spain: the tough choices ahead
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Spain: the tough choices ahead. Dani Rodrik May 28, 2010. Widening external imbalances. And rapid structural change away from tradable sectors. An international comparison. …on industry share of GDP. What countries in Spain’s position need to do. Reduce aggregate expenditures - PowerPoint PPT PresentationTRANSCRIPT
Spain: the tough Spain: the tough choices aheadchoices ahead
Dani RodrikDani Rodrik
May 28, 2010May 28, 2010
Widening external Widening external imbalancesimbalances
Current account balance (% of GDP)
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
1981
And rapid structural change And rapid structural change away from tradable sectorsaway from tradable sectors
Structure of the economy (%of GDP)
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Tradables
Non-tradables
An international comparisonAn international comparisonGDP per capita (US$ at PPP)
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Spain Germany Finland Israel South Korea
……on industry share of GDPon industry share of GDPIndustry (% of GDP)
10
15
20
25
30
35
40
Spain Germany Finland Israel South Korea
What countries in Spain’s What countries in Spain’s position need to doposition need to do
1.1. Reduce aggregate expendituresReduce aggregate expenditures• Private sector has already retrenched significantlyPrivate sector has already retrenched significantly
2.2. Boost competitiveness of tradable goods and Boost competitiveness of tradable goods and services (exports and import substitutes) services (exports and import substitutes)
• Key: increase labor demand in tradablesKey: increase labor demand in tradables
The second is needed to moderate the adverse The second is needed to moderate the adverse effects of belt-tightening while accomplishing effects of belt-tightening while accomplishing the needed structural change. the needed structural change.
Without it, the recession runs deeper, Without it, the recession runs deeper, unemployment is larger, and the fiscal hole unemployment is larger, and the fiscal hole becomes more difficult to fill.becomes more difficult to fill.
Spain starts from a low point in Spain starts from a low point in terms of competitivenessterms of competitiveness
Source: IMF
What about structural What about structural reforms?reforms?
What may be desirable in the medium- or What may be desirable in the medium- or long-term may not be particularly effective long-term may not be particularly effective in the short-runin the short-run
Structural reform may not be a good Structural reform may not be a good substitute for policies that directly increase substitute for policies that directly increase competitivenesscompetitiveness– Labor-market reformsLabor-market reforms
Reducing cost of firing workers will not increase Reducing cost of firing workers will not increase demand for labor much when no-one wants to hire new demand for labor much when no-one wants to hire new labor to begin withlabor to begin with
Decentralizing wage bargain may have little effect on Decentralizing wage bargain may have little effect on the level of wages the level of wages
And it can eat up lots of political capitalAnd it can eat up lots of political capital
How to boost competitiveness How to boost competitiveness (1)(1)
Increase productivity in tradablesIncrease productivity in tradables– This reduces unit labor costsThis reduces unit labor costs– But: this is a medium- to long-term But: this is a medium- to long-term
strategystrategy It cannot happen quickly enoughIt cannot happen quickly enough
– Recent productivity growth achieved Recent productivity growth achieved through labor sheddingthrough labor shedding Which of course defeats the purpose Which of course defeats the purpose
Spain’s productivity Spain’s productivity performanceperformance
Productivity growth
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
1981
Labour productivity growth (%)
Total factor productivity growth (%)
Source: EIU
How to boost competitiveness How to boost competitiveness (2)(2)
Currency depreciationCurrency depreciation– Gives quick boost to competitiveness, unless Gives quick boost to competitiveness, unless
wages and prices catch upwages and prices catch up– It is the traditional remedy used by countries to It is the traditional remedy used by countries to
extricate themselves from crises of this typeextricate themselves from crises of this type– But Spain doesn’t have its own currencyBut Spain doesn’t have its own currency
even a large depreciation of the Euro would be even a large depreciation of the Euro would be insufficient since 70% of Spain’s exports go to other insufficient since 70% of Spain’s exports go to other EU membersEU members
Leaves exit from the eurozone as the only Leaves exit from the eurozone as the only (unappetizing) option (unappetizing) option
How to boost competitiveness How to boost competitiveness (3)(3)
A “fiscal” devaluation A “fiscal” devaluation – Raise import tariffs and apply export Raise import tariffs and apply export
subsidiessubsidies– In principle, it mimics a currency In principle, it mimics a currency
devaluationdevaluation– But few successful casesBut few successful cases
South Korea and Taiwan during the 1960s and South Korea and Taiwan during the 1960s and 1970s; China in 1990s1970s; China in 1990s
– And would violate EU and WTO rules in And would violate EU and WTO rules in any caseany case
How to boost competitiveness How to boost competitiveness (4)(4)
A cut in nominal wagesA cut in nominal wages – Reduces domestic costs and boosts external Reduces domestic costs and boosts external
competitivenesscompetitiveness– But needs to cover private sectorBut needs to cover private sector
Can’t be limited to public sector wagesCan’t be limited to public sector wages
– And it needs to be accompanied by similar cuts And it needs to be accompanied by similar cuts in the in the pricesprices of other services and non- of other services and non-tradables (e.g. utilities, transport and logistics, tradables (e.g. utilities, transport and logistics, housing, …)housing, …) Otherwise the effect on competitiveness remains Otherwise the effect on competitiveness remains
limitedlimited And workers bear unnecessarily large real wage cutsAnd workers bear unnecessarily large real wage cuts
How to boost competitiveness How to boost competitiveness (5)(5)
Industrial policyIndustrial policy – Targeted promotion of new industriesTargeted promotion of new industries
Through subsidies, public loans, public-private Through subsidies, public loans, public-private collaboration to remove identified bottleneckscollaboration to remove identified bottlenecks
– All successful countries engage in industrial All successful countries engage in industrial policies, even if they do not call it thatpolicies, even if they do not call it that
– But takes time to implement and get resultsBut takes time to implement and get results– And it requires a lot of government capacityAnd it requires a lot of government capacity– Unlikely to be effective on its own in a Unlikely to be effective on its own in a
depressed economic environmentdepressed economic environment– There is no successful example of IP in a high-There is no successful example of IP in a high-
cost environment cost environment
The bottom lineThe bottom line
Two unappetizing optionsTwo unappetizing options– Quit the eurozone and let the currency Quit the eurozone and let the currency
depreciatedepreciate– Engineer an economy-wide reduction in Engineer an economy-wide reduction in
wages and prices of serviceswages and prices of services Requires political leadership and a social Requires political leadership and a social
compactcompact