Ignacio de la Torre. Professor. IE Business School
19 March 2013
The export boom has added nine points to Spain’s GDP in record time because Spain’s exporters have not only managed to maintain levels of productivity in the good years, but also raise them in very difficult times.
A famous investment bank recently stated that “Spain is turning into the next Germany”. Actually, this observation is not exactly breaking news, because the reality is that the Spanish economy has managed to swiftly redirect its production output away from the domestic market and toward the international community. One day we will look back and realize how this transformation took place in record time, and will see it as nothing less than a heroic feat.
Consider the facts:
First, there was the “perfect storm” which came to a head when Spain found itself having to fund its enormous current deficit (10% of GDP in 2007, and which would be positive by 2013) and a fall in credit levels the like of which had never been experienced in living history (almost 20% of GDP since 2007). Given this scenario it would have been reasonable to expect Spanish GDP to have fallen by over 15%, and it is true that domestic demand has dropped by that amount. Why, then, has GDP only dropped by 6% over that period? The explanation lies in the export boom, which has added nine points to the GDP in record time. Very few countries in the world have managed to pull off something like that.
Second, when Spain’s competitiveness dropped drastically between1998 and 2007, numerous gurus said off the record that it was because the cost of labor units had risen faster than that of our trading partners, and that therein lay the origin of our crisis. What they didn’t mention, however, is that said rise was due to a statistical quirk resulting from the creation of masse employment in the construction sector, where low levels of productivity per capita where the norm, and that this is what pushed Spain’s competitiveness figures down. The Ford factory in Valencia, for example, continued to be just as competitive. This is why Spain managed to maintain its world share of exports during these “bad” years, while the same cannot be said of the UK, Italy or France.
Third, since the start of the crisis wages have gone down in Spain, while there has been a sharp rise in productivity. Consequently the cost of labor units in Spain has dropped by over 4%, while those of our main trading partners have risen by between 5 and 10%. Thus, Spain had a trade surplus with the Eurozone by the third quarter of 2011, a historic achievement which sadly was not given the recognition it deserved by the press.
Fourth, Spain’s services sector is currently reaching record export levels, fuelled not only by the tourism sector, given that Spain has just robbed France of the number two spot in the world after the US, but also by the export of other services such as engineering or education.
Fifth, as a consequence of the above points Spain has reached record levels of exports of goods and services (€350,000 million per annum). In 2011 a trade surplus was achieved, with the exception of energy, for the first time in fifteen years. In 2012 Spain exported more goods and services than it imported for the first time since the Euro was introduced, which explains why it is now on the way to having a current account surplus, and is therefore saving in aggregate terms vis-à-vis the rest of the world. Export levels of Spanish goods and services now account for 35% the country’s GDP, placing it second only to Germany in this respect among the main EU economies.
What lies ahead for the export sector? Once again, the future seems promising.
First, a Spanish worker costs €20 per hour, while an Italian worker costs €27, a German costs €33, and a French worker €35 . Nevertheless the Spaniard is more productive per hour than an Italian, and only 10% less productive than the French or Germans, which means that the other countries’ greater labor costs are not offset by the difference in productivity. That is why Spain is beating Italy and France hands down in terms of trade, and has massively reduced its deficit with Germany.
Second, the figures show that the labor reform has prevented wage levels from rising along with inflation. This means that the Spanish workforce is not only more competitive, but also more flexible. This will ensure that the number of Spanish products and services worldwide will continue to grow.
Third, Spain had hitherto hardly touched regions with export potential like Latin America (strange as it may seem), Africa, Middle East and Far East. Now it is making up for lost time, which is why in 2012, an extremely difficult year for the world economy, Spain managed to increase its exports to these regions by 20%. Initial low levels and Spain’s regained competitiveness will secure strong growth in the future, particularly when compared to the constant loss of competitiveness of many emerging economies.
Fourth, the fabric of Spanish export production is famed for its low elasticity. If, for example, tobacco consumption is not very elastic (people carry on buying it even though the price goes up) and luxury goods are highly elastic (the opposite happens), then Spain’s exports have proved to be inelastic, unlike the exports of many emerging economies. If we deconstruct Spanish exports we can see that they are far more similar in structure to German exports than those of a country like China. This is important as it means that Spanish exports will not only continue to grow, but they will also not be subject to much volatility.
Fifth, as a consequence of all the above points Spain is attracting increasingly more direct foreign investment, which is now growing at an accelerated rate. This investment is no longer aimed at funding real estate promotion, solar energy parks or leveraged acquisitions. It is now aimed at new industrial activity with export capacity, particularly in the automobile sector. It will result in more exports, which in turn means more jobs, and will help the Spanish GDP to start growing again in 2014, bringing unemployment levels down.
There is still crucial work to be done to ensure this trend continues. The Spanish economy relies heavily on SMEs (65% of GDP and 80% of employment). In order to carry on exporting it needs a lot more mid-sized companies, not small ones (as demonstrated so clearly by German mittelstands). Spanish companies are, however, mainly small rather than mid-sized. That is why it is vital to implement state policies that foster the consolidation of Spain’s SMEs. Moreover, Spain is still experiencing pressing problems where bank loans are concerned, and said problems are not going to go away for a long time. It is therefore essential that non-banking sources of funding be made available to Spain’s exporters to enable them to keep growing. Finally, although the registration of patents in Spain has reached record levels, which could partly explain the increase in productivity in the Spanish economy, the productivity level of its R&D sector is still very low. Moreover, real collaboration among companies, business schools and universities is key to underpin a knowledge economy that will lay a solid foundation for exports driven by added value.
Guy Sorman, the French economist, journalist and philosopher, said a couple of years ago that “consensus is not always the truth.” Bewailing our misfortunes will not get us anywhere. Spain will not exit the crisis if it is led by vacuous state figures, no matter how much they say that it was they who saved the day when it is eventually all behind us. Spain will be led out of this by anonymous people who spend their lives in planes, opening up markets for Spanish products by means of sheer determination.
One day both history and the Spanish nation will thank them for their heroism.