Competitive Spain

José María O´Kean. Professor. IE Business School

12 April 2011

Lack of competitiveness is the biggest problem facing the Spanish economy, and in order to address it we have to commit to the digital revolution and to training programs for workforces.

The main problem with the Spanish economy is its lack of competitiveness. This is the root cause of our high unemployment and ongoing debt which we avail ourselves of in order to maintain the standard of living we want. It is also the reason why we´re finding it so difficult to extricate ourselves from this crisis, now that devaluation is impossible. Countries like Germany reap an immediate benefit from the recovery of the global economy, and exports strengthen the economy. Spain, however, needs its domestic demand to recover and restricted financing is required for this to happen.

Being more competitive than the countries you compete with depends on four factors: productivity, costs, inflation and currency devaluation. Spain has always lost competitiveness in the first three areas but devaluation has restored it. As devaluation is not possible within the Monetary Union, we have to face up to the challenge of competitiveness and establish a strategy as a competitive country. If we are not competitive, we buy more than we sell and we have to go into debt to finance these purchases, and Spain´s solvency becomes questionable. If we are not competitive, we will end up having to adjust our purchases to what we can sell and our standard of living will fall, which is what is happening at the moment.

Moderating our costs depends initially on greater competition among business supply markets - including energy and telecommunications - and also on finding a different way of negotiating labour costs. Our labour costs rise more than our inflation and our inflation is higher than the rise in prices in the countries we compete with. The inflation-cost spiral lowers our competitiveness year after year.

In developed countries, however, the main competitive factor is productivity - given that cost and price rises are very moderate. Productivity is the value generated by each hour of work – in other words, earnings for each hour worked. Spain had negative annual rates of productivity during the last growth cycle. We have grown by putting in a lot of hours’ work, but not by increasing productivity. Why are we so unproductive? The reasons behind our low productivity and, in the last instance, lack of competitiveness are diverse, but we can highlight the main reasons. Firstly, the technological gap of our businesses and our public administration when the digital revolution was expanding. Secondly, the inadequate training of our workforce and ultimately our economic culture, which is more inclined towards looking for income than entrepreneurship and innovation. One particular institutional aspect is one of the main causes of this low productivity: the high number of temporary contracts.

These contracts represent 30% of the total number of contracts for workers in the private sector. It is difficult for a company to invest in training workers who will be dismissed in six months´ time. The company is unlikely to use very sophisticated technology and naturally its productivity will be very low.

Information systems have become a major factor in improving productivity. They improve productivity on two levels: efficiency and value creation. An improved information flow within businesses coupled with a link between internal functional areas and the external business environment (customers and suppliers) brings about improvements in efficiency which enable the same amount to be produced in less time. But the biggest boost which the implementation of these information systems can bring about concerning improved productivity is the potential for value creation.

Today we do not buy goods or services, but rather consumer feelings. The intensity of these feelings determines the value of things and the price we pay. A lot of these feelings search for product differentiation, what differentiates us as customers, a feeling of exclusivity or belonging to a particular network, a nose for quality or the chance to own a state-of-the-art product. In the end, we buy physical goods (Hard) which are wrapped in a feeling (Soft), and the combination of both determines the value we pay for. These feeling are derived from our use of information systems and our impression of the product, both of which differ from those of the source company.

The competitiveness challenge lies in improving productivity via value creation. Information systems and talent are the major productive factors at the moment and there is still a lot to be done in this area.

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