Ignacio de la Torre. Professor. IE Business School
17 December 2012
Lower labor costs, the increasing weight of GDP in knowledge-intensive sectors, and the growth of patents, have all served to strengthen Spain’s exports.
In 1918 Oswald Spengler predicted the inexorable deterioration of our civilization in The Decline of the West. But although his closing chapter was somewhat disturbing, he did state that at the point of collapse there would always be a group of soldiers willing to act to save the West.
Given the general air of moral, economic and political debacle in Spain, it is high time that we highlighted the heroic performance of our export companies. Right now, not only are Spain’s exports breaking records, having reached an annual rate of almost 200 billion euros, but its 3.4% rate of growth in exports (having grown by 13.5% in 2010 and another 7.6% in 2011), is greater than that of China, the world’s leading exporter (+2.7%). Moreover I have the impression that this trend is set to intensify over the next few years. What lies behind this behavior?
The competitiveness of a nation depends largely on the main consumables of the production process, the key component of which is labor, which makes up approximately two thirds of the costs of the average firm. Labor, in turn, is measured in terms of the cost of an hour of work and the productivity of each hour worked. Thus, although France has a higher level of productivity per hour of work than the US, the Americans are richer because they work more hours and because the percentage of population that works is greater than in France.
The cost of labor, in every market, depends on the supply and demand for work. As unemployment rises, there are more people willing to do their work for less money, which drives down the salary expectations of the active population, thereby strengthening the negotiating position of the company. The result is that in Spain labor costs are in inexorable decline, resulting in more competitive exports. Meanwhile, productivity per hour worked is rising for a series of reasons, including the collective bargaining reform, rising investment in research and development, the greater weight of GDP in knowledge-driven sectors, and an increase in patents. Hence GDP per hour of work has risen by 8% since 2008, while it has fallen by 1% in the UK and Germany, and risen by 2% in France. Finally, Spain has one of the highest numbers of hours worked, which serves to bust yet another internal and external myth. In other words, this tweaking of the trinity of labor costs, productivity per hour, and number of hours worked, has made Spain one of the most attractive destinations for investment in Europe, which augurs well for a golden era of Spanish exports.
In China the opposite is happening. In 2004 Chinese exports grew by 34%. Following an extraordinary rural exodus, the growth in demand for work resulting from industrial activity has outgrown the supply of skilled labor, resulting in annual double-figure increases in salary (more than 150% in the aggregate since 2004, while productivity has risen by only 8%). Sadly, these rates of increase have not translated into higher levels of consumption by Chinese households, due to structural factors explained in previous articles. Unlike German exports, Chinese exports are very elastic and easily replaced when their competitiveness falls, whether it is due to fluctuations in the exchange rate (the Yuan has risen by 30% in recent years), labor costs, (which, as we have seen, have rocketed), or the cost of land (which has also soared by 70% since 2004 as a consequence of a badly executed Keynesian policy). In the context of extremely weak exports to Europe (down by 15%), it is not surprising that Chinese exports are sluggish, given that they have coincided with the fallout of residential overinvestment. It will be years before the situation returns to normal.
Preconceived ideas that Spanish exports offer low added value, are very elastic, and have lost a lot of competitiveness since the launch of the euro, need to be recalibrated. Although the cost of labor in Spain went up when the euro came in, Spain managed nicely to keep its world market share of exports, far better than other powers, such as the UK. The secret of this paradox? At the time the construction sector carried more weight, and, as I have explained on previous occasions, it has a far lower level of productivity than the national average. This meant that the cost of an hour of labor appeared higher than it really was, but it didn’t mean that export sectors, such as automobiles or food, were less competitive, as the figures clearly show. They may have been under a little pressure because of labor costs, but they managed to compensate in such a way that their competitiveness was not affected.
In the fall of 2011 Spain achieved a trade surplus with the EU, for the first time in recent history I believe. This historic fact went unnoticed amid the wave of national pessimism (which was really a different take on the same wave that had begun as false optimism in 2005-2007).
In 2013 Spain will have a current account surplus - another historic fact. Spain will become a net capital exporter to the rest of the world. When this happens, it will probably also go unnoticed, drowned out by fatalisms, nationalisms and political folly.
Once again, the “anonymous heroes” that Schumpeter praised so highly, will silently pull the nation back out of the abyss. I am talking about our small and mid-sized exporters, and our large exporters, about small and large entrepreneurs and pieceworkers competing with advanced economies like France and Germany, reaching the highest level of production in our history. When all is said and done, we need to take drastic measures to pull ourselves out of this, namely i) a reindustrialization of Spain with a marked focus on exports, ii) a funding plan for export SMEs, and iii) a concentration policy among SMEs to improve productivity levels by growing the average export firm.
When the worst is over, some sly politician will no doubt try to claim the credit for such an epic feat. But don’t be fooled – it is clear that our hopes and our salvation rest upon these heroic exporters and the creative destruction of their efforts.