this decrease: agriculture

Figure 4.10 Services (variation rates)

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The Spanish economy in the 1990s

Figure 4.11 Aggregate (variation rates)

continues its adjustment process, losing 334,507 jobs; industry suffers a very important loss and reduces its employment by more than half a million jobs; construction also loses jobs, finishing the recession period with 161,742 fewer than in 1990. On the contrary, the services sector was able to create employment, even during the recession period. The recovery phase, that begins in 1995 and continues in 1996, is only real for the construction and services sectors. These sectors increased their employment by 99,257 and 569,345 jobs respectively, adding up to 616,687 new jobs created during those two years. Agriculture follows its adjustment, with negative variation rates, and the industry maintains employment, with positive but very small variation rates. The period 1990–96 closes with an aggregate loss of 231,968 jobs, basically due to the negative evolution of agriculture and industry. In short, employment trends in the Spanish economy during the 1990s have meant that jobs have tended to become concentrated in the services sector, which has seen an increase in its presence in absolute and relative terms in the economy as a whole. Thus, 62 per cent of the jobs existing in Spain in 1996 were concentrated in services (70 per cent if we include construction). While agriculture and industry suffered a strong process of readjustment that led them to lose, between 1990 and 1996, over 400,000 jobs in the former case, and almost 500,000 in the latter, services was the only net creator of employment, with over 700,000 new jobs. For its part, the number of persons employed in construction did not vary significantly during the period, but its evolution revealed the close links between this sector and the cycles of the Spanish economy. The net overall evolution meant a reduction of 231,968 in the number of persons in employment in Spain between 1990 and 1996. 4.4 ANALYSIS BY REGION One of the possible formulas of approaching a breakdown analysis of the structural change that has taken place in Spanish employment during the 1990s consists of studying the variations that have occurred in the regional Autonomous Communities that make up the Spanish state. The highly varying characteristics of each of these

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Communities, in both political and economic terms, with very close relationships at times between a production sector and a particular region,7 make this analysis highly relevant, since the changes in the number of people in employment may have been extremely heterogeneous. In order to carry out this analysis we prepared Tables 4.7, 4.8 and 4.9 in the Appendix. Table 4.7 shows absolute values of employment broken down by regional Autonomous Community and year. Table 4.8 refers to the variation rates during the period. Finally, Table 4.9 shows the distribution of overall national employment among the different Autonomous Communities. At the end of Section 4.4 we have also included Figures 4.12–4.28 for each Autonomous Community presenting employment trends over time in each one. The distribution of people in employment among the Autonomous Communities of Spain does not seem to have varied significantly between 1980 and 1993. Indeed, the biggest changes occurred in the Communities of Madrid and Galicia: in Madrid there was a 0.9 per cent rise in its share of overall employment, while Galicia showed a 0.8 per cent fall. In all the other Communities the changes are slight, the most important being an increase of 0.44 per cent in the Canary Islands and a fall of almost the same amount in Castilla y León. But although it is true, as we have seen, that their relative shares do not vary, possible interpretation in absolute terms of employment trends in each Autonomous Community varies considerably.8 Thus, the data show that there are Autonomous Communities where employment grew between 1990 and 1996, and in some cases at an important accumulated rate. Those Communities are the Balearic and Canary Islands, Madrid and Navarra. On the other hand, in some Autonomous Communities the destruction of jobs in the same period was high. This is the case for almost all Communities but especially for Asturias, Cantabria, Castilla-La Mancha, Castilla y Léon, Extremadura, Catalonia, Galicia and the Basque Country. Beginning with the former group, those Autonomous Communities are responsible for creating around 160,000 new jobs during the period 1990–96:82,854 of these new jobs were created in Madrid; almost 46,000 in the Canary Islands; 22,214 in the Balearic Islands; and the rest (almost 10,000) in Navarra. Moreover, their accumulated variation rates are very significant: 10.5 per cent in the Canary Islands; 9 per cent in the Balearic Islands; and around 5 per cent in Madrid and Navarra. The opposing trend occurred in Galicia and Asturias, where employment decreased by more than 11 per cent between the years 1990 and 1996; Cantabria (9 per cent); Castilla y León (7.9 per cent); Castilla-La Mancha (6.4 per cent); and Extremadura (7.4 per cent). The changes in absolute values introduce new Autonomous Communities in the group that destroyed employment during the first years of the 1990s and show the real importance of this destruction process in others. For instance, 114,515 jobs were lost during the period in Galicia; 66,613 in Castilla y León; 40,618 in Asturias; and 43,098 in Catalonia. More than 20,000 jobs were also destroyed in the Basque Country and Extremadura.

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The evolution of the number of people employed in each Autonomous Community over time follows highly heterogeneous patterns, with extremely differing variation rates. However, most of the Autonomous Communities fit in with the generic model described: in the first place a stage of job destruction between 1990 and 1994, with a generalised extremely important reduction in 1993; and a second stage of job creation, between 1995 and 1996, very important in some Communities (Balearic Islands grew 8.4 per cent in 1995) and small in others (Galicia, Asturias, Basque Country). Two Autonomous Communities stand out for their negative results as regards number of people employed over the period and for not following the generic trends described above. These are Asturias and Galicia. In the case of Asturias, employment was created in the period 1995–6, but the rates of growth were so small that they could not compensate the high destruction which occurred at the beginning of the 1990s. In Galicia the evolution was even worse, since this Community could not take advantage of the growth period. In 1995 and 1996 it also lost 1,463 jobs. Some conclusions can be obtained from analysis of the evolution of employment in the Spanish Autonomous Communities. First, only four Communities were able to create jobs during the 1990s. The rest suffered reduction in their employment, very strong in some cases. Second, most of the Communities follow the general model: recession from 1990 to 1994; expansion in 1995 and 1996. Therefore, if the positive trend continues, we could hope that most of the Spanish Autonomous Communities will recuperate the employment lost at the beginning of the decade. Finally, Spain should pay special attention to the Northwest of the country. The Communities located in that part of the peninsula suffered the biggest losses in employment, especially Galicia, during the recession, and did not improve their situation during the expansion period. (See Figures 4.12–4.28.)

The labour market

Figure 4.12 Andalusia, variation in employment (variation rates)

Figure 4.13 Aragón, variation in employment (variation rates)

Figure 4.14 Asturias, variation in employment (variation rates)

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Figure 4.15 Balearic Islands, variation in employment (variation rates)

Figure 4.16 Canary Islands, variation in employment (variation rates)

Figure 4.17 Cantabria, variation in employment (variation rates)

The labour market

Figure 4.18 Castilla-La Mancha, variation in employment (variation rates)

Figure 4.19 Castilla y León, variation in employment (variation rates)

Figure 4.20 Catalonia, variation in employment (variation rates)

55

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The Spanish economy in the 1990s

Figure 4.21 Community of Valencia, variation in employment (variation rates)

Figure 4.22 Extremadura, variation in employment (variation rates)

Figure 4.23 Galicia, variation in employment (variation rates)

The labour market

Figure 4.24 Madrid, variation in employment (variation rates)

Figure 4.25 Murcia, variation in employment (variation rates)

Figure 4.26 Navarra, variation in employment (variation rates)

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The Spanish economy in the 1990s

Figure 4.27 Basque Country, variation in employment (variation rates)

Figure 4.28 La Rioja, variation in employment (variation rates)

4.5 CONCLUSIONS The main conclusions that can be obtained from the analysis of the evolution of Spanish employment from 1990 to 1996 are as follows: 1 The period analysed can be divided into two sub-periods: from 1990 to 1994 the Spanish economy suffered an important recession, with a decrease in employment close to 850.000 jobs; in 1995 and 1996 Spain began a new expansion period, creating more than 600,000 new jobs. Thus, the total period closed with 200,000 fewer jobs than had existed in 1990. 2 Employment destruction during the period affected the male sector. Half a million men lost their jobs between 1990 and 1996. On the contrary, women created net employment and more than 300,000 women found a job during that period. 3 All employment creation was concentrated in the middle age group, from 25 to 54 years. All other age groups lost employment in the seven years of the decade that we have analysed. 4 Employment destruction was also concentrated in the agriculture and industry sectors. Agriculture continued its readjustment period, losing more than 400,000 jobs. Industry was not able to take advantage of the recovery period, decreasing

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its employment by almost 500,000. The Spanish industry situation raises an important problem since its size is small and at the same time it continues to lose its share in overall employment. 5 The only productive sector that created employment during the period was services. This sector was able to increase employment, even during the recession period. In 1996 it had 721,000 more jobs than had existed in the sector in 1990. 6 Only four Communities were able to create jobs during the 1990s: the Balearic and Canary Islands; Madrid; and Navarra. The rest suffered reduction in employment, very severely in some cases. Additionally, Spain should pay special attention to the Northwest of the country. The Communities located in that part of the peninsula suffered the greatest employment losses, particularly Galicia, during the recession. They did not improve their situation during the expansion period. NOTES 1 2 3 4 5 6 7

8

See the last line of Table 4.1 in the Appendix. We only take into account three trimesters of 1996, since that is the most actualised information we could find. Nevertheless, the good results of the Spanish economy have continued. See also the last three lines of Tables 4.1, 4.2 and 4.3 in the Appendix. See Table 4.3 in the Appendix. See the last five lines of Table 4.3 in the Appendix. Figure 4.11 is, of course, the same as Figure 4.1. We have included it in this epigraph since we want to use it to conclude the evolution of the Spanish economic sectors. There are regional Autonomous Communities that are traditionally agricultural (Andalusia, Extremadura, Castilla y León), and there are others that have been linked through their history with a particular industrial sector (mining in Asturias, or steel in the Basque Country). See Table 4.7 in the Appendix.

Table 4.1 Overall employment by sex and age: absolute values

APPENDIX

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Table 4.2 Employment by sex and age: variation rates

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Table 4.3 Employment by sex and age: share

Table 4.6 Branches of activity: share

Table 4.5 Branches of activity: variation rates

Table 4.4 Branches of activity: absolute values

Table 4.7 Autonomous Communities: absolute values

The labour market

Table 4.8 Autonomous Communities: variation rates

Table 4.9 Autonomous Communities: share

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5 Industry

5.1 INTRODUCTION The aim of this chapter is to identify and analyse those features which characterised the process of development and structural change in Spanish industry in the period 1980–95. There are two stages which are worth differentiating in studying the recent evolution of Spanish industry. These are the period prior to 1986, the year Spain joined the European Union (EU), and the subsequent period, the most marked characteristic of which is the opening up of Spanish markets to international competition. Though the analysis focuses on the most recent evolution of Spanish industry, it should be useful to review the performance of industry in the cycle which came immediately before. The period 1977–84 was characterised by profound political and structural changes, which coincided with the phase of recession of the international economic cycle. During these years the process of restructuring and reforming the industrial sector got under way, and this continued until the early 1990s. The delay in the process of active reform brought about by the change in relative energy prices heightened the recessionary effects and delayed Spain from joining the new economic cycle which began in the early 1980s. Perhaps the main effects of that recession were seen in the period 1981–2: total employment fell by 4.3 per cent and industrial employment showed a 10 per cent decline; inflation averaged 14.5 per cent and the public sector deficit went from 3.2 per cent of GDP in 1981 to 5.9 per cent in 1982. To a great extent the scope and severity of the recent cycle were the result of characteristic features in Spanish industry and economy, some of which are still in existence. Thus, mention must be made of the relative specialisation in production, with high labour and natural resource content, the imbalance between basic industry and that producing intermediate goods, and the strong influence exerted by the prices of these intermediate goods on industrial prices.1 This influence is, finally, a reflection of wage growth, since intermediate goods are largely labour intensive. The years 1985 and 1986 saw a change in the trend in the Spanish industrial cycle. The recovery in business expectations and industrial investment that began 66

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in 1985, in advance of Spain’s entry into the EU on 1 January 1986, was the starting point of the new period of vigorous growth in activity and employment, which was to characterise Spanish industry up to the early 1990s. The gross fixed capital formation for the economy as a whole grew by 5.5 per cent in 1985, its most dynamic element being investment in capital goods, which grew by more than 10 per cent. In the period 1986–90, investment showed an annual 9 per cent growth rate, one of the highest in OECD countries. The period 1991–3 was characterised by a recession in the international economic cycle. This had particularly severe effects on Spanish industry, especially in terms of employment, which fell 9.4 per cent in 1993. This evolution was faithfully reflected in the behaviour recorded for the level of use of production capacity, which fell from a high of 80.9 per cent in 1989 to 70.7 per cent in 1993. Finally, the recent years, 1994–5, were a phase for Spanish industry of rapid and strong growth in production, particularly geared towards international markets. Consequently, these two years served to drive the development of Spanish industry in the direction of structural change which it has shown in recent years, and whose raison d’être is to enable Spanish companies and their products to be ever more oriented towards overseas markets, and to achieve greater specialisation in production more in accord with the industry’s longterm competitive advantage. Thus, the weight of more traditional activities has been reduced and that of the sectors with a higher demand has increased, in line with the pattern in the most industrialised economies, since it surely makes no sense for an economy with medium technology and cost levels to specialise in low technology products.2 An analysis of the Spanish industrial sector in the period 1980–95, which is presented in this chapter, is made up of three sections. Section 5.2 examines the evolution of the relative weight of industry in the Spanish economy as a whole. An estimate is made of the declining importance of the industrial sector compared to the service sector, and how far this can be explained by the evolution of relative prices and relative productivity. Section 5.3 examines the growth process and the cyclical evolution of Spanish industry during these years. The analysis highlights the period beginning when Spain joined the EU in 1986, when the inward development model was replaced by one more typical of an open, non-protectionist economy. The behaviour of the external sector and of foreign investment became strategic factors for explaining Spanish industry’s recovery and growth process from 1986 up to the present. In turn, the evolution of costs and prices is a decisive factor for understanding the problems of structural competitiveness facing the industrial sector. Section 5.4 examines the change shown in the sectoral composition of industry, in terms of production, employment and relative prices. An examination is made of how this structural change affects the sectoral orientation of foreign trade, specifically in terms of exports, by favouring increased specialisation in products with higher technology content. The chapter ends with Section 5.5, which presents the main conclusions.

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Finally, it must be emphasised that the analysis is carried out at all times at the sectoral level, bringing together different industrial activities, from the demand point of view, on the basis of the dynamism of the markets, and from the supply point of view, on the basis of the factors determining their productive efficiency and competitiveness. Based on the traditional OECD classification,3 three technology-based industry groups have been singled out: high technology, medium technology and low technology. The classification largely concurs with that of high, medium and low demand sectors drawn up by the EU Commission. This coincidence is no surprise, since there is a high matching level between the degree of dynamism in the market and the need for technological effort. The latter is higher when there is more likelihood of creating new products, and the newness of the product is indicative of greater prospects of market expansion. Moreover, bearing in mind the many and diverse supply-side factors that determine competitive advantages, a grouping has been used which was also an OECD initiative.4 In this classification, five groups of activities are distinguished according to the main factors affecting competitiveness: labour intensive, scale intensive, resource intensive, specialised suppliers and science-based sectors. 5.2 INDUSTRY AND SERVICES During the last decade, growing concern has been seen regarding the importance and scope of the de-industrialisation process taking place in the Spanish economy. These concerns are generally based on the diminishing importance of the industrial sector within the economy as a whole, both in terms of employment and share in gross domestic product (GDP). It should be noted, however, that the debate is not taking place in terms of the rising or falling trend shown by the absolute level of industrial production. In fact, the favourable cyclical evolution of industrial production in recent years enabled it in 1995 to regain the level achieved in the 1985–90 growth stage, and even to exceed this level by some margin (Figure 5.1). Undoubtedly, the relative share of the industrial sector in GDP and employment terms has shown a marked decline which clearly reflects the expansion of services (Table 5.1). The analysis of the sectoral make-up of GDP at current prices shows

Figure 5.1 Evolution of industrial production in Spain and EU, 1980–95 Source: INE (National Statistical Institute), OECD, Main Economic Indicators

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Table 5.1 Sectoral breakdown of gross domestic product, 1980–95 (percentage shares of total)

1 Up to 1986, homogeneous tax line. Source: INE (National Statistical Institute)

that between 1980 and 1995 the industrial sector changed from accounting for 29.9 per cent of GDP to 24.0 per cent. The share of services in the Spanish economy increased by 7.8 percentage points in the period analysed, and in 1995 stood at 58.8 per cent. This tertiarisation process is a phenomenon found in most developed economies, such as the USA, Germany, France or the UK.5 It is known to have different causes, among which is the growth of industry-linked services and growing standardisation of services: industrial quality firms carrying out engineering activities are considered for statistical purposes as service companies. Likewise, large firms increasingly tend to break up this type of activity, thus increasing the service weighting. Moreover, even if these relative share indicators are regarded as significant, there is a technical problem which highlights a clear flaw in the analysis. Normally, the above-mentioned comparison is made on the basis of the industry’s sectoral GDP and total GDP at current prices. In Spain, bearing in mind that in recent years prices of services have risen at a markedly higher rate than industrial prices, the use of these indicators means overvaluing the de-industrialisation process. In fact, if the analysis is made at constant prices, the findings are noticeably different. From 1980 onwards,6 the industrial sector share fell by 2.2 percentage

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points, standing at 28 per cent in 1995. The increasing weight of the service sector in the same period is only 3.3 percentage points. Compared to 1985, the statistic is even more positive: the industrial sector’s loss of share in percentage terms is restricted to 0.7 points. A noteworthy statistic is that this increase, basically, can be put down to the growth in non-sales services which, in Spain, registered significant development in the period under analysis, as a result of further developments in the construction of the welfare state and the creation of self-governing regions. One of the determining factors in the evolution of the different sectors’ share of GDP at constant prices is the switch in resource allocation within the economy. In particular, it can be seen that the percentage of those working in service activities increased by 15.8 percentage points between 1980 and 1995, reaching 60.8 per cent. Offsetting this, there was a significant fall in the percentage of those working in industry, building and, basically, agriculture and fishing. Thus, the industrial sector changed from employing 27 per cent of the total workforce in 1980 to 20.6 per cent in 1995 (Table 5.2). However, the evolution of apparent labour productivity has to a great extent offset the fall in the percentage of labour resources devoted to industrial activities. In Table 5.3 the evolution of productivity in the industrial and service sectors is shown compared to that for the economy as a whole. It can be seen that, from a very similar starting point in the early 1980s, productivity growth in the industrial sector has been significantly higher than that in the economy as a whole and, especially, in services. Thus, between 1980 and 1995, labour productivity in the industrial sector rose at a cumulative yearly rate of 3.9 per cent, while in services the rate was 0.7 per cent. The growth of relative labour productivity in industry can be attributed, on the one hand, to improved efficiency in production alongside the restructuring process which took place in the sector, plus the strong growth in investment in industry and improvements in organisation. On the other hand, there was a fresh gearing of industrial activity towards less labour-intensive sectors of production. In making an analysis of the production structure of the Spanish economy at constant prices, no significant variations are noted between the years 1980 and 1995. This implies that, in those years, the relative availability of agricultural, industrial and construction goods or services remained stable, and the tertiarisation of the economy noted when the analysis was made at current prices, was brought Table 5.2 Sectoral breakdown of employed population, 1980–95 (percentage shares of total)

Source: INE (National Statistical Institute)

Source: INE (National Statistical Institute) and prepared by authors

Table 5.3 Productivity and relative prices, 1980–95 (indices GDP=100)

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The Spanish economy in the 1990s

Table 5.4 The industrial cycle, main magnitudes, 1981–95 (variation rates on previous year)

Source: INE (National Statistical Institute) and prepared by authors

about, to a large extent, by the evolution of relative prices. There are several factors to explain why the rise in the prices of services has been higher than in the industrial sector. First, there is the evolution of relative productivity. If wage increases in the different sectors do not show a significant divergence, the relatively lower increase of labour productivity in services is reflected in an above-average increase in unit labour costs. This differential increase exerts upward pressure on relative prices. Second, it has to be borne in mind that usually the service sectors are relatively cushioned from outside competition by the very characteristics of their output, and this makes it easier to transfer increases in costs to final prices. In Table 5.3 we see the evolution of relative prices in the industrial and service sectors, calculated by the ratio between the deflator of the gross value added of each of the sectors and the total GDP. It can be seen that, prior to 1986, price evolution in these sectors had not been markedly different to that registered in the whole of the economy. After Spain joined the EU, the growing level of opening up by the economy and the price discipline imposed by international markets in sectors open to foreign competition have led to a progressive fall in relative industrial prices. In contrast, relative prices of services, less exposed to outside competition and, in some cases, with not very competitive domestic markets, have followed a rising trend. It is this evolution which, to a great extent, explains the tertiarisation process of the Spanish economy. The dual nature of the behaviour of industrial and service prices has important repercussions in economic activity. First of all, greater facility in transferring costs to prices in the service sector favours better performance of profit margins with regard to those achieved in industrial activity. This improvement in relative profitability conditions investment decisions which, in this manner, can reinforce

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the trend to tertiarisation in the economy. Second, it must be borne in mind that industry is to an ever-increasing extent a demander of services. Spanish industry became the main demander of business services in the 1980s. Demand by industrial sectors in 1980 accounted for 29 per cent of the output of these services, while in 1989 this percentage reached 40 per cent. This evolution responds, largely, to the externalisation of service activities traditionally carried out within the industrial firms, which has been encouraged by standardisation of some of these activities and by reduction in information and transaction costs. The growing weight of services in the make-up of intermediate industrial consumption is reflected in a similarly growing impact of price increases registered in this sector on industrial costs and competitiveness. In 1989, the impact of the price of services on industrial prices was 16 per cent.7 Finally, consideration must be given to the need for adding to this direct impact on industrial costs that stem from higher wage demands as a result of the effect of prices of services on the growth rate of consumer prices. To sum up, as a result of the analysis it can be stated that industry’s share of GDP, as assessed at constant prices, has fallen in Spain by 2.2 and 0.7 percentage points compared to the figures for 1980 and 1985, respectively. These figures are similar and to some extent lower than results obtained by countries such as the UK, Germany, Italy or France.8 Nevertheless, the tertiarisation process of economic activity and industrial activity, which is becoming more important as a demander of business services, has important repercussions on competitiveness and possibilities for development in the industrial sector. 5.3 GROWTH AND CYCLICAL EVOLUTION OF THE INDUSTRIAL SECTOR From 1980 onwards, Spanish economy and industry have lived through a period of strong growth and profound transformation. Among the factors which have contributed to this evolution it is necessary to highlight the growing openness of the Spanish economy and the dynamic role of foreign investment. The growing involvement of Spanish firms in international markets has given rise to a notable recovery in the foreign trade figures and, particularly, those for exports, while reinforcing the bases for the process of growth and development in Spain. The strong influx of foreign investment in the period has, likewise, made a contribution both to the technological modernisation and development of Spanish industry and to reorienting the sector’s production structure, by favouring its location in growth areas. 5.3.1 The industrial cycle Spain’s entry into the EU in 1986 was a decisive event in the recent history of economic growth in Spain. The second half of the 1980s saw more advances in the opening up process and liberalisation of trade and the consequent introduction of greater competition into the market, together with an important inflow of foreign

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The Spanish economy in the 1990s

Figure 5.2 Indicator of industrial climate and variation rate of the index of industrial production in Spain, 1976–95 Source: INE (National Statistical Institute), Ministry of Industry and Energy and prepared by authors

investment attracted by the ever-increasing integration of Spanish markets with those of the EU. These factors brought about a period of high economic growth which made it possible to bring Spanish per capita income closer to the EU average. This period of high economic growth and convergence with EU countries is also a phase of strong expansion in industrial activity, sustained by the opening up of markets, growth of domestic demand and, particularly, the extraordinary dynamism of investment, backed by the marked improvement of company expectations accompanying the process of integration with the EU (Figures 5.2 and 5.3). The increase registered in these years for industrial production enabled employment in this sector to make a notable recovery. Subsequently, from the second half of 1990 onwards, a new recession in industrial activity began, reaching its nadir in 1993. In this year, sector employment dropped by as much as 9.4 per cent. The causes of this change in the trend were initially domestic ones: a slowdown in productivity which, along with a speeding up of wage increases, gave rise to an increase in unit labour costs (ULC) and, as a result, produced a slimming of profit margins which impaired the continuance of firms’ investment plans. In addition to these domestic factors there was the weak phase in worldwide economic growth. From 1994 onwards and initially export led, Spanish

Figure 5.3 Industrial gross value added and gross fixed capital formation, 1980–95 Source: INE (National Statistical Institute)

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industry entered a vigorous growth phase which continued, though at a more moderate rate, in 1995.9 In the period of industrial activity growth in the second half of the 1980s, the role played by investment was a double one. On the demand side, it was one of the factors which most contributed to sustaining growth in production. On the supply side, important investments in industry contributed to the renovation and adaptation of the industrial sector; it also contributed to the acceleration of structural change which will subsequently be analysed in more detail, and, most particularly, to improving industry’s competitiveness. The high volume of investments made by Spanish industry in the 1980s is one of the factors explaining the important increase in labour productivity which has characterised the recent evolution of Spanish industry. This increase in productivity has been reflected in a moderate amount of industrial job creation even in the most expansionary phases and it has also been favoured by the change in the sectoral structure of industry which will subsequently be analysed. The evolution of employment in Spanish industry has been similar to that followed by production indicators, though normally with a lag of about two quarters. Thus, from 1986 onwards, employment in Spanish industry showed a growth phase which continued till 1990, when Spanish industrial gross value added was already showing clear signs of a slowdown. After the severe restructuring carried out in the early 1990s, the number of those working in industry increased slightly in 1995, while industrial production is in a clearly expansive phase (Figure 5.4). The recession of the early 1990s was heightened in the case of Spain by growth in nominal ULCs, which gave rise to a sharp deterioration in firms’ profit margins. The growth of nominal ULCs took place, initially, as a result of the slowdown in the growth rate of productivity after 1988 (Figure 5.5). The growth rate in apparent labour productivity in industry became negative in 1990, though subsequently it began to grow again, driven by the important adjustment in employment levels which occurred in the recession years of 1992 and 1993. The slowdown in productivity growth in those years coincided with an important rise in wage settlements from 1989 which contributed to the increase in nominal ULCs. At the

Figure 5.4 Industrial gross value added and industrial employment, deviations from the trend, 1977–95 Source: INE (National Statistical Institute), prepared by authors

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Figure 5.5 Evolution of labour productivity and salaries in industry, 1981–95 Source: INE (National Statistical Institute)

same time, monetary policy designed to contain inflation favoured an appreciation of the Spanish currency against that of other European countries, which limited the possibilities of transferring cost pressures to prices. As a consequence, profit margins in Spanish industrial firms were cut, which also favoured the reallocation of investment towards sectors not facing foreign competition. The adjustment in the level of industrial employment after 1991, which gave rise to a significant productivity increase, wage moderation, which began to appear in 1992, and devaluations of the peseta enabled the drop in profit margins mentioned above. The size of the industrial crisis, which in 1993 caused the gross value added of the sector to fall by 3.3 per cent in real terms and the number of those working to fall by 9.4 per cent, gave rise to a qualitative change in the behaviour of social agents. Thus, a marked moderation in wage demands was seen, along with an important rise in productivity, which helped to reduce nominal ULCs. The rise in wages at the beginning of the recovery stage was even more modest and ULCs continued to fall in 1994. At the same time, successive devaluations of the peseta since 1992 led to an increase in competitiveness for Spanish industrial products, which enabled prices to be increased at the beginning of the expansionary phase. This evolution made it possible for profit margins to be regained and a recovery to take place in industrial investment, which is now the driving force for expansion of activity in the sector. One of the characteristic features of the historical evolution of Spanish industry is that the expansionary stages have been particularly sustained by the expansion of the domestic market giving rise to large increases in imports and the trade deficit, which finally acted as a constraint on growth. By comparison, in recessions, industrial firms that were finding it difficult to obtain outlets for their products in the home market intensified their search for new markets. The slowdown in imports and the relative maintenance of export activity reduced the deficit and cushioned the fall in industrial production. Thus, the highly dynamic home demand in the second half of

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the 1980s, and an overseas sector excessively penalised by an overvalued exchange rate as a result of monetary policy geared primarily to controlling inflation, explain the sharp rise in the industrial trade deficit in this period. However, in the last recessionary phase of the early 1990s the external sector helped to sustain industrial production. When the recovery began in 1994, the contribution of the external sector to growth in industrial production once more became negative. An outstanding feature in this latter expansionary phase is that initially it was driven by strong dynamism in exports and, consequently, the industrial sector trade deficit, unlike the case in previous expansionary phases, remained moderate and did not on this occasion act as a brake on the growth process. Subsequently, when growth slowed throughout 1995, the overseas sector’s negative contribution to growth in production also slowly declined. The gain in competitiveness, stemming from the 1992–5 devaluations and the weakness of private consumption, helps to explain the good performance of the overseas industrial sector in the final recovery phase of the cycle (Figure 5.6). 5.3.2 Spanish industry in international markets There is a close link between the cyclical evolution of Spanish industry and the evolution of its competitiveness in international markets. Competitiveness, understood as an economy’s capacity to maintain or increase its market share, is a concept that is difficult to measure. Normally, for the analysis of the competitive situation of an economy at any particular time, indices are used which express the evolution of costs and prices in that economy compared to those of its main competitors. Nevertheless, the usefulness of these indices is rather limited. The most important limitation is that costs and prices are not the only mechanisms by which firms compete. In fact, the predominance of markets functioning according to the description of imperfect competition models highlights the growing importance of competitive strategies based on product differentiation. This set of strategies constitutes what has been called structural competitiveness and measuring it is more difficult than simply following relative prices and costs. Consequently, to analyse the evolution of a country’s or sector’s competitive position, the most

Figure 5.6 Contribution of apparent consumption and foreign sector to the growth of industrial production, 1992–5 Source: INE (National Statistical Institute), Ministry of Economy and the Treasury, prepared by authors

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complete or immediate way is to note the indicators regarding the trade results of that country or sector. With regard to these indicators, the first noteworthy statistic is that Spanish industrial exports have increased their share of EU exports as from the time of entry (Figure 5.7). The share of Spanish exports in the EU total can be regarded as an indicator of the revealed competitiveness of Spanish industrial products compared to those of the EU in the world market as a whole. For the whole of non-energy industry, this share increased from 3.5 per cent in 1986 to 4.8 per cent in 1994. A further breakdown of the figures shows that the greatest gains in market share occurred in the capital goods and processing industries. The rise of this indicator in basic product industries has been more modest and has fallen in mining. The increase of market share in EU exports achieved by capital goods has been particularly significant. In 1986 the capital goods sector had the lowest share of the different sectors analysed. In 1994 it had achieved the highest share. This evolution emphasises the changes that have taken place in the competitive advantages of Spanish industries, since and largely because of Spain’s entry into the EU. A more thorough analysis of the evolution of the competitiveness of Spanish economy and industry requires the study of the evolution of Spanish exports, not just in the EU area but in the world market. This type of analysis may be carried out by grouping together sectors which produce final consumption goods, specialised inputs, specialised production machinery and associated services in broad clusters. This type of grouping is based on the idea that demand conditions, together with close vertical and horizontal relationships among industries, play an important role in stimulating competitive advantages.10 Figure 5.8 shows the evolution of export share of the Spanish clusters in the world market in the years 1978, 1985 and 1990. The existing empirical evidence suggests that countries rich in natural resources initially sustain their growth process on the clusters included in the group of upstream industries, except for semiconductors and computers. Countries poor in these types of resources are sustained initially by final consumption goods and services, generally labourintensive ones. Finally, in the most developed economies, their presence in

Figure 5.7 Share of Spanish exports in EU exports, 1986–94 Source: WEFA

Source: UN SITS statistics (Revision 2); Monitor Company analysis

Figure 5.8 Share of world exports by broad cluster

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international markets normally centres on clusters of industrial and supporting functions. Of the sectoral clusters into which industry as a whole is generally broken down, six of them accounted for 82 per cent of total exports in 1990: transportation; materials and metals; petroleum and chemicals; housing and household; textiles and apparel; food and beverages. Of these six clusters, transportation alone (including motor vehicles, shipbuilding, aerospace equipment, railways, and other means of transport) belongs to the group of industrial and supporting functions, the development of which is considered characteristic of advanced economies. The evolution of export shares shows an important increase in the Spanish presence in world markets, particularly significant in the clusters of industrial and supporting functions. Between 1978 and 1990, except for clusters linked to the textile, clothing and office equipment industries, export shares increased or at least remained stable in all the clusters analysed. However, the evolution of each of them reflects the changes which took place in the competitive advantages shown by Spanish industry during the period of analysis. Of particular note is the increase registered in the world share of Spanish exports included in the transport cluster. In 1978 they accounted for 1.3 per cent of world exports; in 1990 this percentage had risen to 2.9 per cent. This is the most important exporting cluster of Spanish industry and accounted for 30.7 per cent of total manufacturing exports in the year 1994. The evolution of export shares in comparison to the EU, the presence of Spanish competitive clusters in international markets and indicators of competitiveness in prices and costs, which will be analysed later, imply that the relative competitive position of the different manufacturing sectors has shown important changes. A simple indicator of the competitive position of a sector also based on trade results is the index of revealed comparative advantage (RCA), defined as the ratio between the sector’s trade balance and total exports and imports. Given that the industrial foreign trade balance moves up and down with each phase of the cycle, it is obvious that this indicator is not suitable for comparing the competitive position of the different industrial sectors of an economy at different moments of the cycle. To reduce the effects of the cycle on the evolution of the indicator it is possible to construct an index of relative revealed comparative advantage (RRCA) in relation to the manufacturing sector as a whole. This index is the result of subtracting from the RCA of each sector the RCA corresponding to the whole of manufacturing industry (Table 5.5). The evolution of the RRCA in the 1980–94 period highlights, in fact, that there have been modifications in the relative competitive position of the different manufacturing sectors. The very growth of relative ULCs vis-à-vis the EU and the parallel growth in the importance of Spanish exports compared to those of the EU imply a deterioration in the relative position of the most labour-intensive sectors, which must have been offset by an improvement in the sectors with higher technology content. The evolution of the RRCAs confirms this intuition. In fact, between 1980 and 1994 there was a marked fall in the comparative disadvantage shown by the most technology-intensive sectors compared to the whole of

Source: Ministry of Industry and Energy, Informe anual

Table 5.5 Revealed comparative advantages of Spanish manufactures, 1980–94 (indices)

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manufacturing industry. In some of these sectors, such as aerospace equipment, the indicator now registers positive values. In the same period of analysis the RRCA of the medium technology sectors changed from negative to positive values and the comparative advantage held by the sectors with lower technology content, in comparison with the average for manufacturing, showed a noticeable fall. If the analysis is made by looking at the competitive orientation of the industrial sectors, the most important facts to stress are the decline in the RRCA of the most labour-intensive sectors and the steady reduction of the relative disadvantage held by the manufacturing sectors included in the groups of specialised suppliers and science-based sectors. The changes indicated in the previous paragraph took place, basically, in the period between 1985 and 1994. Spanish entry into the EU and the opening up of the Spanish economy have, therefore, given rise to a change in the relative competitive position of the Spanish manufacturing sectors.11 5.3.3 Problems with price and cost competitiveness Explaining the evolution of foreign industrial trade inevitably means examining the behaviour of price and cost competitiveness for the manufacturing sector. If we take the EU as the area of reference, the outstanding feature is the continuing loss of Spanish industry’s competitiveness in price and cost terms. This loss reached such a level that, finally, it could only be regained through recourse to devaluation. This occurred with the devaluations in 1982 and 1983 and the most recent ones in the period 1992–5. These devaluations enabled Spanish industry to recover, by means of modifying the exchange rate, from the deteriorating position in costs and prices that had built up over a number of years. Subsequently a detailed analysis will be made of the respective evolution of the ULCs, industrial prices and the exchange rate. Relative ULCs vis-à-vis the EU, measured in national currency, followed a growth trend from the beginning of the 1980s until 1992 (Figure 5.9). From that year

Figure 5.9 Cost competitiveness compared to the EU, 1985–95 Source: Ministry of Economy and the Treasury, Ministry of Industry and Energy

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onwards, moderate wage growth and, especially, strong growth in labour productivity in industry, reflecting the important effort made in rationalising production and shedding labour during the last recession phase, have favoured ULC growth rates below those registered in the EU as a whole. Nonetheless, if relative ULC evolution is corrected for the nominal effective exchange rate, the conclusions obtained on the cost competitiveness of Spanish manufactured goods are different. The depreciation of the peseta up to 1987 offset, in broad terms, the growth of relative ULCs. From that year onwards, the peseta tended to appreciate against European currencies and, consequently, the evolution of the nominal effective exchange rate reinforced the loss of competitiveness deriving from the rise in relative costs. From 1992 onwards, successive devaluations of the peseta and the slight improvement in relative ULCs allowed cost competitiveness in Spanish manufactured goods to recover to levels similar to those registered in the mid-1980s. In fact, in 1985, ULCs in Spain’s manufacturing industry, expressed in common currency, were equivalent to 76.4 per cent of those of the EU as a whole. The period 1986–92 saw successive increases, rising to 90.4 per cent in 1992. From 1993 onwards, a new stage began in which ULCs fell sharply, to 74.8 per cent of those of the EU in the third quarter of 1995. The analysis of the behaviour of relative industrial prices vis-à-vis the EU shows up the difficulties encountered by manufacturing industry, since Spain joined the EU, in transferring cost increases to prices (Figure 5.10). From 1986 until 1992, the evolution of Spanish manufacturing prices was in line with those of EU competitors. Given that in this period ULCs were growing, it can be concluded that the margins of Spanish manufacturing firms were narrowing compared to those of their EU competitors.12 This fall in relative profitability created more and more difficulties for industrial firms to finance the improvement of other factors of competitiveness, such as modernising production equipment or investing in human capital. The fall in company profit margins for the period 1986–92 is estimated at 21 per cent. In the following three years, 19.3 percentage points were recovered in

Figure 5.10 Price competitiveness compared to the EU, 1985–95 Source: Bank of Spain, Ministry of Economy and the Treasury

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profit margins thanks to a slight improvement in ULCs (3.1 points) and the increase in industrial prices (16.2 points) made possible by devaluations. Finally, in the analysis of the price and cost competitiveness of Spanish manufacturing industry there is clear evidence of the dominant role of the nominal effective exchange rate. The tight monetary policy enforced in the period of economic expansion favoured an appreciation of the peseta which, along with the increase in relative ULCs, gave rise until the beginning of the 1990s to a loss of price competitiveness in Spanish manufactured goods. The following devaluations in the period 1992–5 allowed some recovery in the margin of competitiveness that had been lost. After 1993, an increase has been noted in the prices of Spanish manufactured goods above those of the EU. This result, although eroding to a certain extent the margin of competitiveness gained through the devaluations, has favoured a recovery of relative profit margins and thus created a healthier financial situation for firms, which have managed to build up disposable surpluses to finance their needed investment plans. 5.3.4 The role of foreign capital in the industrial sector The external sector has played an important role in the process of changing the competitive advantages and sectoral structure of Spanish manufacturing. The increase in the degree of opening up by the Spanish economy, resulting from integration within the EU market and its increasing links with the economy of the rest of the world, has favoured the transition process towards less labour-intensive industries with higher technology content. Nevertheless, the influence of the foreign sector on the process of structural change has not been exerted just through the opening up of markets. Direct foreign investment, encouraged in turn by Spain’s integration in international markets, has been a key factor in the structural change in manufacturing. Direct foreign investment is a very important variable for economic analysis since, in a world of intensive globalisation and internationalisation of economic relationships, it highlights a region’s appeal in terms of market scope or lower costs as sought by foreign capital. Moreover, it is considered to have a very important role as a complement to a region’s internal saving and as a vehicle for transmitting new forms of organisation and technological innovations. As a direct consequence of Spain joining the EU, in recent years there has been noticeable growth in the presence of foreign capital in Spanish industry and economy. In Figure 5.11 the evolution of direct investment flows is shown for the period 1986–94. The first noteworthy statistic is the strong growth trend of investment flows and especially those going to the industrial sector. The increase in direct foreign investment in Spanish industry continued even in 1992 and 1993 when, as a result of the recession in the main industrialised economies and particularly in Spain, there was a fall in the level of direct foreign investment in the whole of the economy. In 1994, direct foreign investment projects in Spanish industry reached more than Pta1,500 million, which represents 65.9 per cent of all direct foreign investment

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Figure 5.11 Direct foreign investment in Spanish industry and economy, 1986–94 Source: Ministry of Economy and the Treasury, Ministry of Industry and Energy, Informe anual

received in the Spanish economy. Direct foreign investment reached 12.7 per cent of the gross value added generated by the manufacturing sector in 1994, compared to the 4.3 per cent it represented in 1988. The increase in direct foreign investment has been translated into the incorporation of intangible assets into Spanish industrial firms (improvements in technology, management and know-how and presence in international markets) which have backed improvements in the competitive position and development of some industrial sectors. Analysis of the data for recent years confirms the role being played by direct foreign investment in structural change (Table 5.6). If we adopt as an indicator of its importance the percentage represented by this variable in the gross value added generated by each industrial sector, during the period 1988–94, direct foreign investment can be seen essentially to have favoured medium and high technology intensive sectors, such as computing and office equipment, the chemical industry, vehicle sector, electric and electronic engineering, and rubber and plastics.13 Other sectors with lower technology content, which nonetheless have been significantly attractive for foreign investment, are non-metallic mineral products, paper, printing and publishing, and food, drink and tobacco. In contrast, the sectors where the direct foreign investment ratio to gross value added registered the lowest values in the period of analysis are characterised by low technology content and by being, predominantly, labour intensive. Such is the case of textiles, leather goods, footwear and other clothing, and the metallic products industries. To sum up, the attention of foreign investors in recent years has focused on sectors with medium or high technology content,14 as well as on taking advantage of economies of scale enabling them to gain access to the extended European market and other competitive factors in which Spanish industry appears to have certain advantages. Among other factors, mention must be made, on the basis of the data analysed, of the scientific environment and factors linked to product differentiation. Particularly important are sectors classified within the group of specialised suppliers and, to a lesser extent, the exploitation of natural resources. In this latter case, the high volume of resources invested in sectors such as non-metallic mineral products may be a reflection of less strict environmental legislation than in other countries that might be fomenting the growth of the relative importance of this sector in Spanish manufacturing, the medium-term cost of which is difficult to assess. In contrast, the most labour-intensive sectors in which Spanish industry specialises

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Table 5.6 Direct foreign investment, 1988–94 (percentage of sectoral gross value added)

Source: Ministry of Industry and Energy, Informe anual

compared to European countries are those showing least appeal for the foreign investor according to the indicator analysed. This evolution could, therefore, reflect a change in the type of attractions offered by the Spanish industrial sector, characterised by the declining importance of the traditional advantage of labour costs in favour of other factors such as economies of scale, technology content or factors linked to product differentiation. Furthermore, the process of internationalisation of markets and globalisation of the economy means that Spanish firms have an ever-greater presence in other

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countries. This process demands an increase in investments which industrial firms make abroad and may be linked to strategies of marketing, guaranteeing supplies or seeking competitive advantages for locating production. The effort made by Spanish manufacturing in this respect can be regarded as a limited one. Direct investment abroad by Spanish manufacturing industry accounted for, in the period 1988–94, only 11.4 per cent of the direct investment received and 1.2 per cent of the gross value added generated in the sector. In accordance with this latter indicator, the sectors that made the highest investment effort were electrical engineering, paper, printing and publishing, and non-metallic mineral products. 5.4 STRUCTURAL CHANGE IN SPANISH INDUSTRY The changes that took place in the Spanish economy in the period 1980–94 (reform and restructuring of the industrial sector after the impact of the oil shocks; opening up of the Spanish economy in the context of integration in the EU and the globalisation of markets; an increasing degree of liberalisation and competition in the home market) have led to a profound transformation of the sectoral structure of Spanish manufacturing industry. Specifically, and in accordance with the sectoral classification based on technology content, there has been a progressive increase in the relative weight of medium and high technology intensive sectors to the detriment of sectors with less technology content. Likewise, if we examine structural change according to the classification by competitive advantages, one can see an increase in the relative weight of the sectors with greater economies of scale and of science-based ones, and this is offset, fundamentally, by a reduction in the importance of labour-intensive sectors. Although part of these transformations is the consequence of changes registered in worldwide demand for industrial products and is common to most industrialised countries, there are factors which have accentuated the process of structural change in the case of Spanish manufacturing. To a great extent the changes in manufacturing sectoral structure were a response to changes in the competitive advantages shown by the Spanish economy. The sharp increase in the level of research and development (R&D) in the economy, particularly from 1986 onwards, and the improvement in the training of human resources (even though in both cases there is still a long way to go to reach something close to the average levels of developed countries) help to explain the increasing relative importance of the sectors with the greatest technology content. The opening up of Spanish markets, as a result of EU entry and the subsequent process of building the Single European Market, has fostered the development of those sectors which have the highest economies of scale, by facilitating access for their products to a market which is markedly wider than their previous one. Finally, the steady reduction of the advantage that, in terms of labour costs, was a characteristic of Spanish industry compared to the industries in other countries in our economic area, and the growing cost competition from new competitors (newly industrialised countries from Southern Asia, Eastern European economies in transition), with undoubted

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advantages in terms of labour costs, are some of the factors to explain the decline in relative weight of the most labour-intensive sectors within Spanish manufacturing industry. The analysis of the structural change in Spanish manufacturing industry in the period 1980–94 highlights a series of characteristic features. First, the structural change registered by production indicators and gross value added is more pronounced than that shown in the employment structure. Second, the change in the sectoral make-up of gross value added and production is more marked when the analysis is made at constant prices than when made at current prices. Finally, the change in the sectoral structure of Spanish manufacturing exports is much more striking than the changes registered in the production and employment structure. 5.4.1 Structural change in production and employment If we consider the sectoral make-up of manufacturing gross value added, assessed at constant prices,15 a steady growth can be observed in the relative importance of the most technology intensive sectors, which went from accounting for 9.5 per cent of manufacturing gross value added in 1980 to 12 per cent in 1994 (Table 5.7). The gross value added share of the group of medium technology intensive sectors evolved from 26.5 per cent in 1980 to 30.9 per cent in 1994. As a counterpart, the percentage accounted for by sectors with the lowest technology content fell from 64.0 per cent to 57.1 per cent in the same period of analysis. The increasing importance of industries with greater technology content has been fundamentally based on the development of the pharmaceutical and electronic engineering sectors. Among medium technology sectors there is a noteworthy increase in the relative importance of the basic chemical and consumption industry and, particularly, the vehicle sector, which in 1994 registered a 10.4 per cent share of the whole of manufacturing gross value added. The fall in the share of manufacturing gross value added of the sectors with least technology content has been a fairly generalised one, with a particular fall in relative importance being registered in sectors such as textiles, siderurgy and preliminary processing of iron and steel, footwear, dresses and other clothing, and shipbuilding. The only low technology intensive sectors whose share of manufacturing gross value added increased in the period 1980–94 were food, drink and tobacco, and paper, printing and publishing. In both cases, they are sectors which in recent years have been highly favoured by the provision of foreign capital. As has been indicated above, the changes registered in the sectoral distribution of industrial employment have been less intense than those shown in the makeup of gross value added. It is quite true that during the period 1980–85, and as a consequence of industrial restructuring plans, the percentage of those working in the sectors with least technology content, which largely coincide with the most labour-intensive ones, showed a sharp fall. But after 1985 and until the period of recession which occurred in the early 1990s, the sectoral structure of manufacturing employment remained relatively stable (Table 5.8).

Source: Ministry of Industry and Energy, Informe anual

Table 5.7 Sectoral structure of gross value added in Spanish manufacturing industry, 1980–94 (percentage share of total)

Source: Ministry of Industry and Energy, Informe anual

Table 5.8 Sectoral structure of employment and growth of productivity, 1980–94 (percentage shares of total and average annual cumulative growth rate)

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The conclusion that can be drawn from the analysis of these findings is that the change observed in the production structure has been based fundamentally on the higher productivity gains registered in the most dynamic sectors, as a result of their greater investment effort and capacity for incorporating new technologies. Thus, in the periods 1980–85 and 1985–90, productivity rose at a higher rate in high technology sectors and at a lower rate in sectors with less technology content. According to the sectoral classification based on the competitive advantages of sectors, it can be seen that the greatest rises in productivity occurred in the science-based sectors and, in the period 1985–90 (when Spain joined the EU), in sectors in which there were large economies of scale and in the specialised suppliers sectors. In contrast, productivity growth in the labour-intensive sectors was among the most modest in the manufacturing industry. Nevertheless, in the years 1990–94, a break was to be seen in this development. Growth in productivity in the sectors with less technology content was higher than in high technology sectors. This evolution is the result, basically, of the strong increase in productivity in labour-intensive sectors, where this variable grew at a cumulative average yearly rate of 8.9 per cent, 2.6 percentage points above that recorded in the whole of manufacturing industry. The increase in labour productivity in these sectors reveals the important shedding of labour carried out in 1993 and 1994. 5.4.2 Change in sectoral prices The second of the above-mentioned characteristic features is that the changes are most evident when the analyses are carried out at constant rather than current prices. To express it another way, the evolution of relative prices in manufacturing sectors has partly offset changes in the industrial production structure. In general terms, the determining factors in relative prices are: relative demand pressure; relative unit costs of production; and the degree of competition in the markets, which determines, along with demand conditions, the feasibility of transferring costs to prices. Regarding the first of these factors, it must be pointed out that demand for industrial products, both in Spain and in the principal industrial countries, is more and more geared towards products with high technology content. Demand conditions, therefore, do not appear to contribute to explaining the greater rise in prices in the less technologically advanced sectors. On the contrary, the evolution of relative unit costs may indeed have favoured a greater rise in prices in less technology intensive sectors. An important part of this evolution is explained by the different sectoral behaviour of apparent labour productivity which, as has been indicated, until the early 1990s had registered higher growth in the sectors with greater technology content. As far as the degree of market competition is concerned, the increased opening up to the outside by medium and high technology intensive sectors can be interpreted as an indicator of a higher level of competition compared to low technology intensive sectors, some

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of which have problems of international competitiveness and, consequently, on several occasions have undergone readjustment processes or are protected by means of safeguard clauses. 5.4.3 Change in sectoral structure of exports The third characteristic which has been highlighted is the radical change in the structure of manufacturing exports, basically when the sectors are classified according to their technology content. The share of the most technologyintensive sectors in the whole of manufacturing exports more than doubled in the period of analysis, moving from 7.6 per cent to 15.4 per cent. All the sectors included in this group showed rises in their share rate, though the most noticeable were for electrical and electronic engineering. The contribution of these medium technology sectors to manufacturing exports has also shown a marked rise, due, basically, to the extraordinary increase in the weight of the vehicle sector. In 1994, exports from this sector accounted for 26.8 per cent of total manufacturing exports, compared to 12.9 per cent in 1980. Finally, almost all sectors with low technology content saw reductions in their share of manufacturing exports as a whole. This evolution indicates that exports, and in general the opening up of markets to the outside, have acted as an element of dynamism in the structural change towards more technologically advanced production (Table 5.9). Considering the evolution in the structure of Spanish manufacturing exports in accordance with sectoral competitive advantages, there is a noteworthy rise in the share of the science-based sectors and a loss of relative importance in the most labour-intensive sectors. There has also been a rise in the share of sectors with large economies of scale in exports as a whole. This has been favoured by the increased opening up of the Spanish economy and institutional changes such as joining the EU and further work on building the single market. Nonetheless, the performance of the different sectors making up the group has been very diverse. Increased export share has occurred in the vehicle sector and, less so, in chemical industries. However, export share in other sectors included in the group has fallen. This behaviour has been registered in the sectors with less technology content such as siderurgy and preliminary processing of iron and steel, shipbuilding, and paper, printing and publishing. 5.5 CONCLUSIONS During the period 1980–95, Spanish industry saw rapid growth in its level of openness and integration in international markets and a pronounced change in its production structure. The processes of restructuring and industrial adjustment, which were set in motion at the beginning of the 1980s and reached their peak during the period 1980–84, and Spain’s entry into the EU, were decisive factors in this change of orientation. The main conclusions to be drawn from the analysis carried out in this work are as follows:

1 Defined as (Xi+Mi)/Yi, where Xi, Mi and Yi are, respectively, the exports, imports and production of each sector. Source: Ministry of Industry and Energy, Informe anual

Table 5.9 Sectoral structure of exports and degree of openness, 1980–94 (percentage shares of total and indices of openness)

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1 With Spain’s entry into the EU, Spanish industry’s frame of reference was modified. Its traditional reference, the internal market, was replaced by the international market and, more specifically, by EU countries, making it much more competitive and less protected. From that time, the cyclical behaviour of Spanish industry fell in line with the characteristic of EU industry: the time profile of the cycle’s evolution has been identical and differences have appeared only in terms of breadth and intensity. 2 The cyclical evolution of Spanish industry in these years did not bring about very significant variations in its relative importance within the economy as a whole. In 1995 the relative weight of industry was 28.0 per cent, a very positive statistic in comparison with that of some of the major OECD countries, and 2.2 and 0.7 percentage points below the value shown by the same indicator in 1980 and 1985 respectively. Indeed, the evolution of Spanish industry in real terms from 1986, the date of Spain’s entry, was similar to that of EU industry. During this period, the cumulative annual mean growth rate of Spanish industry was 1.8 per cent, identical to the EU mean. 3 This result can be explained, above all, by rapid growth in labour productivity, whose cumulative annual variation rate during the period was 3.9 per cent. Industrial employment suffered markedly in terms of its share in total employment in the economy, partly as a result of the change in production orientation towards activities that were more technology intensive and more productive in relative terms. A more detailed analysis enables us to identify different sectoral behaviours, with a group of activities showing productivity gains higher than the average (chemical industry; metallic products; electrical and electronic engineering; motor vehicles; aerospace equipment; leather) and another group lower than average (shipbuilding; metallurgy; footwear and clothing; timber, furniture and cork). 4 During these years, the foreign sector played a strategic role in the process of change in the competitive advantages and sectoral structure of Spanish manufacturing industry. On the one hand, the growing openness of the economy to the outside world and its increasing integration in international markets encouraged the process of transition towards higher technology and less labourintensive industries. On the other hand, direct foreign investment, driven in turn by the process of openness and integration, was a decisive factor in determining the new sectoral composition of Spanish industry. These changes were confirmed above all in the period 1985–94, after Spain joined the EU. 5 The Spanish industrial sector has responded satisfactorily to the challenge posed by the rapid opening up of the Spanish economy. The fact that industry has succeeded in maintaining an almost constant share in total GDP during the last ten to fifteen years confirms this. Nevertheless, this chapter has probed other more specific indicators of competitiveness, which corroborate and reinforce this statement. On the one hand, industry’s propensity to export (industrial exports in real terms as a proportion of industrial GDP) showed a spectacular increase, from 12.4 per cent in 1980 to 28 per cent in 1994. On the other hand, examination of the evolution of the share of industrial exports in

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EU and world markets showed markedly positive results. What is more, this improvement in share was particularly important in the sectoral clusters belonging to the group of industrial and supporting functions, among which an especially important place is held by the transportation cluster, which at present accounts for over 30 per cent of Spanish manufacturing industry’s exports. Last, analysis of the indicators of relative revealed comparative advantage indicates a decline in the relative position of the more labourintensive sectors that has been offset by an improvement in the relative position of those sectors with medium and high technology. 6 Exports, and in general the opening up of markets to the outside world, have acted as a driving element in the change towards more technologically advanced production. This result is fully confirmed when examining the change in the sectoral structure of exports. Exports from high-technology sectors grew from 7.6 per cent in 1980 to 15.4 per cent in 1994, while every sector included in this group showed an increase in its share rate. 7 Direct foreign investment has fostered structural change in industry. Inflows of direct foreign investment showed a strong increase in the industrial sector after Spain joined the EU—in 1988 it accounted for 4.3 per cent of gross value added while in 1994 the figure had grown to 12.7 per cent—and were aimed above all at medium and high technology sectors. Moreover, direct foreign investment helped to improve the appeal offered by Spanish industry in terms of economies of scale, technology content and factors linked to product differentiation, thus relegating the traditional appeal resting almost exclusively on advantages in labour costs. 8 This positive evaluation of the better competitive position of Spanish industry should not lead us to forget the dramatic problem faced by this sector: the differential evolution in costs and prices in relation to its main competitor countries. The persistence of this differential is steadily eroding the international competitiveness of Spanish industry. The increase in business service prices is forcing industrial costs upwards. In the same way, the behaviour of salaries, generally rising out of line with productivity—except in the years 1994–5— ends up affecting the evolution of prices or reduces companies’ profit margins. This results in a continuous loss of competitiveness that is not corrected until too late, and then in an unsuitable manner, through the quick, easy channel of devaluing the peseta. To sum up, Spanish industry, in accordance with the available information on the compared evolution of its production with that of the EU and on its gains of export share in international markets, has considerably improved its competitiveness in international markets. Also, there has been a marked change in its sectoral structure, characterised by the growing relative importance of the most innovative and dynamic sectors and a growing similarity between its commercial pattern and that of the EU countries. Thus, the value added generated in medium and high technology sectors rose to 42.9 per cent in 1994, 6.9 percentage points above the equivalent figure for 1980.

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The results shown reinforce the argument that the international competitiveness of industrial production depends to a growing extent on factors other than relative prices and, specifically, on those linked to product differentiation and technological innovation, understood in a broad sense. This assertion opens the way for an industrial policy aimed at fostering those factors of competitiveness within industrial enterprises. Nevertheless, it is necessary to insist that the development of a solid, healthy and competitive industrial sector in an increasingly open, globalised economy also requires the strengthening of factors of competitiveness external to the company. More specifically, it is necessary to achieve a stable macroeconomic framework conducive to industrial development through the definition of strict monetary and fiscal policies, and to undertake structural reforms and encourage competition in sectors less open to the outside world that at present cause an increase in the costs of industry and limit its international competitiveness. Only through this type of reform of the competitive framework will it be possible, in the long term, to correct the differential growth of prices and costs of Spanish manufacturing industry in relation to those of its main competitors. NOTES 1 For an interesting summary of the characteristics of Spanish industrial development from the early 1960s until the beginning of the 1980s, see Segura et al. (Madrid: Alianza, 1989). 2 It must not be forgotten, nonetheless, that the important specialisation processes are those occurring within each branch of activity. 3 See OECD Science and Technology Indicators (Paris: OECD, 1986). Sectors included in each one of the groups are classified in the Statistical Appendix (Table 21). 4 Employed for the first time in Structural Adjustment and Economic Performance (Paris: OECD, 1987). See also Manufacturing Performance: A Scoreboard of Indicators (Paris: OECD, 1994). 5 On this matter, see Lewis (London: Routledge, 1992, Chapter 11) and Kitson and Michie (London: Macmillan, 1996). 6 For a detailed examination of structural change in the Spanish economy before 1980, see Raymond (Madrid: Fundación FIES, 1992). 7 See Notas Informativas (Ministry of Industry and Energy, 1992). 8 For a discussion of the industrial performance in major industrial countries, see Kitson and Michie (London: Macmillan, 1996). 9 For a more detailed annual analysis of industrial evolution since 1985 onwards, see Segura and González Romero (Madrid: Fundación FIES, 1992) and the Informe sobre la Industria Española published every year by the Ministry of Industry and Energy. 10 This kind of classification is developed in detail in Porter (New York: Free Press, 1990) and Porter (Madrid: Ministerio de Industria y Energia, 1992). 11 A detailed analysis of the effects of Spain’s entry into the EU on industry is presented in Collado and González Romero (Bilbao: Banco Bilbao Vizcaya, 1994) and Martín (Madrid: Ministerio de Económia y Hacienda, 1992). 12 See Gordo and L’Hotellerie (Madrid: Fundación FIES, 1993) and Notas Informativas (Ministry of Industry and Energy, 1996). 13 This result coincides with Ahijado, Pegg and Mayes (London: National Institute of Economic and Social Research, 1993). 14 In this sense Myro and Gandoy (Madrid: Civitas, 1994) maintain that ‘development achieved in intermediate and advanced activities has been based to a large extent on the

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penetration of foreign capital, which nowadays controls, in both groups, more than 60% of production’. 15 The statistical series employed are based in a previous work of Sancho and Gradolph (Madrid: Ministerio de Industria y Energia, 1994). See also Myro (Madrid: Ministerio de Industria y Energia, 1993).

6 Privatisation

6.1 INTRODUCTION The programme of privatisation of state industries in Spain effectively started in the mid-1980s.1 At that time the government considered that the policy would transform the inefficient companies of the state sector. The aim was to raise the performance of the companies, in order to enable them to perform better in a competitive business environment. This was the impetus behind the sale of SEAT2 (the car company) and Pegaso (the truck company). Nevertheless, while there were some privatisations during the 1980s, the bulk of activity took place in the 1990s. However, the form and structure of the privatisation in the 1990s has been altered from that of the 1980s. Having followed a policy of disposing state industries mostly to foreign owners, the government transformed this process to favour institutional and retail investors and chose share flotations as an alternative. 6.2 MEETING EMU CONDITIONS As the deadline approached for qualifying for the European Monetary Union (EMU), the process of privatisation was speeded up from the mid-1990s in line with the programme of convergence. This was primarily to meet the budget deficit criteria of the Maastricht Treaty. Up to 1996 the Spanish government did not have a formal policy governing privatisations. Instead, they offered numerous small stakes in several different state companies slowly over the years. The companies were placed with a state-owned holding company called Patrisimo prior to the privatisation of the firm concerned. In all, around twenty subsidiaries of Patrisimo were put into the private sector, and nearly always to large international companies (e.g. SEAT was bought by Volkswagen). In May 1996 the government stated, after much delay, that it had decided to introduce a co-ordinated and well-structured plan to privatise state industries. This replaced the previous government’s methods of gradually disposing of them in small sections. Indeed, EMU added a further impetus to a policy that was being carried out 98

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Table 6.1 Government revenue from major privatisations in Spain, 1992–97

Note: *This year goes up to the first quarter and includes March

relatively slowly. Whereas during the years 1988–90 around Pta230 bn ($2 bn)3 was generated from shares issued to the public. This sum increased fivefold during the subsequent three years. From 1993 to February 1996 around Pta1,300 bn ($10.4 bn) was raised from privatisations of the five companies Argentaria, Endesa, Repsol, Telefonica and Ence alone. (See Tables 6.1 and 6.2.) 6.3 PROGRAMME OF PRIVATISATION In 1994 the government put forward some fourteen proposals in its 1995 budget in order to make Spanish firms more competitive and to reduce government spending. Some of the important measures were: • opening up of the petroleum and telecommunications sectors through the introduction of competition into the domestic market (e.g. Airtel in the mobile phone sector and Retevision in the telephone market); • removal of a large number of regulations hindering efficiency in business performance; • control of public spending and reassessment of financial help distributed to state industries by the government; Table 6.2 Major privatisation issues in Spain, 1990–97

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Figure 6.1 Government revenue from major state privatisations Note: * The year 1997 goes up to the end of the first quarter and includes March

• improvement of the performance of public sector industries and reorganisation of some of these firms; • reorganisation of the system of housing subsidies. In addition, in the 1995 budget certain firms were targeted for complete privatisation by mid-1996 (e.g. Argentaria, a partially privatised bank; Repsol, the oil company; Telefonica, the main telecom operator). Portions of these firms had already been successfully offered to the private sector. (See Figure 6.1.) Some of these reforms were not carried through due to the minority government in control in 1995 and 1996. Among them were: • • • • •

deregulation of the state sector; increasing fiscal discipline; disbursement of financial aid from the state; liberalisation leading to increased competition; reorganisation of state industries.

One policy that the government proposed at the beginning of 1995 and managed to pass through towards the end of the year gave it the power to exert an overriding influence on the business affairs of firms after privatisation. According to the law passed in 1995 the government would retain a golden share in the privatised firms (e.g. Telefonica) which would allow it to oppose any actions taken by the board of the company concerned. In this manner, the government would retain overall management even after privatisation. This power could be enacted by the government, with respect to other privatised state companies, if the firm had a bearing on the well-being of the nation and if the firms’ share structure fulfilled certain conditions. The conditions applied are: • If the government’s stake in the firm falls below 15 per cent or if more than 5 per cent of it was privatised; • if the government owns more than 25 per cent of the shares and more than 5 per cent are sold.

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If all these conditions are satisfied, then the government can pass a law to create a framework, specific to each firm, to control the legislation governing the firm’s business transactions. Ownership of the privatised utilities will also be influenced by the government’s golden share which allows it to block any company that it does not want from taking a stake larger than 10 per cent equity share. In the example of Repsol this power will be retained for a decade. 6.4 STRUCTURE OF SHAREHOLDING A French term meaning ‘hard core’, noyaux durs, applies to a situation where a small group of shareholders is put together to exercise certain powers on a company. This is usually initiated by the state to shield the firms from unwanted takeovers. These shareholders have a disproportionately large stake in a given company and as a result can greatly influence the company’s activities. This type of shareholding structure has been encouraged by the Spanish government. It is seen as a way of keeping sectors of the economy (regarded as vital to national interests) in domestic hands, while the companies undergo the slow privatisation processes. This is achieved by ensuring that all members of the hard core of the shareholders are Spanish. The net effect of noyaux durs is that it acts as a protective measure. As a result, such companies are not forced to compete in a manner similar to ordinary private sector firms. If noyaux durs were removed and the management of privatised industries were not shielded from takeover bids, it would otherwise force an improvement in their performance standards. In Spain, the most glaring example of this is to be found where a new government has the power to change the top personnel of state industries. This power has in fact been exercised. It thus signals to the managers that it is the government and not the performance of the managers within the competitive private sector that determines whether or not they retain their jobs. The government has tried to play down the influence which a core of shareholders can have. Instead, it pointed out in 1996 that the shareholdings are small. At the same time the government stated that its aim is neither to encourage nor to deter a small group of shareholders from having a disproportionate influence. However, despite this official statement of government policy, it is clear that it is actively encouraging the formation of hard cores of shareholders. 6.5 GROUPS OF SHAREHOLDERS Two major rival investment groups have emerged as a result of the creation of a hard core of shareholders within each privatised company: • La Caixa and BBV; • BCH and Banco Santander. Both groups are active in the energy and telecommunications sectors. La Caixa and BBV have shares in Repsol, Telefonica and Iberdrola (the second biggest

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electricity company in Spain). The other finance group, BCH and Banco Santander, has shares in the same sectors but in rival companies. In the telecommunications market they hold a stake in Airtel as well as Retevision. In the energy sector, they have shares in Cepsa (the oil company) and Endesa (the electricity company). Such financial institutions perform a larger and a more active role than dormant shareholders. For example, BBV (Banco Bilbao Vizcaya) has been the initiator of a joint venture between Repsol the oil company and Iberdrola the power generator. The joint venture, worth Pta130 bn, has involved gas generation through to conversion of oil-refining residues in Bilbao. 6.6 SHIFTS IN PRIVATISATION POLICY However, discernible differences from one government to the next began to emerge after March 1996. Two of the most prominent differences are concerned with the management of firms and the speed of privatisation. During 1996–7 the government concluded that in past privatisations their top executives played a role which was too influential in determining the outcome of the privatisation. This is to be altered and executive influence is to be reduced. The government is to be the prime decision-maker, as opposed to the senior management of the firms to be privatised. Nevertheless, the senior executives are still to make the roadshows and presentations. There seems to be a more structured approach to liberalisation (i.e. opening up the state firms and exposing them to competition). This is evidenced by policy reversals in the telecommunications sector. The EU has a programme of ‘full liberalisation’ of its industries by 1998. Prior to 1994, Spain had requested a fiveyear delay until 2003. But in 1994 Spain changed its policy and chose to go the full-speed option of complete deregulation by 1998. This was mainly a political decision aimed at further strengthening Spain’s credentials as a member of the EU by putting the country on a par with France and Germany. A faster timetable for liberalisation would keep Spain alongside these countries and ahead of less important EU members such as Portugal and Greece, which have taken up the year 2003 option. However, the new government wanted initially to use this additional period better to prepare the companies for liberalisation. Some see this as a welcome sign that the government has a clearer notion of the constraints of the Spanish economy. However, pressure from the government’s coalition partners (CiU), other EU governments and the USA has forced it to honour the previous government’s commitment to liberalisation by 1998. This commitment will force rapid changes in the Spanish telecoms sector beyond the 1998 liberalisation date. In order to meet the 1998 deadline, the EU and Spain agreed in the first quarter of 1997 to commence liberalising the Spanish telephone market in July 1997. The results of the first change of policy have already come to fruition during the second half of 1996. Although no clear roles for each side, i.e. management on the one side and government on the other, have been identified, this policy has

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already had some effect. It has resulted in the replacement of many of the executives appointed by the previous government, irrespective of their performance (e.g. all the chief executives of the major state industries were replaced, whether considered to have done a good job or not). At first the government was still wary of putting political appointments to replace the presidents of companies which are not controlled by the state, as their shares are now owned mostly by the private sector. 6.7 REGULATION Until 1997 there was no sound system put forward to oversee the utilities after privatisation. This is most clearly illustrated in the state’s approval for Endesa (which generates electricity). Endesa intends to buy up two other power companies which deliver electricity to its customers. This type of link-up has been deemed not necessarily in the consumers’ interests in other countries such as the UK and has thus been successfully opposed by the government. In 1997 plans for regulating the electricity sector were finally announced by the government. The major features of these regulations are as follows: • Complete dissociation of the processes of making and supplying electricity will occur by the end of the decade. • Large users of electricity will be able to select their electricity supplier from 1998 onwards. At this time overseas companies will have access to the domestic Spanish market to compete for business. • Similar rights to choose their electricity supplier will be extended to lower volume electricity consumers in the year 2000. • Regulation of electricity prices by the government will cease completely in 2008. • Natural fuels required to produce electricity will be supplied competitively as competition will be introduced into this market. One exception to this measure is the coal produced by Hunosa (the national coal mining company). This supply of coal must be used to produce 15 per cent of their total production. • Re-reduction in monetary charges (‘tariffs’) imposed by electricity companies is set to be reduced: by 3 per cent in 1997; 2 per cent in 1998; 1 per cent from then until 2001. It is hoped that this measure will push the electricity sector into becoming less wasteful with its resources and more profitable. Telecommunications is another sector that is constrained by the introduction of regulations. The changes in the telecommunications market are being enforced in line with the relevant directives contained in a 1987 EU Green Paper dealing with deregulatory directives. As a result the Telecommunications Market Commission was formed, which will be responsible for handling competition between firms. This body has replaced the government organisation that used to perform this function. However, the body is not totally independent of government influence as its board members are chosen by the government. The Development Ministry has

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emphasised that the board will remain independent and serve a fixed four-year term. The Commission will oversee the timetable for deregulation of the telecommunications market as follows: • A second mobile operator was licensed to operate a mobile phone service in October 1995. • Retevision entered the market to compete in the basic fixed-link voice telephony market in mid-1997. • Cable operators have begun to offer their services using the Retevision network in a limited capacity with more cable TV operators being licensed in 1997. • The June 1996 decree has set forth a 24-month time period, after cable operators begin to broadcast, when Telefonica will not be allowed to offer any cable services. After this period Telefonica will be allowed to enter the market. After the June 1996 decree, the Telecommunications Market Commission has proposed a much more flexible procedure to decide on the time lag appropriate for Telefonica in each region, using criteria relevant to each region. • Cable operators are also allowed to enter the local fixed-voice telephony market in January 1998. They can only handle calls originating and finishing in their regions • By the end of 30 November 1997, full liberalisation of the market will take place with all foreign operators with a licence being allowed to compete in any market. 6.8 REORGANISATION OF THE STATE HOLDING COMPANIES To achieve the Minister’s aim of greater efficiency, he has continued with the reorganisation of the state holding company started by the previous government. On the grounds of national interest, the National Institute for Industry (INI) was set up in September 1941 with the aim of trying to encourage and provide backing for the invention and reinvigoration of domestic firms. It was established specifically for firms vital to national security or essential in safeguarding the economy’s independence. Its purpose was to provide an environment of safe and high yielding capital returns financed by the nation’s ‘savings’. In the Institute’s statement of purpose, one of its main roles was to ensure that companies were made ready for the private sector. During the 1960s INI was a holding company for over fifty corporations and favoured protectionist policies when barriers against imports were lowered in 1962. INI was not the only holding company to be created. Two other prominent holding companies were Patrimonio del Estado and the National Hydrocarbons Institute (INH). Patrimonio del Estado was the umbrella company for Telefonica, Tabacalera, Aldeasa and Transmediterranea, to name but a few. The National Hydrocarbons Institute (INH) was created in 1981 to act as a body under which the state’s interests in oil and gas could be combined. Six years later it was grouped into two major subdivisions—Repsol and Enagas. Repsol was an

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amalgamation of five previously distinct natural fuel companies while Enagas brought ‘natural’ gas into Spain. For almost half a century, INI, INH and Patrimonio were the sole representatives of the state in corporate life. Patrimonio employed around 133,000 people and had a turnover of $26 bn in 1993. INI employed nearly as many (131,000) but has a lower turnover ($20.6 bn in 1994). As Repsol was being separated from INH, INH employed 20,000 people to make sales of $8.5 bn. With the departure of Repsol from INH in 1987, INH became of little importance. However, the two other holding companies (Patrimonio del Estado and INI) continued to be important in the 1990s, even after suffering restructuring for privatisation. The partial privatisation of many companies which they controlled reduced their role in the economy. Teneo was created in 1992 from INI. The companies in INI that were considered to be best placed for privatisation were all grouped in Teneo. Teneo was to be used to promote the privatisation process. Companies in INI were to be moved under the control of Teneo when they were considered to have a good chance of a successful privatisation (i.e. a good chance that the company would earn money in the years to come). The Teneo group, consisting of 47 companies and valued at $6.5 bn, employed 56 per cent of INI’s workforce and contributed to 80 per cent of INI’s turnover. Despite being the best privatisation candidates, Teneo’s companies were not all profitable, since they are selected more on the basis of potential rather than current performance. However, as an overall entity Teneo is profitable because of the contribution of Endesa. There were many other companies not in the main holding companies, since the likelihood of their privatisation is much lower. These include Retevision, RTVE and RENFE. The previous government introduced laws to change the handling structure of privatisation. The laws enacted in June 1995 effectively replaced the old structure of INI and INH on 31 July 1995. These laws were subsequently adjusted by the government in 1996. As of 31 July 1995 the structure consisted of three companies: AIE (State Industrial Agency), SEPI (State Company for Industrial Holdings) and SEPP (State Company for Patrimonio Privatisation). All AIE companies are governed by the Ministry of Industry (CSI and coal). AIE was instructed to reorganise its companies with a view to transforming them into money-earning ventures based on a solid monetary basis. If it is not possible to improve the productivity and profitability of a particular company, that company will be shut down. The majority of AIE companies are expected to continue losing money for the next couple of years at least. They are supported by a government subsidy scheme initiative because they are considered to have an inherent importance to the nation which requires their maintenance. AIE is not allowed to lend or underwrite any sum of money used by its companies. All help of a monetary nature will have to be through provisions made for them in the government budget. The role of SEPI is essentially the same as Teneo’s. It also has to guide the

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companies that Teneo steered through to privatisation. In addition to the companies under the Ministry of Industry which Teneo had to prepare, SEPI has the added responsibility of preparing Repsol. In 1995 SEPI also inherited Pta700 bn of losses that had previously been the responsibility of the INI group. The revenue generated by the SEPI companies since 1995 and in the years to come should mean that it can handle this debt without having to default. The public utilities which were earning money inherited the debts of those which were losing money. This reorganisation also involves a provision for cutting subsidy given to them from Pta519 bn for two years from 1996 to Pta366 bn. Apart from this, SEPI is not eligible for handouts from any tier of local or state government. In June 1996 the government added another holding company to the privatisation process, SEPP (State Company for Patrimonio Privatisation). As the name indicates, SEPP took over care of the companies formerly in Patrimonio del Estado (e.g. Telefonica and Tabacalera). The resulting system of holding companies has achieved several goals for both governments (Socialist and Centre Right): • They give a useful scale of reference to decide which companies are viable privatisation prospects. • The viable candidates can then be placed under pressure to cease relying on public finance and undergo a process of restructuring. The less well-placed companies are restructured even further or closed down. • Finally, the holding companies provide an essential vehicle to conduct the issue of shares to the public. This has been the only minor adjustment to the structure for conducting privatisations which the socialists put in place. A review of the Socialist and Centre Right government policies revealed the extent of this similarity: • Both governments believe that the private sector is preferable to the public sector. • Both have used a system of holding companies, with each company having a clear constitution stating its aims. • Both have targeted the same set of companies for privatisation. • Both have not set out a timetable for privatisation. 6.9 PRIVATISATION STRATEGIES The final similarity is notable, since the government specifically stated that it would depart from the previously uncoordinated manner in which the privatisations were conducted. After the mid-February sale of 21 per cent of Telefonica, no details of ensuing offers have been revealed. Using only ministerial press statements and other more general indicators, it is possible to forecast a privatisation timetable for the next two years. The minister in charge of the privatisation programme says that he aims to sell off all the public sector companies in the black and intends to reduce state handouts to those still losing money. The industry minister has set the year 2000 as the completion date for these sell-offs. This is depicted as part of a drive to increase the

Privatisation

Table 6.3 Prospective privatisations

Note: 1 Financial Times

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The Spanish economy in the 1990s

efficiency of Spanish firms, so that companies will be in a position to invest overseas. (See Table 6.3.) Due to the absence of an official timetable, the privatisation process has suffered from a lack of co-ordination. This has culminated in a disagreement on the overall approach to privatisation. The Ministry of Industry which oversees SEPI wants to keep a short leash on the pace of privatisation of its companies. The Ministry of the Economy wants privatisation to be more co-ordinated. The Economy Ministry manages the SEPP group and is promoting a more co-ordinated privatisation programme for SEPI, AIE and SEPP, controlled by a single body. The arguments in favour of a central privatisation office are well founded and wide ranging: • It will form a consensus and clear up the opposing political views on this policy area. • It could clarify the sequence that the government aims to follow when it decides which companies it will sell and at what time. • It will promote a plan for state industries which the markets are unaware of as the company is new to the privatisation process or because the finances of the company are weak and require good presentational skills to persuade the markets. This will apply to Iberia and Inespal, which will require ‘considerable corporate skills to find buyers’. The disadvantages of a central privatisation office are as follows: • It might involve a very complex process of reorganisation. • Financial costs to get it up and running might be considerable. 6.10 POSSIBLE STATE COMPANIES FOR PRIVATISATION 6.10.1 Telefonica Telefonica is the dominant telecommunications company in every segment of the Spanish telecommunications market. In most sectors competition is weak as rivals have comparatively few resources. In the rudimentary telephone sector Telefonica has a monopoly until 1998, at which time Retevision will become the other company to be allowed into the sector. Retevision will also offer services to transmit data, operate a mobile telephone system and cable TV. Only in October 1995 did the government pass legislation to create a legal framework to handle cable TV companies. Hence, the cable TV market is just beginning to develop in Spain. The mobile phone market began to expand rapidly in 1996 and growth is expected to continue in the medium term. The Spanish market also has a less developed basic telephone market, with only 38 telephone lines per 100 head of population in 1995, while for the same year the UK had 45 per 100 head of population. The Spanish telephone market failed to develop in line with its European neighbours. In 1975 Spain had a higher frequency of telephone lines than France.

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However, in 1996 Spain had only 63 per cent of the French frequency of phone lines. These statistics are indicative of a market that is grossly underdeveloped. This condition of the Spanish telephone market has made it one of the most attractive emerging telecommunications markets to overseas investors. The growth potential of this sector compared to its counterpart in other countries indicates a healthy rate of expansion for Telefonica in years to come. With competition it is expected to lose market share, but will remain dominant for the next decade at least. In May 1996 it was estimated that the combined value of the services and machinery sectors of the telecommunications market was around Pta1,700 bn ($14 bn)—services at Pta 1,400 bn and machinery at Pta300 bn. Both sectors are expected to grow to around Pta2,600 bn (the service sector) and Pta500 bn (the machinery market) by 2000, according to Price Waterhouse. On a global scale Telefonica has entered into numerous alliances to cement its position as the leading Spanish-speaking telecommunications company. Hence, as deregulation approaches, Telefonica is not only preparing a strong defence of its core markets, but is also preparing to extend its lead elsewhere. Telefonica’s preparation for privatisation and deregulation The last remaining government stake was offered in mid-February 1997. Around 75 per cent of the shares were allocated to domestic investors. One of the main aims of this offer was to promote share ownership within Spain. This has been successfully achieved with over double the number of predicted domestic applicants showing an interest in the offer. Success was assured, given the company’s financial performance over the last four years. In 1996 alone, shares in Telefonica have risen by 84 per cent. A comparison of price to earnings ratios for the major telecommunications companies in Europe again reiterates why Telefonica stock has been in so much demand (see Figure 6.2).

Figure 6.2 Telefonica’s profit growth Source: Telefonica

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In 1997 a price-earnings ratio of 14 is predicted for Telefonica, and net income per share stood at $1 in 1996 which is a rise of 19.8 per cent on the previous year. This compares favourably with its competitors who are all expected to have lower price-earnings ratios: British Telecom (10.94), the Dutch company KPN (11.1) and Portugal Telecom (13). Telefonica’s shareholding structure contains a few large domestic investors who form a noyaux durs. In early January 1997, the Argentaria group of banks, in which the Spanish government still holds a stake, bought an extra 2.2 per cent worth of shares in Telefonica to bring its total holding to 5.2 per cent. This acquisition places it second only to the government in terms of ownership. BBV also purchased shares in Telefonica to bring its total to 5 per cent of equity from 4 per cent. La Caixa, Argentaria and Banco Bilbao Vizcaya now own around 15 per cent of Telefonica. The three banks denied that the shares were bought as a result of a plea from Telefonica to acquire a certain amount by the privatisation date. The banks cited the revenues gained by handling treasury operations for Telefonica combined with their considered opinion that the shares were a sound investment as the main reasons for their acquisition. The ‘hard core’ are also playing a significant role in handling the worldwide privatisation, when the government sells its 21 per cent of Telefonica. The share issue is targeted mostly at retail investors. Thirty per cent has been set aside for international firms, a further 10 per cent to 15 per cent is aimed at Spanish firms, with only around 4 per cent having been allocated to smaller individuals. However, there is a host of sweeteners specifically designed to induce them to invest: • A 4 per cent reduction has been offered on the normal share price to encourage the Spanish public. • To maintain a degree of stability in its shareholding structure after privatisation, Telefonica has decided to offer a free share for every 20 shares held on to for over a year after privatisation. This tactic has proved successful, with one million minor domestic individuals declaring an interest, and was over twice the predicted take-up. It also signals that ‘people’s capitalism’, the government policy to encourage a wider share ownership in Spain, has been successful. The issue was helped by low interest rates making equities more attractive and the rapid increase in the amount of funds available to domestic investors. In preparation for the introduction of competition in the domestic market, the government has adopted a programme of restructuring to transform Telefonica into a more competitive organisation. It is using the revenues it earns from the advantage of being the sole incumbent to set aside funds to finance 11,000 job cuts by the year 2000 and to effect improvements to its advertising departments. Results of this drive for competitiveness are already becoming evident: • The mean period of delay before an individual can be connected to the telephone system has been reduced dramatically since 1993 from 100 days to around 3 days.

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Figure 6.3 Telefonica productivity: basic telephone line in service per employee, 1980–95 Source: Telefonica

• The mean length of time before repairs are carried out has fallen from 18 hours to 12 hours. • The ‘network’ or entire system of telephone lines has been considerably updated with digitalisation up to 63 per cent in 1996. This has been achieved in the last five years from a 1991 base of 34 per cent digitalisation. This level is still rather low compared with other European countries, which again reemphasises the potential of the market to grow, but digitalisation is a necessary precusor to providing a whole range of higher value-added services. In addition, the increased size of the economy has also expanded the potential market for Telefonica. To take advantage of this, Telefonica has invested around Pta2.2 trillion during the period 1991–6. The number of lines during this period grew at a rate of 16.2 per cent between 1991 and 1995. (See Figure 6.3.) In specific sectors, such as cable TV and mobile phone services, Telefonica faces different challenges. Mobile sector The mobile phone sector has experienced explosive growth, to the extent that there were more people beginning to use a mobile phone than a standard one installed to a wall socket. However, they were not all Telefonica customers as its mobile arm, Telefonica Moviles, faces competition from Airtel (a coalition headed by the US company Airtouch). Airtel bid Pta85 bn to win its licence but Telefonica was awarded the mobile licence automatically, without having to pay for it. The European Commission has decided to investigate this as it is considered an uncompetitive practice.

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By the end of 1995 Telefonica Moviles had around 928,955 customers and Airtel had around 16,000, having only launched their service two months earlier. At the end of March 1996 Airtel had increased its customer numbers to around 77,000. Telefonica had about 1,250,000 subscribers to its service at the same time. In the ten-year period from 1996 to 2006, growth is expected to continue to be rapid. By the end of the millennium over five million people are expected to use mobile phones. This sector has only really begun to take off since 1993. There are several clearly identifiable explanations for this. In addition to the normal growth pattern exhibited by a market as it reaches its full potential, the growth rate in Spain exceeds this for the following reasons: • A reduction in the price of joining the mobile phone service network. • The rapid increase in the number of retail outlets over the last few years has not only increased competition between them and hence advertising expenditure promoting mobile phones, but has also made it a much more accessible product to purchase. • The larger number of firms has increased competition and has forced down the prices of mobile phones, which fell from Pta350,000 five years ago to a seventh of that price by 1995. The Pta50,000 ($400) price tag for a mobile remains, in comparison with other EU countries, very expensive. Hence, further price reductions will boost the market. • In 1995 the ‘feel good factor’ began to return to the economy. This coincided with a wide-ranging marketing campaign to promote mobile phones. Between 2000 and 2005 the mobile phone sector is expected to double in size to incorporate 10 million users, giving it around 25.5 per cent of the entire population. These bold predictions could even be on the cautious side, as in other EU countries a higher degree of the market had mobiles after a similar time period of development. Telefonica’s MoviLine is based on analogue technology and is slowly being superseded by its Movistar, which uses the ‘latest GSM’ digital technology. The rival Airtel service uses the same up-to-date service. In the competition for the mobile phone market Telefonica had gained an edge over its competitor by negotiating terms in more than thirty foreign markets on which its Spanish GSM subscribers can access and use the lines of foreign networks. Cable TV sector Prior to 1995 there were several attempts to introduce a body of legislation to govern the cable TV market. These attempts were either sidetracked through minor edits or wholesale corrections to the legislation. During this period several large international firms had begun preparing the groundwork for launching cable TV stations and awaited the necessary legislation. In October 1995 the Spanish Congress passed the ‘Cable Television Law’. As a consequence the cable TV market is structured as follows:

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• Each cable company is to be given a demarcated area in which it must provide services to at least 50,000 people and at most two million (except the Balearic and Canary Islands). • The companies providing this service have to be situated in Spain. • Non-Spanish firms or individuals wishing to purchase a stake in an operator of cable TV will have to abide by the 1987 Telecommunications Law. • It is illegal to own shares in more than one cable TV station if the two or more companies have more than 1.5 million customers. • Along with Telefonica, another company will be allowed to offer cable TV services in all regions. The opportunity to do so will be offered through a bidding process open to all. • Telefonica has given the automatic right to offer a cable service in each area, if and only if it also offers a rudimentary phone operation. • The Ministry of Public Works must be informed by Telefonica if it aims to operate cable TV in each area, prior to the meeting at which the local cable operator is selected. • Failure to declare such an interest in operating such a service by the date of the selection meeting will prevent Telefonica from operating a cable operation freely until 1 January 1998. • The network of cables which Telefonica already has in place must be made freely accessible to all the local cable companies in each area on terms which are unbiased, clear to all concerned and unprejudicial. • After the date set for deregulation, any companies offering a cable service will also be given the right to run a normal fixed telephone network in its area. A significant part of the attraction of obtaining cable TV is the opportunity at a later stage to offer more profitable services, e.g. telephone network and information conveyance. Telefonica’s expansion into the international market To meet the challenges offered by the international market Telefonica has followed a widely praised strategy. It has focused on the worldwide Spanish-speaking market and through foreign alliances using TISA, its international arm, has cemented its position as the leading Spanish-speaking operator in the world. At the time of its complete privatisation it had the following alliances: • Telefonica International (TISA) is the Latin American subsidiary of Telefonica. TISA consolidates Telefonica’s position in the Spanish-speaking world. However, Telefonica’s plan to take full control by buying up the 23.8 per cent still owned by the government was dealt a severe blow as the Finance Minister stated at the end of 1996 that it would sell its stake to the highest bidder in order to maximise revenue. This statement has since been seen as an ultimatum to Telefonica to pay more for its stake in TISA, as there were disagreements over the purchase price offered by Telefonica. As a result the issue has to be settled after the Telefonica privatisation.

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• Telefonica joined with Kirch, a German entrepreneur, in August 1996 to start developing digital television for Spain. Around $1 bn has been tied up in this venture and the project is considered a large gamble for Telefonica. • TISA investigated the possibility of linking up with several American partners including MCI (with whom BT is currently proposing a merger). The possibility of a foreign shareholder instead of an alliance has been ruled out. • Telefonica purchased a 25 per cent stake in Unisource in June 1995. Unisource included three other partners: KPN from Holland, Swiss Telecom and Sweden’s Telia. Following the purchase, delays by the Spanish government to open up their domestic market to international competition led the European Commission to veto Telefonica’s involvement in the alliance until a date was set for the necessary changes to Spain’s rudimentary telecommunications market. The date eventually agreed upon for the change is 30 November 1998. Subsequently Telefonica has been given permission fully to consolidate its union with Unisource in May 1997. • As a member of Unisource it has entered into an agreement with AT&T to form the largest international firm. Evolution of telecoms in the medium term The most profitable telecommunications services in Spain are still growing rapidly. In terms of new products being introduced and actual increase in market size, the telephone sector is the most innovative and rapidly expanding. However, the evolution of this sector is restricted by the comparatively less advanced state of the basic industrial framework and by larger markets. Hence, growth in this sector will rely upon firms realising the potential demand already in existence. 6.10.2 Retevision Retevision is wholly owned by the Spanish government and controls the equipment for sending telephone messages. One of the conditions attached by the European Commission to its approval of Telefonica’s participation in Unisource was the introduction of competition into the domestic market. The government decided to break up Telefonica’s monopoly by using Retevision as the competitor in the basic voice telephony market. A subsidiary of Retevision was given a permit to offer basic Telephony to customers who would otherwise have to use Telefonica. The first issue has been set provisionally for May 1997 when a majority of the equity stock, between 51 and 61 per cent, is likely to be placed with a few institutional shareholders, who will form the noyaux durs. In the last offering the remaining unissued equity will be offered to the general public to buy and sell on the stock market. The initial offering will probably be targeted towards the banking sector. Two of the largest Spanish banks, Banco Central Hispano and Banco Santander, have joined with Endesa, the electricity company, to co-ordinate their equity

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strategy. Banco Central Hispano and Banco Santander have together acquired 27.4 per cent of shares in Airtel, the main rival to Telefonica in the mobile sector prior to this. At the end of 1996 France Télécom signed a pact with Banco Central Hispano through which it will enter a competitive tender for Retevision in the first placement. Retevision has also entered the television market with its ‘digitalised channels/ services’. After August 1996 when Telefonica entered the same market, Retevision revealed that it had reached an agreement with the Telefonica set of companies based in Mexico and the Australian entrepreneur Rupert Murdoch. 6.10.3 Argentaria Argentaria was the leading bank in the Corporación Bancaria de España, a body consisting of several banks established at the beginning of the decade. The precusor to Argentaria was Banco Exterior. The reliable but cautious reputation of Banco Exterior has been transformed to one of an enterprising and innovative culture under the Argentaria name. It now occupies a firm place among the other major Spanish banks: Banco Santander, BCH, Banco Bilbao Vizcaya and Banco Popular. The state owns 25.01 per cent of the equity of Argentaria. The remaining 75 per cent has been floated on the stockmarket or placed with institutional shareholders. Since the banking industry is not considered to be a ‘strategic sector’, there has been no official policy of promoting domestic ownership of Spanish banks. As a result, around 35 per cent of Argentaria’s issued equity has passed on to foreign hands. However, in the June 1996 meeting the shareholders passed several resolutions to safeguard the bank from unwanted attention that would threaten its autonomy. These resolutions essentially make it harder for any potential rival to seize power in the Argentaria set of banks. By the beginning of 1997, around 75 per cent of Argentaria had been privatised over three tranches of around 25 per cent of equity each. The shares have been widely dispersed with around half a million individuals holding stakes in Argentaria. In previous privatisations of Argentaria the governments made agreements to prevent shareholders from losing money by investing in the privatisation issue. The 25 per cent still owned by the state is likely to generate around Pta165 bn ($1.3 bn). The chairman of the bank has endorsed a future for Argentaria in which it will be owned completely by the private sector. In December 1996 the chairman estimated that within twelve months the Argentaria group could be ready for its final flotation. The government favours the presence of a hard nucleus of domestic institutional shareholders, as has been created in Endesa, Repsol and Telefonica. This proposition has also been endorsed by the chairman of Argentaria in August 1996 when the bank was in favour of the final tranche issue being conducted along the same principles as the first three, which would not lead to the formation of a hard nucleus. The bank’s management favours ‘between three and four’ institutional shareholders with around 10 per cent of the issued share capital under their management. These

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reference institutions will be regarded by the bank’s management as partners rather than ordinary shareholders. The privatisation of the last 25 per cent is certain, but there are uncertainties over the manner in which the issue will be conducted (i.e. questions over the formation of hard cores). There is also a certain amount of confusion surrounding the precise date of the final issue. Originally, Argentaria was toted for early privatisation. However, the poor halfyear results announced in October 1996 have forced a reworking of the old privatisation plan. These results were partially caused by measures introduced by the chairman appointed in May 1996: • The introduction of much stricter accounting regulations was designed to give a more accurate picture of the bank’s performance over the year and its state of financial health. Such restrictions would give potential investors greater confidence when investing in Argentaria. • The bank’s top management has been altered. Top managers from Banco Bilbao Vizcaya and Banesto took up key positions within Argentaria. This management is to remain in place to guide the bank through to its complete privatisation. • The balance sheet of the bank is being reorganised to counter the detrimental effect that low interest rates are having on profits. This reorganisation should position the bank not only to take advantage of EMU but also to ensure a successful privatisation. Around Pta43 bn has been set aside from expected profits to eliminate certain liabilities. The deposits made to the bank that earn interest over a lengthy period of time are most damaging to profits. These deposits, which earn an average fixed rate of 9.8 per cent, will be paid in advance and then the deposit arrangements will be rearranged in a manner less damaging to profits. This arrangement will apply to around Pta700 bn worth of the bank’s borrowings and Pta43 bn will be set aside to implement these financing arrangements. The preceding measures were introduced as a reaction to several factors. The profit margins at the bank had suffered too much due to low interest rates. Additionally, the bank had been excessively reliant on one-off income sources which implied that profitability was not possible over a medium or longer term. By exchanging their current strategy of maximising current profits for one designed to generate profits from more durable sources over a longer time horizon, the bank has won acclaim even from managers of funds based abroad. The management of Argentaria was optimistic about their prospects from 1997 onwards, expecting both profits and dividends to rise in the years to follow. Other key financial indicators also support this view in general: • The extraordinary charge of Pta43 bn was initially more than planned and reduced ‘attributable net earnings’ in 1996 to Pta31.2 bn. • In addition, the net profit figure was also below most forecasts. However, operating profits grew at 9 per cent, exceeding most expectations, to Pta89.6 bn.

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• Adverse effects on net interest income reduced it by 5 per cent to Pta196.8 bn. • However, this was offset by revenue from the financial sectors which grew 170 per cent to Pta29.8 bn. • In 1995 profits rose by 11.7 per cent to Pta74.2 bn. The prospect of Argentaria no longer being guaranteed by the state has resulted in its ‘debt’ being classified as A+, which is lower than the previous AA– classification it enjoyed. After Argentaria becomes a private bank, it will continue to be an active participant in the privatisation of other state industries (e.g. Argentaria has shares in Telefonica and Endesa, around 5.2 per cent and 3 per cent respectively). 6.10.4 Endesa Endesa consists of a group of companies known as the Endesa Group, which includes the following: • Endesa is the largest company within the group and made net profits (expressed as a percentage of the entire group profits), for the first nine months of each year, of around 83.55 per cent in 1995 and 70.23 per cent in 1996. Debt figures for Endesa, expressed as a percentage of the total group debt, were 57.25 per cent for 1995 and 50.27 per cent in 1996. • Enher Group contributed around 6.22 per cent in 1995 and 6.50 per cent in 1996 to total group net profits for the first nine months of each year. Of total group debts it held 15.91 per cent in 1995 and 19.14 per cent in 1996. • Gesa Group made a contribution to total group net profits for the first nine months of each year of around 6.29 per cent in 1995 and 5.83 per cent in 1996. It held 3.28 per cent of total group debts in 1995 and 4.10 per cent in 1996. • Unelco Group contributed around 6.63 per cent in 1995 and 6.70 per cent in 1996 to total group net profits for the first nine months of each year. Similarly, it held 8.26 per cent in 1995 and 8.72 per cent in 1996 of total group debts. • ERZ Group’s contribution to total group net profits for the first nine months of each year was around 3.09 per cent in 1995 and 3.41 per cent in 1996, while holding 3.63 per cent of total group debts in 1995 and 3.57 per cent in 1996. • Viesgo Group contributed around 3.66 per cent in 1995 and 3.65 per cent in 1996 to total group net profits for the first nine months of each year, and of total group debts it held 3.63 per cent in 1995 and 19.14 per cent in 1996. • Sevillana and Fecsa were acquired in 1996. Sevillana made net profits of Pta17,589 million and had debts of Pta316,765 million in the year 1994–5. Over the same period Fecsa made net profits of Pta15,394 million and had debts of Pta386,200 million. • Other companies within the Endesa Group play a less dominant role. Endesa is the main electricity company in Spain, which comprised roughly 10 per cent of the Bolsa in December 1996. SEPI owns a 66.89 per cent stake in Endesa which is worth around Pta1,400 bn ($11.2 bn) when floated on the stockmarket.

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There are doubts over whether the government will fully privatise Endesa, since it has been a consistently large revenue earner for the government treasury and generated almost half the total profits in the electricity sector in previous years. However, the government has stated it does not see any reason for a viable state industry to remain in state hands. By the year 2000 the electricity sector should be completely open with any company, domestic or foreign, able to enter the market. The privatisation of Endesa has had to wait for several months while a proper regulatory framework was set up to handle the ensuing market forces. (For the major features of this framework see Section 6.7.) While the framework was drawn up, the government ordered Endesa to repurchase its shares up to the amount legally allowed for a firm to hold its own equity. This will reduce the total equity of the company, giving the government the opportunity to increase its stake in Endesa. This is an easy way of getting the most out of its ‘financial reserve’/reserve privatisation. As the sector changes to become more competitive, the domestic electricity companies (Endesa, Iberdrola, Union Fenosa, Sevillana and Fecsa) will be allowed Pta1.9 trillion ($14 bn) in aid to decommission and dismantle nuclear projects. This is a result of the government declaring a ‘nuclear moratorium’. Endesa is now set for a successful privatisation. It is regarded as the most attractive of the state industries. Even among the electricity sector, Endesa has enjoyed privileges which enable it to make more profit on any given amount of revenue compared to the rest of the sector. This has allowed it to keep profits up over the years while also producing equally impressive cash flow figures. (See Figure 6.4.) Both of the past privatisations have generated in total Pta260 bn. The first offering of around 18 per cent of Endesa in May 1993 generated PtaSO bn. The second bundle of 18 per cent, made up of an assortment of shares in May 1994, brought in Pta180 bn. Further privatisations of Endesa are to be conducted over three 20 per cent tranches in 1997 and 1998. The first issue is set for the second half of this year with estimated revenues of Pta425 bn. Another two offerings are set for 1998.

Figure 6.4 Endesa’s net profits, 1991–5 Source: Endesa

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Recently Endesa has made two acquisitions for Pta198 bn, which have worsened the privatisation prospects of the company. Bids by Endesa to acquire 75 per cent of Sevillana de Electricidad and 75 per cent of Fecsa were instigated by the government as part of their contentious reorganisation of the companies sector. These reductions in the number of independent utilities operating in the electricity sector are an attempt to remove the networks of share ownership, where a firm has shares in its competitors and vice versa. By allowing Endesa to absorb Fecsa and Sevillana, the domestic electricity industry is being prepared for competition against foreign-based firms through two sets of major Spanish electricity utilities (i.e. Endesa and Iberdrola). The government hopes to safeguard these two companies (Fecsa and Sevillana) against being taken over by overseas competitors when a free market comes into being. Prior to making the bid, Endesa owned 40 per cent of both companies. This restructuring clearly goes against the free market principles that they are introducing. There was a sudden upswing in the share prices of all three companies in October 1996. This surge in value forced the CNMV (the regulator of the Bolsa) to suspend all trading in the utilities involved on 18 October. The suspension in trading was hours before the government announced the takeover plans. The CNMV believes that any deregulation of the stockmarket can only take place if there is a more transparent system of viewing market activity, along with an onus on companies to assume more responsibility. Many investors in the stockmarket have welcomed actions against Endesa, as it signifies to the government that the rules of the Bolsa apply to everyone and state industries must show consideration to small investors. The CNMV is planning severe penalties against Endesa and its chairman, who has since resigned. Endesa could be penalised a maximum of Pta35 bn (which is equivalent to 5 per cent of its total equity valued at October 1996 prices), or it could have any of its stockmarket transactions greatly confined or frozen for a maximum period of five years. Another damaging effect of the takeovers on Endesa’s privatisation plans concerns its debt. At the beginning of the decade, in 1991, it had liabilities of Pta550 bn ($5.4 bn). Over the next four years its strong cash flow and profits enabled it to reduce the amount owed to creditors to around Pta336 bn ($2.7 bn). Once Sevillana and Fecsa were absorbed into the Endesa Group, the total liabilities of the group increased from an expected Pta552 bn in 1996 to over Pta1,260 bn. The increase in this figure is due to the Pta200 bn purchase price and Pta500 bn of inherited liabilities already present in Sevillana and Fecsa. The implications for the Endesa Group’s ratio of total liabilities to total issued equity is an increase from 49 per cent to 112 per cent. Coupled with this is the negative effect on profits that are predicted to fall by 2 per cent in 1996. The impetus behind the takeovers is rationalised, even after considering the disadvantages and problems already caused, through the impact on raw material costs. Prior to the takeovers, Endesa was forced by the government to use around 95 per cent of the domestic coal production in its plants to produce electricity. The production of Spanish coal is very inefficient and hence a very expensive raw

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material. Electricity prices are about 5 per cent higher than they would be if cheaper foreign coal was used. These inflated prices add up to a Pta200 bn transfer from the electricity sector to the coal sector. Around 40 per cent of all electricity is reliant on expensive domestic coal. However, with the addition of Sevillana and Fecsa, this proportion has fallen to under 30 per cent. This has helped Endesa to reduce its cost of supplying electricity to its customers, as well as becoming more efficient. As a result, when the industry is liberalised, Endesa will be able to compete more effectively with its rivals, which in turn has made it a much more attractive prospect for privatisation. The government passed on plants that used domestic coal to Endesa in the past when the electricity industry was being restructured. At that time Endesa was recompensated by the government with special consideration when drawing up its financial accounts. With the advent of market liberalisation this privilege is set to be repealed. The government’s approval for the takeovers is seen as a means of replacing the extra revenues generated by special accounting regulations with the revenues made by Sevillana and Fecsa. Endesa increased its shareholdings in Sevillana and Fecsa through independent bids, not involving any partners. Most investments by Endesa in other companies listed on the Bolsa will most likely involve a partner. Since June 1995, BCH and Endesa have had in place an agreement to co-ordinate their business affairs. BCH is one of the weaker major retail banks in Spain. In 1995 its profits for the first six months were 34 per cent down on the corresponding period in 1994. However, the bank’s managers did predict that, once ‘bad debts’ had been fully dealt with, profits would recover significantly in 1996. This agreement will have the greatest impact on four major segments of the Spanish economy: oil, gas, electricity and telecommunications. The details of this agreement are as follows: • BCH will be the largest shareholder in Endesa, after the government, once it purchases 3 per cent of Endesa’s equity. The 3 per cent is valued at Pta46.5 bn ($360 million). A quarter of Endesa’s 10 per cent shareholding in the third biggest electricity provider, Union Fenosal, will be bought by BCH, to add to the 5 per cent BCH has already acquired. Together, the BCH and Endesa 15 per cent holding will be the largest single block of shares in Union Fenosal. • Endesa has agreed to buy a 5.6 per cent shareholding in Cepsa, the second largest oil producer in Spain. BCH has 20 per cent of Cepsa and can control the votes of a further 18 per cent of shares at shareholder meetings. This was a condition on which BCH agreed to sell the 18 per cent to a financial institution based in Holland in 1994. The government considers natural fuels a strategic sector and wishes to keep Cepsa under domestic influence. By selling the 18 per cent to a foreign firm, BCH left the French company, Elf Aquitaine, as the largest shareholder in Cepsa. The government disapproved strongly of this development. Since the BCH-Endesa agreement again places a Spanish institution as the guiding influence in Cepsa, it has been welcomed by the government. The government

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wants domestic hard cores to stop vital sectors of the economy being controlled by multinationals. • BCH and Endesa have decided to form a holding company, designed to manage the 28 per cent shareholding in Airtel (the second largest mobile phone company in Spain). This shareholding is made up of the 13.8 per cent owned by BCH, the 7.8 per cent owned by Endesa and the 7.8 per cent owned by Union Fenosal. This holding firm will also manage a 20 per cent stake in Antena 3, a privately owned television station, and is expected to pursue ventures in cable TV. • BCH has a 10 per cent shareholding in Gas Argentina, 49 per cent of which will be bought by Endesa. Two major queries hung over the viability of this partnership. Initially there was a lot of doubt over whether Banco Central Hispano had the necessary financial muscle to enter into such an arrangement. Then the obvious conflicts of interest that would arise as a result of pooling the two companies’ resources were noted. In the electricity sector BCH has shares in Iberdrola, Endesa’s main competitor, and in the oil sector SEPI which owns Endesa also owns Repsol, whose main competitor is Cepsa. The opportunities that this alliance provides are in the telecommunications sector. 6.10.5 Repsol Repsol was formed in 1987 from combining five companies controlled by INH, as part of a reorganisation. The other creation of this reorganisation in the oil and gas sector was Enagas. However, Repsol was clearly the more prominent creation. Repsol is essentially an amalgamation of five previously unrelated and autonomous natural fuel companies. It concentrates on oil refining, fuels and liquefied petroleum gases (LPGs) and is the biggest Spanish company, having sales of Pta 2,545 bn ($20.4 bn) in 1995. Worldwide it is among the top twenty oil organisations. Since May 1989 around 90 per cent of Repsol’s shares have been sold, generating more than Pta670 bn ($5.4 bn) and conducted over seven different sales (including five offerings to the stockmarket). Over 500,000 people have invested in Repsol and its future ownership lies firmly in the private sector. The government, through SEPI, has a 10 per cent stake left in Repsol. A condition attached to the February 1996 Repsol issue banned for the duration of the following year any further share issues. This type of clause, known as a lock-out period, has been used in other privatisation issues. (See Figure 6.5.) The composition of Repsol’s owners after the February 1996 issue was a wideranging mixture of investors. Around 25 per cent was in the hands of small individual domestic shareholders. Another 25 per cent was owned by North Americans, with a further 23 per cent having gone to Japanese investors. Spanish institutions own around 12 per cent, with Banco Bilbao Vizcaya having 7 per cent and La Caixa 5 per cent. Pemex, the state-owned oil company in Mexico, owns around 5 per cent.

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Figure 6.5 Repsol (Chemical) operating profits/losses Source: Repsol

In the February 1996 issue, the hard nucleus policy, visible in numerous previous privatisations, seems to be taking shape in Repsol’s shareholding structure. BBV acquired 4 per cent of Repsol in the very first issue in May 1989. In the early 1996 issue, BBV acquired a further 3 per cent and La Caixa bought 5 per cent of Repsol. The government indicated in June 1996 that the final 10 per cent of Repsol might be issued solely to Spanish institutional shareholders to create a hard core of domestic owners to influence Repsol. However, this type of share issue will almost certainly create public anger. For this reason the government might open the share issue to the public. Repsol is the most likely candidate for privatisation after Telefonica’s privatisation is complete. The probable date is April, with the government keen to maximise privatisation revenues to meet the budget deficit criteria. The final 10 per cent is expected to generate Pta138 bn for the government budget. Past privatisations have been very successful. This is not surprising since Repsol has an average growth rate which is considerably higher than the mean rate of profits growth for others in the sector. Net profits grew around 21 per cent in 1994, reaching Pta96.8 bn. The government decided to capitalise on this by planning a 15 per cent flotation ‘in March 1995’. An unexpectedly high appetite for Repsol shares prompted the government to issue an extra 4 per cent of Repsol stock, bringing the total issue to 19 per cent. This issue generated around Pta200 bn. Following the sale, net profits for the first three months grew by an impressive 25 per cent. Growth was attributed partly to the incorporation of Enagas, which is the major gas supplier in Spain and was acquired by Gas Natural in 1994. Gas Natural is 43 per cent owned by Repsol. In February 1996 an 11 per cent issue of Repsol was again well received. The allocation for both domestic and international investors was insufficient to meet their demand. Domestic investors wanted eight times more than their allocation, while foreign investors wanted ten times more. The sale generated around Pta140 bn ($1.1 bn). This response confirmed among foreign equity analysts that Repsol is one of Spain’s most competitive companies, even when compared with the best foreign competitors in its sectors.

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Holding the issue in early 1996 proved extremely good timing, since 1995 profits, announced after the issue, were disappointing. Most investors were expecting in December 1995 that Repsol’s profits would be greater than Pta120 bn ($1 bn) and approaching Pta125 bn. Repsol forecast a likely range for 1995 profits of Pta115–120 bn in January 1996. Eventually profits of Pta117.7 bn were announced, which was a 21.6 per cent increase on 1994. This disappointing performance was the result of a steep reduction in profits made on chemical sales in the final quarter, when only Pta5 bn of profit was made, compared to Pta58 bn in the first three quarters of 1995. Overall chemical profits were still 170 per cent up on 1994. The distillation and selling operations actually grew stronger in the final six months of 1995, rising by 12.7 per cent on the first six months. Overall this pick-up could not prevent a 15 per cent decline in total profits, to Pta76 bn, from these activities. In the next couple of years growth of profits will mainly be derived from two sources. Revenues from gas and the location and development of virgin natural fuel fields will provide, in the medium term, most of Repsol’s profits. In 1995 these two sectors showed the first signs of realising this potential, with operating profit from gas reaching Pta57.5 bn (a 20 per cent increase on 1994) and an 11 per cent increase in operating profits, to Pta19 bn, for locating and developing natural fuel fields. In 1996 figures are expected to show that the chemical division contributed below 50 per cent of Repsol’s profits. In total around PtaSO bn of profits is expected to be generated in the chemical division. If profits are to be sustained at 1995 levels, other divisions need to make up for the chemical division. This requires higher profits from distillation and ‘marketing’, increased efforts in searching for and developing untapped sources, and sustaining the customers’ appetite for LPGs and natural gas. The gas division is the prime candidate for strong expansion in the latter half of the 1990s. This growth will be based on the government’s pledge to raise the percentage that natural gas constitutes of the total ‘primary energy sources’ used from 5.5 per cent at the turn of the decade to 12 per cent by the end of the millennium. The operating profits of LPGs in 1995 were Pta26 bn (only Pta4 bn below profits from natural gas). Repsol also produces a large share of Spain’s LPG output. Of the 1.65 million tonnes of LPG output, 630,000 tonnes were from Repsol, with an additional 1.2 million tonnes of imports. Repsol Butano has been selling an additional 2.4 million tonnes for the past three years. Around Pta50 bn has been used to search for and develop fresh natural fuel fields in the last ten years. In addition to this, more than $1 bn has been put into acquiring untapped reserves of natural fuel fields. In early 1996 Repsol’s commercially marketable natural fuel stocks amounted to 600 million barrels of oil equivalent (BOE). For the remaining years of this decade Repsol’s attention will be concentrated in two areas:

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1 The Harding field in the North Sea, where it has a 25 per cent interest. This was scheduled to start raising output from the 7,000 bbl/day produced by the Murzuk field to 37,000 bbl/day by the end of 1995. 2 In Libya and Algeria a much larger operation is planned, especially in Libya where output is set to rise from 65,000 bbl/day to 215,000 bbl/day in the next two years. The Harding and Murzuck fields will lead to Repsol output rising from 60 million bbl (‘25 per cent of its requirement’) to 90 million bbl. Other operations in Egypt (34,000 bbl), Indonesia (14,000 bbl/day) and South America (22,000 bbl/day) are expected to follow suit. The Algerian Tin Fouye gas field has been described as a ‘huge’ discovery. However, Repsol only has a 30 per cent stake in this (along with Sonatrach at 35 per cent, and Total 35 per cent). No official confirmation of the exact size of this field has been obtained. Repsol has also entered into agreement with Iberdrola, which is second only to Endesa in the electricity generation market. The two companies plan to put in Pta130 bn to build a factory which will transform the byproduct of oil residues into a gaseous substance. This substance will then be given to Iberdrola to power its plant, which produces electricity. The joint project, which is the most ambitious of its type for several years, was organised by Banco Bilbao Vizcaya (BBV), as it owns 7 per cent of Repsol and 11.5 per cent of Iberdrola. The coalition between these two companies fits into the aforementioned structuring of state industries in the hands of two rival investment groups concentrating on the telecommunications and energy sectors. In the domestic market Repsol is facing strong competition, after liberalisation measures were introduced in the oil sector. This has resulted in a round of price cuts by Repsol varying between Pta1 to Pta3 (2 cents) in the price of petrol, depending on the location of the retail outlet. The main competitors matched these price cuts almost instantly. As a result, the price of petrol fell below the ceiling price level set by the government. This increased retail competition is another reason for the dip in profits experienced in 1995. However, a programme of diversification in Repsol’s activities is expected to lift profits in the long term. Tabacalera Tabacalera is Spain’s main set of companies specialising in catering for the tobacco market in all its varying niches. In all but the strictest definition, it has been a monopolist in its market for several decades. Of Tabacalera’s equity 52.4 per cent is still owned by SEPP, the holding company wholly owned by the state. All other shares in Tabacalera are bought and sold on the Bolsa. Due to its near complete domination of the tobacco market as a monopolist, Tabacalera’s financial history is extremely impressive. However, in the latter half of the 1980s, Tabacalera expanded away from its core tobacco market into consumer nutrition via a series of acquisitions. In 1988 Tabacalera bought several companies in the food sector: Lesa, Carcesa, Coise and

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Fridarago. By 1991, the decision to branch out was regarded as a mistake and an attempt was made to refocus the group on its original key market. Coupled to this was part of a wide-ranging programme introduced between 1994 and 1996 to reduce costs. As a result, all the companies in the food sector were disposed of in 1995. Lesa, which specialises in nutrients derived from milk, was sold to Leyma for around Pta4 bn. After disposing of non-core businesses, the strategy adopted seems to be one of expanding the tobacco interest and reinforcing its strong distribution business. In 1995 Tabacalera attempted to take an interest in General Cigars, which is the most successful cigar maker in the US market. Tabacalera decided to pay $100 million for a 51 per cent stake, with a right to buy the remaining 49 per cent. This was seen as an indication of Tabacalera’s intended strategy to become an international tobacco giant. Unfortunately, the deal fell through. However, in early 1997 it acquired a company to strengthen its distribution arm. Tabacalera’s international ambitions suffered another setback in early 1997 when it attempted to take control of its Portuguese counterpart, Tabaqueira. Despite making the highest bid of Es36.46 bn, for a 65 per cent share of the Tabaqueira Group, it lost out to Philip Morris (the US cigarette manufacturer). Philip Morris bid only Es33.15 bn, but promised plans to increase production and shift jobs from the Netherlands to Portugal were the decision in its favour. Tabacalera’s plans for privatisation in 1996 were adversely affected by the government budget, when taxes on tobacco products were announced. This led to a fall in Tabacalera’s share price in excess of 20 per cent in the ensuing two weeks. This damaged its chances of a quick privatisation. The actual manner in which Tabacalera’s privatisation will take place is subject to speculation. The remaining share could either be offered to the general public or sold directly to a large international firm. 6.10.6 Iberia Iberia is the national airline of Spain. Previously under the control of Teneo, it is completely owned by SEPI. Like many other commercial state companies, Iberia is the dominant company in its sector but it is not the most profitable. Its main competitor in the internal Spanish market is Air Europa. Air Europa is privately owned and in 1995 it joined with Viajes Halcon (another travel company). Following this, it put 24.5 per cent of its equity to the stockmarket to raise an additional Pta8 bn of financial resources to fund its planned expansion. This should increase profits which stood in 1993–4 at Pta300 million for Air Europa, and Pta300 million for Viajes Hacon also in 1994. Iberia has in fact only been profitable in 1996 and during a brief period in the late 1980s. (See Figure 6.6.) After several years of lax management had led to heavy losses, the need for drastic restructuring was recognised. Between 1994 and 1996 Iberia lost more than PtaSO bn. Iberia received Pta120 bn of funds from the government in 1992 to stop it from becoming financially unviable. Originally two alternative proposals, comprising salary cuts, job cuts and the disposal of several companies within the group, were put forward to solve its problems. Iberia’s employees stationed on the

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Figure 6.6 Iberia profits and losses, 1983–96 Source: Iberia

ground agreed to one of the offers. However, 1,200 of its pilots did not, due to the proposed wage reduction which was in excess of 2 per cent. This could be regarded as extremely obstinate, given that their salaries at that time (early 1995) were well above the equivalent mean private sector pilots’ earnings. The initial restructuring plan agreed on in mid-1995 involved the following measures: • a mean cut in wages of 8.5 per cent compared to the wage paid in 1992; • a ‘non-traumatic’ elimination of 3,500 employees; • an increase of Pta130 bn in funds being made available to Iberia. The final measure caused certain problems with the European Commission, which has taken up the matter to consider whether such help is legal. The Pta130 bn is officially being put into Iberia from its holding company Teneo. However, since Teneo (which is controlled by SEPI) is virtually identical to the government, the funds are regarded as state interference in the private sector in favour of domestic firms. The previous cash handout of Pta120 bn in 1992 was approved by the European Commission, with a proviso that no further financial help of this form could be given to Iberia until 1997. The handout proposed in the restructuring package in 1995 obviously breached this condition. Iberia cited the acute and unpredictable fall in the value of the peseta for forcing it to breach the condition previously imposed. The Spanish government reacted angrily towards the decision by the European Commission to re-examine the proposal to restructure Iberia. The government stated that the only response by the European Commission which it would recognise was an approval of the aforementioned proposals. After the initial disagreement there followed nine months of tough bargaining between the European Commission and the Spanish government. On 14 December 1996 a revised version of the original restructuring plan was implemented. This infusion of cash has not been welcome by Iberia’s private sector competitors, most notably British Airways. The European Commission was supposedly swayed by Iberia having already made a start on its restructuring programme by giving notice of 3,500 job losses, reduction in wages and a limited sale of its 85 per cent share in Aerolineas Argentinas. It provided Pta37 bn in its 1994–5 financial accounts for

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laying personnel off and as a result losses increased in 1995 to Pta45 bn. The revised aid deal reduces the cash infusion to Pta87 bn, with a further Pta20 bn added in 1997 as long as satisfactory progress has been made on reorganising and reforming Iberia. The Pta 87bn is to help lower the amount Iberia owes its creditors and to help with redundancy costs for employees. Revenues from disposal of Iberia’s South American shares are set to boost its 1996 profits. The stake in Aerolineas Argentinas has been a particularly large problem as it has run up around Pta100 bn in losses. In June 1996, Aerolineas Argentinas was set to be bought by a US airline, with the deal scheduled to be completed by early 1997. However, there are indications that this deal may not go through. Iberia’s stake in Austral, a much more diminutive carrier, and Aerolineas Argentinas looks likely to generate around Pta67 bn if sold on. Aside from loss-making Latin American subsidiaries, Iberia faces problems within the core group of companies forming the Iberia Group. Aviaco, the carrier responsible for internal flights (32 per cent owned by Iberia with the rest of the shares being held by Iberia’s holding company), has had continual disagreements with its pilots in 1996. These are over the adoption of appropriate tactics to take advantage of the Europe-wide deregulation of the airline market set to occur in 1997. The management of Aviaco insists that its pilots reduce their salaries, which were 21 per cent above the mean salaries of Iberia pilots. Aviaco’s pilots have demanded that additional routes be introduced to increase revenues and managers must raise their performance, instead of pay cuts for pilots. The pilots argued that more intra-European flights, especially between major cities within Europe, were needed. At the beginning of 1996, pilots at Aviaco launched a takeover bid via the trade union representing the pilots, called Sepla, to buy the 32.9 per cent of Aviaco owned by Iberia. Rejection of this proposal confirmed Iberia’s intention to keep a hold of Aviaco. Another stumbling block in their relationship stems from claims made by Aviaco that Iberia has provided handling and repairs services at an inflated price to Aviaco. A further disagreement has arisen over the division of routes between Iberia and Aviaco, with Aviaco insisting that several of Iberia’s routes fall naturally under their remit. Aviaco can only succeed if it avoids competing against Iberia. An independent report on Aviaco (by Coopers & Lybrand) in May 1995 concluded that restructuring was needed to achieve profitability; only ten of Aviaco’s routes were not losing money. However, the proposed method of restructuring remains at the core of disagreements between Iberia and Aviaco, with each company’s proposals being guided by contrasting principles. Iberia’s restructuring schedule runs up to 1998. when profits of around Pta 47 bn are expected. This figure would be considered an average for carriers similar to Iberia, considering its financial position. However, another three-year schedule for reducing costs and increasing productivity was drawn up in early 1997. This schedule has been formed with an eye very much on a forthcoming privatisation. Hence, Iberia’s privatisation is likely to be announced three years away at least. The revised target is to raise operating profit from the Pta34.7 bn (£152 million) in 1996 to Pta48 bn in 1999. In 1997 the chairman predicted that the company would increase net earnings

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threefold, as long as Pta20 bn of additional funds was infused by the government. The government needs the European Commission’s consent before this Pta20 bn can be given. The total money earned by the airline is set to rise by 15 per cent to Pta641 bn in 1999, along with a rise in productivity of 20 per cent. Wage expenses will be reduced by keeping the rate at which wages rise lower than the rate at which prices rise. It was calculated that if these reforms were not introduced, Iberia’s operating profit could have shrunk quickly, forcing it to run up even more losses. Iberia’s tactic to succeed in the post-deregulation era is through joining with a major international airline. Some potential partners have been dissuaded by SEPI’s insistence that Aviaco and Aerolineas Argentinas must stay in the Iberia Group. Other domestically based flight operators would also remain. These include Binter, a company flying within the different areas of Spain, Viva Air, which was a spinoff from the main business and is a charter company, and Aviaco. These three companies will continue to project distinct brand images in the marketplace. However, closer links would be developed. This would facilitate their inclusion in the Iberia timetable of flights and give a wider range of opportunities to use the existing planes and ground crews more efficiently. In 1995, Iberia signed an accord with the American company, United Airlines, which was aimed at complementing its Latin American interests. Unfortunately, this deal did not work out. Privatisation prospects of Iberia are tied closely to finding a suitable partner and favourable market conditions. The Spanish government has also made efforts to find a domestic investor to take a stake in Iberia, as well as stepping up efforts to create an international alliance with other carriers for Iberia. In September 1996 Iberia revealed that it was nearing completion of an agreement with KLM. Both have roughly the same number of aeroplanes and employ an equivalent workforce. However, KLM’s profits were Pta50 bn in 1995, with Iberia losing about as much in the same year. Iberia’s chairman revealed that KLM proposed to enter into a code-sharing arrangement. It was stressed that this was a firm proposal. Despite the advanced stage that negotiations had reached with KLM, Iberia was also holding discussions with BA (as well as a few others) and it was still premature to predict any potential partner. In summation, there are too many uncertainties over: • • • •

Iberia’s strategy to cope with deregulation; whether Iberia can be consistently profitable; what any upcoming reorganisation will look like; what financial aid it will receive, to consider a privatisation of Iberia in the short or medium term (i.e. before 1998).

6.10.7 Hunosa Hunosa owns and operates the state’s coalmining interests. It is not one of the main candidates for privatisation as it is very expensive due to an inefficient production process. In 1997 Hunosa is expected to get around Pta95 bn in state

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handouts alone and will cost the government around Pta210 bn ($1.6 bn) to run it in 1997. Over the 1997–2000 period, the government has made a provision of Pta300 bn (£1.4 bn), funded by earnings from privatisations, to help reinvigorate the areas in the north of Spain whose main industry is coal. Even with this government help, losses of Pta40 bn are forecast for 1997, which is only Pta5 bn above the Pta45 bn in losses it is expected to make in 1996. Thus, a great deal of reorganisation is required. As this must involve job losses, it is a sensitive topic for politicians to address. In November 1996, the government shelved plans to allow electricity suppliers to purchase coal freely. This would almost certainly have led to cheaper imported coal supplanting domestic coal as the main fuel for generating electricity. Coupled to this were proposals to stop subsidies to the coal sector by 2002. These would also affect private coal producers, who would no longer be able to compete. Since 95 per cent of the entire annual domestic coal output of around 17 million tonnes is bought by the electricity sector, this provoked a heated strike action which forced the government to drop the proposals. Demonstrations in different parts of Spain resulted in special provisions being made for coal. A ten-year restructuring phase will introduce competition into the supply of all other fuels except domestic coal. The major Spanish generating firms are committed to enforcing this plan. The guaranteed buyer of coal that has existed in the sector (i.e. the electricity industry) has compounded on past problems. Since demand was fixed, output remained constant to meet it. All this time jobs were being cut and state aid was increased. The entire coal sector, consisting of privately and publicly owned companies, will need around Pta222.5 bn in aid to keep employing a total workforce of 24,000. This amounts to Pta9.27 million (£42,976) of funding for each employee. The European Commission allowed Spain to aid the coal industry, under the European Coal and Steel Community Treaty, which ends in 2002. This agreement permitted financial help, as long as output was cut. The amount of financial help given was progressively lowered and the sector was gradually opened up to competition. The Industry Minister admitted that Spain had completely flouted the terms of this accord with no credible explanation. Revenues in 1997 from privatisations (Telefonica, Repsol, Endesa) are forecast to generate Pta1,000 bn, which may be directed at rebuilding firms under government control or used to help areas of Spain concerned with coal mining. The government has conceded that any further reorganisation of this sector will have to be accomplished through consultation with the trade unions. Since the beginning of the 1980s Hunosa has been continually subjected to reorganisation, which has resulted in a 50 per cent reduction in the numbers employed to 10,000. Further reductions were planned in 1996 to downsize the workforce to 8,800 by 1997. The negotiations conducted by the Centre Right government with the unions are aimed at trying to shut down every mine run by Hunosa within the next ten years. In early 1997, talks were under way to finalise a viability plan for Hunosa by mid-1998 involving trade unions, business leaders

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and local government bodies. Therefore it seems very unlikely that privatisation of Hunosa is the government’s policy, but instead it is aiming to shut it down. The only other possibility is limited sales of its assets. 6.10.8 Corporación Siderurgica Integral (CSI) In October 1994 the Spanish government approved the reorganisation of the steel companies owned by the state into one body, Corporation Siderurgica Integral (CSI). This amalgamated body will combine Altos Hornos de Vizcaya (AHV) and Ensidesa. CSI will be responsible for carrying out the reorganisation, guided by the proposals approved by the European Commission in December 1993: • reducing the 27,000 strong labour pool by 11,800; • reducing the maximum output volume by 2 million tonnes to 4.5 million tonnes; • building a mini-mill for around Pta30 bn, to be situated in Sestao in Spain, the centrepiece of the reorganisation plan; • permitted financial aid until the year 2000 must total around Pta667 bn, with around Pta100 bn used for investing purposes. This plan may be affected by the European Commission’s failure in early 1995 to agree on a worldwide reorganisation for the steel sector in Europe. The manner in which CSI will be affected remains unclear. The decision to build the mini-mill in Spain might be questionable, especially since a major domestic steel firm, Marcial Ucin, invested Pta11.2 bn in early 1995 to build a steel works at Bayonne in France. Marcial Ucin’s choice of location is a result of more favourable business conditions existing in France. The price of electricity is 20 per cent less expensive (important as a mini-mill is powered by large quantities of electricity in order to melt scrap metal) and the price at which scrap metal can be bought as a raw material is cheaper in France. The implementation of this reorganisation had, by early 1996, begun to show tangible results. For 1995 CSI reported a pre-tax profit of Pta29.1 bn, the first full operational year, during which it had a turnover of Pta387.7 bn. Thus, restructuring of the steel sector has raised the possibility of eventual privatisation, since it is a viable business. This is in stark contrast to the results achieved under the Hunosa restructuring. As a result of this improvement in performance, CSI has attracted the attention of foreign multinational steel manufacturers that wish to purchase shares in CSI. Hence, the government is unlikely to offer shares in CSI to the public for at least another two years. 6.10.9 Astilleros Españoles Astilleros Españoles is the government-owned firm responsible for building ships. It has been reorganised twice in an attempt to make it profitable and is therefore a viable candidate for privatisation. The first reorganisation was in 1984, with another following in 1991. These two reorganisations implemented a schedule of rationalisations, which reduced the number of workers by 17,000

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to around 10,000. In July 1995 the government announced a further reorganisation, when Astilleros Españoles made losses of Pta45 bn ($330 million) in 1994. The government responded by proposing an even more severe schedule of down-sizing: • a further 5,200 workers were to be laid off; • two shipyards were to be shut down and another three privatised, leaving Astilleros Españoles to manage just three full functional plants. However, more financial aid from the state and investments totalling Pta187 bn will be added until 1998. From 1998 onwards the government will not be allowed to give financial aid to Astilleros Españoles, as such aid will be made illegal in OECD countries. The reorganisation was aimed at making the company more productive. Prior to these measures, the government calculated that its financial aid accounted for around 50 per cent of the shipbuilding costs. It is hoped that the rationalisations will deliver improvements in productivity of around 36 per cent, which should also be enough to make the plants profitable. Andalusia and Galacia were the two parts of Spain most directly affected by these measures. In these areas fierce industrial action, which lasted for three months, forced the government to water down the proposals. The proposed number of redundancies was reduced to 3,850 from 5,200 and all plans for closing any of the nine plants were abandoned. The revised plan for rationalising will require funding of around Pta205 bn until 1998, which is Pta20 bn higher than the original plan. This revised plan can be implemented if the European Commission agrees to it. In early 1996 the reorganisation of Astilleros Españoles received two major boosts. The company successfully obtained an order to construct four petrol tankers for use by Statoil of Norway. This is the largest order ever secured by Astilleros Españoles and will keep it busy at least until the end of 1998. In addition, Brasoil has given another large contract, worth around Pta15 bn, to transform a tanker into a plant which produces petrol. Astilleros Españoles did concede at the end of 1996 that despite these orders, losses for the year are expected to be around Pta30 bn. Around Pta90 bn of financial aid from Brussels is expected. This aid might be jeopardised by the large losses incurred in 1996, being regarded either as an indication that Astilleros Españoles is not a viable enterprise, or a sign of the lack of progress in its reorganisation. The management of Astilleros Españoles has remained optimistic, with its stated aim to make a profit in 1998. Privatisation is not even a consideration until the restructuring is completed and the company is in the black. Hence, it is unlikely to be privatised before 1998. 6.11 OTHER PROSPECTIVE PRIVATISATIONS Auxini is 60 per cent owned by SEPI and is involved in the construction business. It has a good privatisation prospect, since 40 per cent has already been placed in

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the hands of a private sector company, OCP, for around Pta3 bn. OCP is also involved in construction and has indicated its interest in acquiring the remaining 60 per cent of Auxini from SEPI. The state-owned paper firm, Empresa Nacional de Celulosas (ENCE), has already been partially privatised. An 18 per cent stake in ENCE was offered in May 1995, when it generated Pta11.7 bn in privatisation revenues. The offer was open only to institutional investors and was timed to take advantage of its previous good performance. After numerous years of making losses, ENCE posted profits of Pta3.3 bn. Its turnover was 42 per cent up in 1994 at Pta32.9 bn. Profits in 1995 were around Pta15 bn. It will be very easy to privatise the remaining stake of ENCE held by SEPI. Aldeasa manages the duty-free shops at the domestic airports and has diversified from this core interest into organising large ventures, including some in the retail sector. It has acquired outlets in government museums. SEPP owns 80 per cent of Aldeasa, with the remaining 20 per cent owned by Aeropuertos Españoles y Navegación Aeran (AENA). AENA is the government body dealing with air and shipping ports. Although SEPP may privatise its stake, AENA is expected to hold on to its stake. Several private sector companies were reported to have made takeover proposals to the government concerning Aldeasa. Among these are FCC (a large building group) with El Corte Ingles as a partner, and Cortefiel (an owner of clothes shops). Duty-free business is threatened by the EU, so Aldeasa will most likely concentrate on ‘logisitic type services’. With this aim it has entered into an agreement with Ogdern Cargo of the USA to rival Iberia in the cargo-handling operation at Barajas airport, Madrid, starting from 1997. Gas Natural has been transformed into the private sector, except for 3.8 per cent still owned by SEPI. Its shareholding structure is divided between two private sector companies: 25.5 per cent is in the hands of La Caixa and 45.26 per cent is owned by Repsol. SEPI’s 3.8 per cent is valued at Pta34 bn and will be issued to La Caixa and Repsol to strengthen the core group of domestic owners built up to influence Gas Natural. The government is also likely to take La 2, the government-controlled TV station, to the stockmarket for a flotation. A relaxation of the rules governing privately owned TV companies is to be introduced to accompany this action. Other smaller companies ready for privatisation include Transmediterraneas, which is 95 per cent government owned. Companies not ready for privatisation fall into two categories: those still not making profits (e.g. Santa Barbara which produces Spain’s defence systems) and those which need a clearer direction, term and structure in the medium term (e.g. CASA, the aerospace firm, and Babcock Wilcox in engineering).

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NOTES 1

2 3

The two companies which effectively started this process of privatisation in 1985 were Textil Tarazona and Ingenasa. Textil Tarazona (a textile company) was sold to CimaEursa and Ingenasa (a company involved in research into genetics) was sold to Exp Rio Tinto. This sale occurred in two sections, first in 1986 and then in 1990. The exchange rate at that time was trading at Pta115 to $1.

Index

Active Population Survey (EPA) 24 adjustment costs 35 Aerolineas Argentinas 126–7, 128 Aeropuertos Españoles y Navegación Aeran (AENA) 132 age factor (employment) 43–7, 52, 60–2 agriculture 2, 4, 69, 70–1; Common Agricultural Policy 3; EFOAG Guarantee 36, 37, 38; employment 45, 47–8, 50, 58, 63 AHV (Altos Hornos de Vizcaya) 130 AIE (State Industrial Agency) 18, 105, 108 Air Europa 125 airlines (privatisation) 125–8 Airtel 99, 102, 111–12, 115, 121 Airtouch 111 Aldeasa 104, 132 Algerian Tin Fouye gas field 124 Altos Hornos de Vizcaya (AHV) 130 analysis of labour market: by region 50–8, 64–5; by sector 47–50, 63 Andalusia 53, 64–5 Antena television station 3, 121 Aragón 53, 64–5 Argentaria 99, 107, 110, 115–17 Astilleros Españoles 130–1 Asturias 51, 52, 53, 64–5 AT&T 114 Austral 127 automobile industry 5–6, 9 Autonomous Communities 28, 38, 43, 50–8, 64–5 Auxini 131–2 Aviaco 127–8 Babcock Wilcox 132 Balearic Islands 51, 52, 54, 58, 64–5 Banco Bilbao Vizcaya (BBV) 101–2, 110, 115, 116, 121–2, 124

Banco Central Hispano 115, 121 Banco de España 5, 9, 10–12, 13, 16–17, 30, 34, 40, 83 Banco Exterior 115 Banco Popular 115 Banco Santander 101–2, 115 Banesto 116 banking sector 4; privatisations 99, 101–2 107, 110, 115–17, 121–2, 124; see also central bank Barcelona Olympic Games 8 Basque Country 51, 52, 58, 64–5 BBV (Banco Bilbao Vizcaya) 101–2, 110 115, 116, 121–2, 124 BCH 101–2, 115, 120–1 Binter 128 Bolsa 118, 119, 120, 124 bond markets 12, 39, 41 bond yields 15, 16, 17 Brasoil 131 Britain 22 British Airways 126, 128 British Telecom 110, 114 budget deficit 3, 18–19, 98; financing strategy (1997) 39–41; Government Budget (1997) 20, 22, 28–30, 32, 34, 39–41 budget summary (1997) 20–41 ‘Cable Television Law’ 113 cable television sector 104, 108, 112–13 Canary Islands 51, 54, 58, 64–5 Cantabria 51, 54, 64–5 capital: flows 12; foreign (in industrial sector) 84–7; formation (gross fixed) 7, 23, 67, 74; investment see investment; spending 28 capital account 11 capital goods 7, 67, 78 134

Index

Carcesa 124 CASA (aerospace firm) 132 Castilla-La Mancha 51, 55, 64–5 Castilla y Léon 51, 55, 64–5 Catalonia 51, 55, 64–5 central bank 15; Banco de España 5, 9, 10–12, 13, 16–17, 30, 34, 40, 83 Centre Right government 106, 129 CEOE (employer’s confederation) 18 Cepsa (oil company) 102, 120, 121 Ceuta 64–5 Club-Med countries 15 CNMV 119 coal industry 38, 103, 128–30 Coal and Steel Economic Community (CSEC) 38, 129 Cohesion Fund 11, 37–8 Coise 124 Common Agricultural Policy 36 Community of Valencia 56, 64–5 comparative advantage:relative revealed (RRCA) 80–2, 95; revealed (RCA) 80–1 competitive advantage 67–8, 78, 80, 84, 87, 91, 92, 94 competitiveness 12, 13, 73, 75–8; based industry groups 80–1, 89–93, 95–6; cost 82–4, 95 construction sector 2, 4, 5, 7, 14, 23, 24, 69, 70–1; employment in 48–9, 50, 63; privatisations 131–2 consumer goods 78 consumer spending 20 consumption: government 7, 23–4; private sector 18, 21, 22–3, 34, 77 Consumption Price Index 15, 23, 24, 25–6 Corporación Bancaria de España 115 Corporación Siderurgica Integral (CSI) 130 corporation tax 18 Cortefiel 132 costs: adjustment 35; competitiveness 82–4, 95; industrial 73, 82–4, 95; labour see labour costs; transactions 73 Counsel of Europe 37 current account 1, 9–11, 24 de-industrialisation process 68, 69 debt see public debt demand, domestic (Treasury role) 40 deregulation 26, 100, 102, 104, 109–11 devaluation of peseta 3, 5, 8–10, 12–13, 15, 33, 76, 77, 82–4, 95 Development Ministry 103–4

135

digital television 114, 115 domestic demand (Treasury role) 40 domestic investment 6 duty-free shops 104, 132 Economic and Monetary Union 20, 21 economic growth (policy aims/challenge) 24–5 economic performance 2–19 economic policy: budget summary (1997) 20–41; operation of (for 1997) 33–5 economic recession (1992–3) 3, 4, 5, 12, 27, 33, 42, 75 economies of scale 85, 86, 87, 91, 95 El Corte Ingles 132 electricity generation/supply 99, 101–2, 103, 105, 107, 115, 117–21, 124, 129 Elf Aquitaine 120 employment 23, 24, 66, 67; creation 28, 52, 58, 75; evolution (by sex/age) 43–7, 60–2; evolution (variation rates) 42–3; sectoral analysis 70; structural change 88–91; see also labour; labour costs; labour market; unemployment; wages Empresa Nacional de Celulosa (ENCE) 99, 132 Enagas 104–5, 121, 122 ENCE (Empresa Nacional de Celulosa) 99, 132 Endesa 99, 102, 103, 105, 107, 115, 117–21, 124, 129 energy: crisis 33; see also fuel industry Enher Group 117 Ensidesa 130 ERZ Group 117 ‘Euro’ 22 European Agricultural Guidance and Guarantee Fund (EAGGF) 11 European Coal and Steel Community 38, 129 European Community:Fund of Development (FED) 35–6; general budget (BGCE) 35–8; single currency 15, 17, 18; single market 87; transfers to Spain 36–8 European Council 15 European Fund of Development (FED) 35–6 European Fund of Orientation and Agrarian Guarantee 36, 37, 38 European Monetary Institute 13, 14–15, 17 European Monetary Union 20, 22, 25, 28, 33, 35, 116; meeting conditions

136

Index

(privatisation process) 98–9; prospects 3, 13–15 European Regional Development Fund (ERDF) 11 exchange rate 22, 77, 82; fixed 33; mechanism (ERM) 12–13, 15, 33; nominal effective 13, 83, 84; real effective 13, 83; stability 32–3 Expo’ 92 (in Seville) 8 exports 3, 5, 23; exchange stability and 32–3; growth 13, 24; sectoral structure of 88, 92, 93, 95; share (evolution) 78–80, 94–5; trade balance 9–11 external balance 9–13 external sector, exchange stability and 32–3 Extremadura 51, 56, 64–5 FCC 132 Fecsa 117, 118, 119–20 FEDER 37, 38 financial account 12 financing policy (1997 state deficit) 39–41 fiscal policy 5, 18–19, 26, 28–30, 32–4, 96 fishing industry 2, 4, 8, 69, 70–1 fixed capital formation, gross 7, 23, 67, 74 fixed investment growth 7 foreign balance 77 foreign direct investment 6–7, 12, 73–4; in industrial sector 84–7, 94, 95 forestry 2, 4 France 22 France Télécom 115 Fridarago 125 FSE 37, 38 fuel industry: coal 38, 103, 128–30; electricity 99, 101–2, 103, 105, 107, 115, 117–21, 124, 129; gas 104–5, 122, 132; oil 99, 101, 102, 104–5, 106, 107, 115, 120, 121–4, 129, 132 Galicia 8, 51, 52, 56, 58, 64–5 Gas Argentina 121 gas industry 104–5, 122, 132 Gas Natural 122, 132 GDP: economic performance and 2, 3–4, 5, 9–10, 14–15, 18–19; government debt as percentage 14–15, 18–19, 28–32; growth 2, 3–4, 5; industry’s share of 68–72, 94; 1997 budget and 21, 22–5, 27, 28–32, 35, 40; trade balance and 9–10

gender, employment variation by 43–7, 52, 60–2 general budget of the European Community (BGCE): Spanish contribution to 35–6; transfers from (to Spain) 36–8 General Cigars 125 general government debt/deficit 14–15 Germany 15, 16, 17, 22 Gesa Group 117 globilisation (of the economy) 86–7 goods:capital 7, 67, 78; consumption 78 intermediate 66 government:budget deficit 3, 18–19, 20–2, 28–30, 32, 34, 39–41, 98; consumption 7, 23–4; debt 14–15, 18–19, 21–2, 28–32, 41; golden share (of privatised firms) 100, 101; privatisation programme 98–132; spending 18, 19, 20, 21, 28; subsidies 105, 129; see also fiscal policy; monetary policy Government Budget (1997) 18, 20–41 gross fixed capital formation 7, 23, 67, 74 gross value added, industrial 72, 74, 75, 76, 85, 86, 87, 88–9, 95 growth:economic (policy aims/ challenges) 24–5; of industrial sector 6, 73–88 GSM digital technology 112 Harding field (in North Sea) 124 Hunosa 103, 128–30 Iberdrola 99, 101–2, 118, 119, 121, 124 Iberia 125–8, 132 imperfect competition 77 imports 5, 23, 24; exchange stability 32–3; trade balance 9–11 income tax 18 industrial costs 73, 82–4, 95 industrial cycle 73–7 industrial gross value added 72, 74, 75, 76, 85, 86, 87, 88–9, 95 industrial growth rate 6 industrial prices 67, 70–3, 77, 82, 83 industrial production 1, 4, 5–6, 68, 74 industry/industrial sector 94–6; development/trends 66–7; employment 47, 48, 50, 58, 63, 66, 67, 76; growth and cyclical evolution 73–87; in international markets 77–82; services sector and (trends) 68–73; structural change 87–92, 93

Index

inflation 1, 75, 77; economic performance 15, 16–17, 18; Government Budget (1997) 21–6 passim, 34 information costs 73 interest rate: economic performance and 12, 15–19 passim; Government Budget (1997) 20–5 passim, 30–2; international comparisons 17; nominal 24; of public debt 30–2; real 24, 25, 30, 32, 34; tenday repurchase rate 16–17 intermediate goods 66 international markets:Spanish industry in 77–82; Telefonica’s expansion into 113–14 internationalisation process 86–7 investment 1, 67, 75, 76; economic performance and 3, 5–7, 12, 18; Government Budget (1997) 20–5 passim, 34; groups (privatised companies) 101–2; see also foreign direct investment Italy 22 Kirch 114 KLM 128 KPN 110, 114 La Caixa 101–2, 110, 121, 122, 132 La Rioja 58, 64–5 La 2 (TV station) 132 labour: intensive sectors 80–1, 82, 84, 95; productivity 27, 69, 70–2, 75–6, 83, 90–1, 94 labour costs 87–8, 95; unit (ULC) 72, 74, 75, 76, 82–4; see also wages labour market 6, 27–8, 42, 59; evolution (by sex and age) 43–7, 60–2; regional analysis 50–8, 64–5; sectoral analysis 47–50, 63 Lesa 124, 125 Leyma 125 liberalisation policies 26, 32, 40, 73, 87, 102, 104 liquidity in markets (Treasury role) 40 liquified petroleum gases (LPGs) 121, 123 Maastricht Treaty/criteria 13–15, 18, 24, 25, 98 macroeconomic environment (Government Budget 1997) 20–41 Madrid 51, 57, 58, 64–5 manufacturing 2; exports (sectoral structure) 88, 92, 93, 94–5; exports

137

(share) 78–80, 94–5; gross value added 85, 86, 87, 88; price/cost competitiveness 82–4; relative revealed comparative advantage 80–2, 95; revealed comparative advantage 80–1; role of foreign capital 84–7; structural change 87–92, 93, 94 Marcial Ucin 130 market share 77, 78–80, 94–5 MCI 114 Melilla 64–5 men (in employment) 43–7, 52, 60–2 merchandise exports/imports 11 milk burdens 36 Ministry of Economy 7, 29, 31, 36, 37, 38, 77, 82–3, 85, 108 Ministry of Industry 105, 106, 108 Ministry of Industry and Energy 74, 81, 82, 85–6, 89–90, 93 Ministry of Public Works 113 mobile phone sector 99, 102, 108, 111–12, 115, 121 monetary policy 5, 15–17, 33, 34, 75–6, 77, 84, 96 Monitor Company analysis 79 MoviLine/Movistar (of Telefonica) 112 Murcia 57, 64–5 Murdoch, Rupert 115 Murzuk field 124 National Hydrocarbons Institute (INH) 104–5, 121 Navarra 51, 57, 58, 64–5 nominal unit labour costs 75 noyaux durs 101, 110, 114 OCP 132 OECD 29, 67, 68, 131 Ogdern Cargo 132 oil industry 99, 101, 102, 104–5, 106, 107, 115, 120, 121–4, 129, 132 Olympic Games (Barcelona) 8 openness, degree of (of economy) 92, 93, 94 ‘Other Transferences’ (EC to Spain) 38 output (Spanish economy) 3–4 paper industry 132 Patrimonio del Estado 104, 105, 106 Patrisimo 98 Pegaso 98 Pemex 121 pension system 18, 34 ‘per capita’ income 27, 74

138

Index

performance, economic 2–19 peseta 28; behaviour of 12–13; devaluation 3, 5, 8–10, 12–13, 15, 33, 76, 77, 82–4, 95 Philip Morris 125 Portugal Telecom 110 prices: competitiveness 82–4, 95; Consumption Price Index 15, 23, 24, 25–6; industrial 67, 70–3, 77, 82, 83; relative 67, 70–3, 77, 83, 91, 96; sectoral (change) 91–2; stability 24, 25–6 private consumption 18, 21, 22–3, 34, 77 privatisation 18; EMU conditions and 98–9; policy shifts 102–3; programme of 99–101; prospective state companies for 108–33; regulation 103–4; reorganisation of state holding companies 104–6; shareholders (groups of) 101–2; shareholding structure 101; strategies 106–8 product differentiation 77, 86, 95, 96 production: branches of activity (sectoral analysis) 47–50, 63; structural change 88–91 productivity 27, 69, 75–6, 83, 90–1, 94; relative 67, 70–2 profit margins 12; in banking sector 116– 17; in industrial sector 72, 74–6, 83–4, 95 Progress towards Convergence (European Monetary Institute) 13 public debt 14–15, 22; amortisation 39; financing strategy (1997) 39–41; maintenance 30–2; maturity (expiry outline) 41; stabilisation 28–9; structural components 29–30 public deficit 3, 18–19; Government Budget (1997) 20, 22, 28–30, 32, 34, 39–41 public incomes 28, 34 public services 21 public spending 18, 19, 20, 21, 28, 32, 34 recession (1992–3) 3, 4, 5, 12, 27, 33, 42, 75 regional analysis (employment) 43, 50–8, 64–5 regional funding 14 regulation (of privatised companies) 103–4 relative prices 67, 70–3, 77, 83, 91, 96 relative productivity 67, 70–2

relative revealed comparative advantage (RRCA) 80–2, 95 relative unit costs 91 RENFE (national railways) 18, 105 Repsol 99, 101, 102, 104–5, 106, 107, 115, 121–4, 129, 132 research and development 87 retail sector 104, 132 Retevision 99, 102, 104, 105, 107, 108, 114–15 revealed comparative advantage (RCA) 80–1 RTVE (national broadcasting group) 18, 105 Santa Barbara (defence system) 132 savings 22, 23, 25, 40 SEAT (car company) 98 sectoral analysis (employment) 47–50, 63 sectoral clusters (world exports) 78–80 sectoral composition of industry 87–93 sectoral prices (change) 91–2 sectoral structure: of exports 88, 92, 93, 95; of manufacturing 88–90, 94 SEPI (State Company for Industrial Holdings) 105–6, 108, 118, 121, 125, 126, 128, 131–2 Sepla (trade union) 127 SEPP (State Company for Patrimonio Privatisation) 105, 106, 108, 124, 132 services sector 2, 4, 21; employment in 47, 49–50, 58, 63; expansion of 68–73 Sevillana de Electricidad 117, 118, 119–20 Seville (Expo’ 92) 8 sex, employment by 43–7, 52, 60–2 shareholders (in privatised companies) 101–2 shareholding structure 101 shipbuilding (Astilleros Españoles) 130–1 single currency 15, 17, 18 Single European Market 87 social security 14, 18, 28 Socialist government 106 Sonatrach 124 Spain: Autonomous Communities 28, 38, 43, 50–8, 64–5; budget summary (1997) 20–41; economic performance 2–19; industry 66–96; labour market 42–65; privatisation 97–132; structural changes (in 1990s) 1 specialisation 67 state: deficit (in 1997) 39–41; see also government

Index

139

State Company for Industrial Holdings (SEPI) 105–6, 108, 118, 121, 125, 126, 128, 131–2 State Company for Patrimonio Privatisation (SEPP) 105, 106, 108, 124, 132 state holding companies:prospective privatisations 108–33; reorganisation of 104–6 State Industrial Agency 18, 105, 108 Statoil (of Norway) 131 steel industry (privatisation) 130 structural actions 37, 38 structural changes: in production and employment 88–91; in Spain (1990s) 1; in Spanish industry 87–92, 93 Structural Funds 37 Swiss Telecom 114

tertiary sector (employment in) 42, 43, 45, 47 Tin Fouye gas field 124 TISA (Telefonica International) 113–14 tobacco industry 107, 124–5 Toledo Pact 34 Total 124 tourism 3, 4, 8–9, 24 trade; balance 9–11; exchange rate stability 32–3 trade unions 18, 127 trading partners 10–11 transaction costs 73 transferences to Spain (from EC) 36–8 Transmediterranea 104, 132 Treasury 29, 30, 31, 36–8, 77, 82–3, 85; financing policy/strategies 39–1 Treaty of Rome 20

Tabacalera 99, 104, 106, 107, 124–5 tariffs: on electricity supply 103; imports 32 taxation: income 18; value-added tax (VAT) 18, 26, 29, 35 technology 67, 68; based industry groups 80–2, 85–95 passim telecommunications: evolution of (medium term) 114; privatisation 99, 103–4, 106, 107–15 Telecommunications Law (1987) 113 Telecommunications Market Commission 103–4 Telefonica 99, 101, 104, 106, 107, 108–14, 115, 117, 122 Telefonica International (TISA) 113–14 Telefonica Moviles 111–12 telephone sector 99, 101–2, 104, 106, 107, 108–14, 115, 117, 121–2 television industry 132; cable TV 104, 108, 112–13; digital TV 114, 115 Telia (of Sweden) 114 ten-day repurchase rate 16–17 Teneo 105–6, 125, 126 tertiarisation process 69, 70, 72–3

Unelco Group 117 unemployment 1, 2, 5, 20, 21, 23, 24, 27–8, 34, 45 Union Fenosal 118, 120, 121 Unisource 114 unit labour costs 72, 74, 75, 76, 82–4 United Airlines 128 Valencia 56, 64–5 value-added tax (VAT) 18, 26, 29, 35 Viajes Halcon 125 Viesgo Group 117 Vigo 8 Viva Air 128 wages 18, 24, 26, 34–5, 66, 72, 75–6, 83, 95 WEFA 78 welfare state 27 women (in employment) 42, 43–7, 52, 60–2 world exports, Spanish share (clusters) 78–80 yield curve spreads 15, 16