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5th Spanish I-O Analysis Conference: New challenges for a shifting and global economy. SHAIO. Seville 2013

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Conjectures about the crisis in Spain

Julio Sánchez Chóliz

Abstract

Starting from the conjecture that the current crisis in Spain is in fact part of a wider

picture and is associated with the downswing of a long wave, we review the main problems

facing the country’s economy and some possible measures and actions.

We begin by justifying the long wave hypothesis using data from the US economy and

Spanish productivity data. Observation of economic developments in Spain reveals that the

country has basically been a follower in the technological wave, achieving growth above all

through the assimilation of existing technologies and the economic modernization associated

with the transition to democracy and integration with the European Union. In this regard, we

also analyse the evolution of eight different sector blocs through a structural decomposition of

value added in the period 1980 to 2007.

Among our main conclusions, we argue that input-output analysis must be combined with

other methodologies, and that a swift solution to the crisis is not be expected. Also, it is clear

that Spain needs to invest more in R&D if the country is to return to growth, and that it will

need to undertake far-reaching structural reform of the tax system, the labour market and the

welfare state. In light of these results, it does not appear reasonable in the medium term to

argue for longer working hours, later retirement or the continuation of the current tax system.


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1. Introduction

The depth of the current economic crisis, the failure of many highly regarded economists

to forecast its arrival and effects, and the hard road to recovery demand some reflection on

the causes of the downturn, our responsibilities as academics and the policies needed to

overcome the situation. In this paper, I have followed in the path opened up by other more

qualified scholars, who have urged that we review our ideas and models (see, for example,

Howitt et al., 2008 and Solow, 2008). I certainly believe that all economists need to reflect on

what went wrong, what we overlooked and what we forgot. As I hope to make clear, we

ignored the cycles associated with innovation and we mistook the nature of the crisis,

believing it to be a financial crash (or at least a crisis in which financial factors were

uppermost) and disregarding the lessons of ’29 and the existence of long economic waves. Not

everyone fell into this trap however. For example, Korotayev and Tsirel (2010) produced an

outstanding spectral analysis, on which Table 1 is based, identifying the current crisis as the

downswing in the fifth wave, which began some thirty-five years ago.

Table 1. Swings in the world economy

Long wave number Long wave phase Starting dates Ending dates

One Upswing End of the 1780s - beginning of the 1790s 1810-1817

Downswing 1810-1817 1844-1851

Two Upswing 1844-1851 1879-1875 Downswing 1879-1875 1890-1896

Three Upswing 1890-1896 1914-1928/29 Downswing 1914-1928/29 1939-1950

Four Upswing 1939-1950 1968-1974 Downswing 1968-1974 1984-1991

Five Upswing 1984-1991 2008-2010? Downswing 2008-2010? ?

When I refer to a long wave, I do not mean the deterministic and inevitable existence of

cyclical developments in the economy occurring with a periodicity of around 50 years. For

those who believe in such waves, crises are inevitable every 50 years. My own view is rather

different. I assume that long waves have existed in the past and that we are once again in the

throes of a crisis of this nature, but the occurrence and severity of such phenomena are due

mainly to our ignorance of any techniques that might cancel them out, or at least mitigate

them. Unfortunately, the underlying causes are highly complex, including technological

development, the pace of social learning, the social dynamic generated by the desire of


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individuals to achieve wealth and satisfaction, social uncertainty about new scientific

breakthroughs and the availability of natural resources. All of these factors and more mean

that the length of waves may vary (ranging at present from 35 to 70 years)1, that they are

difficult to foresee, and that each such crisis is unique and has its own specific features. In this

light, it could be said that even if we believe ourselves to be in the midst of a Kondratiev-type

crisis, we cannot be completely sure. In the end, we must make do with conjecture and accept

the risk that we may be wrong.

My claim in this context is that the current crisis is not a financial crash. The monetary

factor is important, of course, but the true causality is much deeper, consisting of the

exhaustion of technological growth prospects, the exhaustion of the natural resources used by

our society, a dearth of the know-how and experience necessary for society to embark upon

new projects, and the difficulty of realigning institutions and changing the rules (rights and

obligations) applicable to economic agents. In short, this is essentially a crisis of production

and a political crisis (by which I mean politics in the broad sense). One direct consequence of

this, which has also been ignored, is that this crisis will not simply work itself out but will

require major changes in power relations and in the distribution of incomes. In this regard,

there can be little doubt that crises like the present one are as much social as economic.

2. The situation in Spain

All of this is of particular relevance to the Spanish economy, in which low levels of

productivity and feeble competitiveness, unemployment, energy dependence, specialization in

some of the industries that have been hardest hit by the crisis like tourism, construction and

automobile manufacturing, and general frustration over the impossibility of maintaining the

living standards achieved during the boom years all combine to reveal the urgent need for

change (Cabrales et al., 2009; OECD, 2012; Eurostat, 2012). The questions we must answer are

clear. What is the nature of our crisis? What technological options will lead us into the new

phase? How will incomes be distributed? What must we change if we are to return to growth?

Have we taken the right or the wrong measures so far? These questions must be addressed

without delay. Let us consider the salient facts.

2.1. High rates of unemployment

The policies applied by two governments of a very different political hue in recent years

do not appear to have been much help in solving Spain's problems. More than 6 million

1 We measure waves in terms of physical time, but we should rather measure them in terms of historical time, which is quite different.


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workers were unemployed at the beginning of 2013, representing over 27% of the country’s

total labour force, the highest figure in the last fifty years. The previous (Socialist) government

allowed joblessness to rise to almost 5 million, an employment rate of 25%, but matters have

only worsened since the new, conservative administration of the Partido Popular took power.

(see Charts 1, 2 and 3).

Chart 1. Joblessness and unemployment rate

Number of jobless workers (left scale); percentage unemployment (right scale); methodological change at 2Q 2001 Source: http://clementepolo.files.wordpress.com/2013/04/parados-012013.png

Chart 2. Quarterly unemployment figures since 1976 (official Labour Force Surveys)

Source: http://javiersevillano.es/EPA.htm

http://clementepolo.files.wordpress.com/2013/04/parados-012013.png


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Chart 3. Quarterly unemployment rate since 1976 (official Labour Force Surveys)

Source: http://javiersevillano.es/EPA.htm

2.2. High deficit and rising debt

Government debt continues to grow as the administration has proved incapable of

aligning spending with revenues, or to put it more accurately to generate sufficient revenues

to cover key expenditures. There is little that can be said for the political capacity of a

government which posted a deficit of 7% in 2012 (not counting financial support for the

banking system) after slashing spending in all directions, cutting civil service wages and putting

public works practically on ice, and which is now applying the axe to health services, education

and research. Nor are there any easy arguments in defence of the short-lived and ineffective

Plan E launched by the previous administration, which merely masked the reality of the crisis

for a while, or of its action in launching a system of state-funded dependency aid for which

there was no money available. This is the kind of policy which only engenders frustration and

anger in society at large. Charts 4 and 5 plot the evolution of the deficit and debt during the

terms of recent Spanish governments in comparison to other European nations according to

Eurostat.

2.3. Pervasive corruption

The much-criticized corruption infesting the Spanish economy has spread both wide and

deep, making it difficult to establish the true extent of the problem. Like an open sore,

corruption taints the whole of society. There are of course many levels of corruption and they

are not all alike −some are even socially acceptable−, but sleaze is now so widespread that

some kind of social response has become a matter of urgency. Chart 6 shows the world map of

corruption and the 2012 political corruption ranking prepared by Transparency International,

which finds Spain in 30th place.


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Chart 4. Surplus over GDP* (per Eurostat)

* 2012 includes support for the banking sector. Source: http://javiersevillano.es/BdEDeuda.htm

Chart 5. Consolidated gross government debt as a percentage of GDP (per Eurostat)

Source: http://javiersevillano.es/BdEDeuda.htm

2.4. Need for economic and structural change

In addition to the economic problems of unemployment, deficit financing and corruption,

many of Spain’s economic structure are crying out for change and in their current state can

only hinder recovery from the crisis. Let us consider some of these structures:

a) The tax system is poorly designed and very unfair. The enormous range of taxes and

levies, collected by a plethora of different institutions, mean that the cumulative tax

burden bears little relationship to actual incomes. The great fortunes enjoy

numerous opportunities to reduce their tax payments and contribute very little.


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Chart 6. World political corruption in 2010


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Meanwhile, the distinction between corporate expenses and the expenses of

shareholders could clearly be improved. The underground economy represents

approximately one fifth of Spain’s total economy, and of course it pays no taxes.

Finally, fairness is not guaranteed even where the citizen pays in conformity with the

law, because rights continue to depend to a great extent on geography and income

levels.

Chart 7 shows the reality of the underground economy province by province, while

Chart 8 compares Spain with other OECD countries. In percentage terms, Spain’s

underground economy is 1.5 times that of Germany and almost three times that of

the United States.

Chart 7. Percentage underground economy by province in 2009

The Gestha report does not include data for the Basque Country and Navarre, which have their own tax systems. Source: Gestha.

b) The social and economic structure maintains numerous corporate privileges which

shackle competition. This situation affects notaries, pharmacists, architects and

numerous other professionals, and the EU has long urged deregulation. This

corporate rigidity also extends to other areas, which share with the professions the

same inflexibility in the face of change, not to mention the demands for income

guarantees. Some of the rigidities found in the public sector in Spain are also of this

nature.


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Chart 8. Percentage in GDP of underground economy in different countries

Countries: Greece, Italy, Portugal, Spain, Belgium, Sweden, Denmark, Finland, Germany, MEAN, Ireland, Canada,

France, United Kingdom, Australia, Netherlands, Japan, Luxembourg, Austria and USA

c) The existence of multiple tiers of government is unsustainable. The four basic,

structural tiers are defined by direct election and comprise European, national,

regional and local government. However, a closer examination reveals as many as

nine levels: European, European regions, national, regional, provincial, metropolitan

areas, district, municipal corporations and municipalities. This adds to the cost of the

public administration and duplicates or multiplies responsibility, resulting in a highly

complex web of administrative competences which is neither transparent nor

efficient.

d) The situation described in the preceding point has also splintered the single market in

Spain, since tax charges differ considerably from one region to the next, as do

regulations and technical standards, while permits and licences are not necessarily

valid nationwide.

e) Finally, social inequality has grown dramatically over the last 10 years. Organizations

like Caritas and Unicef have warned of the gravity of this problem and its impact on

children. Chart 9 shows the high Gini coefficients for Spain and the adverse

development of the index compared to partner nations in recent years according to

Eurostat data.


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Chart 9. Gini indices for disposable income in 7 European countries, 2002 to 2011

Source: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&pcode=tessi190&language=en

2.5. Need for institutional and sociological reforms

Profound institutional and social change will also be needed if Spain is to up its game and

recover from the current crisis, as the system has used up the social credit gained in the

transition to democracy in the late 1970s and early 80s, and outstanding problems must now

be addressed. Chief among these are the following:

a) The Spanish legal system is slow and could be made much fairer. This is particularly

true in the case of serious financial crimes, for which offenders normally receive

relatively light sentences after protracted trial proceedings which rarely require the

return of the sums misappropriated. Many such cases are in fact dismissed for lack of

evidence or because they have become statute barred. No wonder then, that it was

the European and not the Spanish courts which found that the terms of many

property mortgages were leonine.

b) The political class is largely discredited, and the groundswell of disaffection among

voters is only growing. The same is true of the trade unions and employers’

organizations. Meanwhile, their sources of income appear in some cases quite

unjustifiable at a time of crisis, even if they are legal. The scant attention of elected

officials and union or business leaders to their duties and their apparent preference

for party or organizational politicking are likewise indefensible. Finally, the borderline

and even outright corruption of some politicians is absolutely intolerable.

http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&pcode=tessi190&language=en


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3. Do economic waves exist? Are we in such a wave?

Our analytical conjecture is that the current crisis in Spain is part of a broader crisis, and

that it is associated with the downswing phase of the current wave. This phase would have

begun at the world level around the turn of the century, and it may last 20 year or longer.

When the wave slows and stagnation sets in, the outlook for innovation diminishes as the

available technological alternatives are exhausted, business earnings drop and incomes fall. Let

us look at some of the theoretical and empirical arguments underlying these claims.

3.1. Existence of waves

Fatás-Villafranca et al. (2012) offer a theoretical model of long waves and the processes

linking successive waves which reflects many of their expected properties. Taking an entirely

endogenous approach, the model generates approximately sigmoid curves for the productivity

of both labour and capital, which are the result of unequal rates of investment and

technological development. We may distinguish an initial phase of slow growth (recovery)

followed by a phase of fast growth, a period of deceleration and a final phase of stagnation.

These developments and their phases may be shortened or lengthened depending on the

timing and intensity of the investment process, which affect the duration and shape of the

underlying sigmoid function. Consequently, we should not expect each of the different waves

to last for any specific length of time, or to evolve a clearly sigmoid shape other than in certain

cases, which will be the exception rather than the norm.

Meanwhile, the logistical evolution is based on investment processes and innovation

booms, and the model therefore allows the conjecture that the wave will generally change

(and the investment processes that result in a new wave will occur) after the deceleration and

stagnation phases or, in other words, after a period of falling productivity and diminished

innovation prospects. These periods, linked as they are to the deceleration and stagnation

phases, will also feature low or negative growth rates, falling corporate profits and lower

income generation (wages and/or business earnings).

The paper confirms the connection between long and short cycles and their influence on

each other, and its authors further maintain that the frequency and amplitude of short cycles

rise at the end of the wave, making this period much more unstable.

3.2. The last wave in the US economy

In their applied study, Jarne et al. (2007) obtained sigmoid adjustments for US industrial

capacity indices. Specifically, clear logistic evolutions were obtained for total US industrial

capacity index and for indices of four key sectors (Durable goods; Manufacturing; Computer &

Communication Equipment & Semiconductors; and Primary Processing) in the period 1967-


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2003. The data utilized were obtained from http://www.federalreserve.gov/datadownload.

The adjustments obtained are shown in Charts 10 to 14, and the parameters applied may be

consulted in Jarne et al. (2007), pages 250 and 251. Given their quality, the adjustments

support the conjecture that the evolution of the US economy over the last 50 years did indeed

follow a long-wave cyclical pattern.

Chart 10. Adjustment of the total US industrial capacity index from 1967 to 2003

Chart 11. Adjustment of the US consumer durables industry capacity index from 1967 to 2003

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http://www.federalreserve.gov/datadownload


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Chart 12. Adjustment of the US manufacturing industry capacity index from 1967 to 2003

Chart 13. Adjustment of the US computer, electronics and semiconductors industry capacity index from 1967 to 2003

Chart 14. Adjustment of the US primary processing industrial capacity industry from 1967 to 2003

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These results reflect a slow growth rate until around 1986, followed by a period of sharp

acceleration with signs of exhaustion appearing around 2002. The growth rate is clearly

decreasing in the 1970s but picks up again around 1986. Hence, the 1960s and 70s would

correspond to the contractive phase of the previous wave, and the transition to a new wave

begins somewhat before 1980 (we may recall here the events of May 1968 and the first oil

crisis, which occurred in 1973). After a few years of slow growth in the new technologies, the

rapid growth phase took off around 1986. Symptoms of exhaustion begin to appear after

20022, indicating that the downswing had already begun, although it was very difficult at the

time to deduce the exact nature of these phenomena. These led us to the following conclusion

in our paper:

“our adjustments point to the exhaustion of growth in 2002, although the

available information does not allow us to hazard a guess as to whether this

will be temporary or permanent” (page 258)

The tests described above have been repeated with more recent data from the same

source in an effort to confirm the findings from the study. The new monthly data cover the

period from 1967 to 2012, inclusive, and are represented together with the adjustments in

charts 15 to 19.

Chart 15. Adjustment of the total US industrial capacity index from 1967 to 2013

2 This is consistent with the belief that waves follow a Gompertz-type sigmoid curve rather than a logistic curve, as the acceleration phase is rapid while contraction and deceleration take place over a significantly longer period. As may be observed, timing is consistent with the results obtained in the spectral analysis performed by Korotayev and Tsirel (2010) and described above.

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Chart 16. Adjustment of the US consumer durables industry capacity index from 1967 to 2013

Chart 17. Adjustment of the US manufacturing industry capacity index from 1967 to 2013

Chart 18. Adjustment of the US computer, electronics and semiconductors industry capacity index from 1967 to 2013

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Chart 19. Adjustment of the US primary processing industrial capacity industry from 1967 to 2013

The adjusted sigmoid curves remain very good in four of the five cases, all except

“Computers, communications equipment and semi-conductors” in fact. These four cases, then,

corroborate and confirm the conclusion that the US economy has evolved in cyclical terms as a

long wave over recent decades. Growth rates have so far been slower in all of the years of the

21st century than in the 1990s. Furthermore, the duration of short cycles has decreased

compared to previous years, and they have become more intense, reflecting the rising

instability predicted in theory. In this light, we may affirm with some degree of certainty that

we are in fact in a long wave which began sometime before 1980, entered the fast growth

phase around 1986 and began to contract at the turn of the century, triggering and deepening

recessions after 2008.

This wave would at present have lasted some 35 years, and based on past experience it

could take more than a decade to work itself out and allow room for the inception of a new

wave, which would in turn require some time to generate significant economic expansion. If

this is true, strong growth is not to be expected for the next five years or so, even if the current

wave is short.

The adjustment for Computers, communications equipment and semi-conductors is also

interesting. Until 2002, this sector follows the sigmoid evolution of the other sectors and

industrial capacity as a whole, but growth returned in that year and since then the industry has

followed an erratic path. In other words, its technology is being absorbed into the new wave,

which probably means this sector is one of the technological keys to the new paradigm. This

would explain the computer industry’s continued growth. What will be the basis of the new

paradigm? This is no easy question, but it is likely that it will be founded on technological

breakthroughs in nanotechnology and materials science, bioengineering, genetics, medicine,

artificial intelligence, renewable energy, climate control and/or telecommunications, and many

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of these developments will themselves be related with the Computers, communications

equipment and semiconductors sector.

3.3. Falling world productivity and growth

Let us now consider other empirical data in support of the conclusion that we are in the

downswing of a long economic wave.

If innovative new technologies have become more scarce, we should expect the growth

rates of the most developed nations to fall, even if their growth is not entirely cancelled (as

there is always room for minor gains due to learning and replication), and we should also be

able to observe diminishing productivity. Charts 20 and 21 for France and Germany (obtained

from Fuentes Castro, 2013), and Chart 22 (Fuentes Castro, 2012) confirm the decline in

productivity and show that falling output in these countries is due in the main to a reduction in

total factor productivity (TFP). In contrast, Chart 23, which shows value added in the Spanish

economy, and indeed Chart 22a reflect productivity growth. However, this was generated only

by labour (basically as a result of job losses and rising unemployment), while TFP has also

fallen in recent years.

Chart 20. Productivity gap compared to the pre-crisis period in Germany

It could be argued that shrinking productivity and growth affect only a few countries,

which would contradict theoretical expectations for the end of a wave. In particular, the cases

of China and Brazil would appear to support this view. However, the issue is not whether

output is growing, but whether this growth is attributable to the use of new, innovative

technologies or to the use of known technologies which have become available through spill-

over processes (often resulting from the establishment of local affiliates of multinational

corporations) and imitation.


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Chart 21. Productivity gap compared to the pre-crisis period in France

Chart 22. Breakdown of labour productivity in the member States of the European Union

(a) Spain, (b) Germany, (c) France, (d) Italy, (e) United Kingdom, (f) European monetary union of 12 countries K/L, stock of capital per hour worked; MFP, multifactor productivity


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Chart 23. Productivity gap compared to the pre-crisis period in Spain

China’s double-digit growth in recent years is the result not so much of an innovative

technological leap in the world context, but of the extensive application and assimilation of

technologies imported from abroad. It is an open question whether China will succeed in

leveraging its current situation to place itself in the technological forefront and develop the

basis for sustained growth in the coming decades.

The reasons for the apparently anomalous growth achieved by Spain, observable in Charts

23 and 22a, are at least partially similar. On the one hand, Spain maintains a large wage gap

compared to most developed countries, which means it can compete internationally on price

in medium and medium-high technological sectors (construction, civil engineering and so on)

even though Spanish firms use the same technologies as their foreign rivals. Meanwhile,

cutting wages makes many low technology products (tourism, farm produce, etc.) even more

competitive. The final question is the same for Spain as for China. Will the country succeed in

making progress, or will it continue to trust in prices, imitation and technological spill-over to

compete.

3.4. Growth and productivity of the Spanish economy from 1980 to 2007

Leaving an in-depth analysis of the technological evolution of the Spanish economy for

later, let us now turn to consider the evolution of value added and productivity, as well as the

compatibility of the evidence with our conjecture. The information was obtained from the EU

KLEMs database (http://www.euklems.net/) ISIC Rev 4, and it is presented for the eight sectors

which we shall use in the structural breakdown of Spanish income presented below. An

excellent description of this period will be found in OECD (2007).

http://www.euklems.net/


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Charts 24 and 25 show the evolution of value added at 2005 constant prices. Growth

slowed in the early 1970s and almost came to a halt in the early 1980s, whereafter it gradually

speeded up, peaking in 1986. Except for the crisis of 1992, value added grew at a smart pace

until the onset of the recent crisis, which cast the Spanish economy into the slough of the

present recession. Chart 24 shows the final phase of the fourth wave, which ended in the

1980s, and the expansion associated with the fifth wave in two shorter cycles. Three cycles

(which could be Juglar cycles3) can be appreciated more clearly in Chart 25. The first would be

the last phase of the preceding wave, and the following two would belong to the upswing of

the new wave, which means the Spanish economy would now be in the downswing associated

with the decline in technological productivity.

Chart 24. Value added in the Spanish economy (billions of euros)

Chart 25. Change in value added in the Spanish economy (%)

All of this is clearly confirmed by the evolution of total factor productivity in the economy

as a whole and in the aforementioned eight sectors, calculated using data from the same

3 Juglar cycles or fixed investment cycles last for between 7 and 10 years and are associated with the output and returns obtained from the utilization of investments in capital goods.

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source and presented in Charts 26 to 34. TFP in the total economy shot up in the 1980s with

the onset of the new wave, peaking at the end of the decade although it remained high until

1995, when the trend switched to a clear, sustained decline. This fall continued over the turn

of the century, and by 2004 productivity was down to the same level as in 1980. However, TFP

continued to sink and by 2009 it was some 4% less than in 1980. This pattern is clearly in line

with the processes that occur at the end of a long wave.

TFP of course evolves at its own rate in each of the sectors, but this does not invalidate

the overall conclusion. Productivity grew in the primary sector (Chart 27) in the 1980s and 90s,

but since then it has remained more or less constant (which may explain why this sector has

performed rather better than others in the crisis years). In the energy sector (Chart 29), TFP

also increased in the 1980s and 90s, but it has slipped since the turn of the century.

Chart 26. TFP of the Spanish economy, 2005 = 100

Chart 27. TFP of the primary sector in Spain, 2005 = 100

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Chart 28. TFP of the energy sector in Spain, 2005 = 100

Chart 29. TFP of the high and medium-high technology sectors in Spain, 2005 = 100

Chart 30. TFP of the medium-low technology sector in Spain, 2005 = 100

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Chart 31. TFP of the low technology sector in Spain, 2005 = 100

Chart 32. TFP of the construction sector in Spain, 2005 = 100

Chart 33. TFP of the high technology services sector in Spain, 2005 = 100

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Chart 34. TFP of the other services sector in Spain, 2005 = 100

The evolution of the technology sectors is somewhat surprising, but we confirm it in the

structural decomposition presented below. Productivity grew at the beginning of the period

analysed in the high and medium-high technology sector (Chart 29), which accounts for only a

small share of Spain’s total GDP, but it has remained basically stable since 1995. Consequently,

it acts as permanent technological modernization factor throughout the period. In contrast,

TFP in medium-low technology (Chart 30), which is a much more relevant sector industrially

and in terms of jobs, displays growth in the 1980s but has fallen continuously over the last two

decades. Low technology presents a similar picture (Chart 31), although there has been some

improvement in recent years.

TFP has also fallen in construction since 1996. Finally, services (Charts 33 and 34) display

declining productivity throughout the whole period. TFP in high technology services was very

high in 1980 but had fallen by almost half in 2009. TFP has also declined in other services.

Given their significant role in income generation, the evolution of these three sectors is

decisive for Spanish TFP as a whole.

3.5. Falling incomes in the most developed nations

Technological exhaustion puts downward pressure on incomes in the developed nations

in two ways. On the one hand, the removal of technological prospects reduces income growth

(business surpluses + wages). On the other, the absence of innovative new technologies

requires additional investments in human capital, which places greater pressure on business

surpluses and wages. Therefore, we may expect that the end of a wave will be accompanied by

falling growth in wages and the replacement of less skilled workers by capital (labour-saving

innovations). Chart 35, obtained from the 2012/2013 Global Wages Report published by the

International Labour Organization, confirms that the predicted decline in wages has actually

occurred worldwide.

0

20

40

60

80

100

120

140

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008


24

Chart 35. Growth in (inflation adjusted) real wages in 2006-2011

We cannot ignore the fact that this downward pressure on wages is a source of social and

institutional conflict and a serious problem in a context that will require a major increase in

investment in the future. Recent growth in nationalist feeling in the EU, increasing xenophobic

tendencies, wars and conflicts like the fighting in the Congo, the revolts of the Arab spring and

civil strife in Syria are themselves symptoms of the end of a wave, in the same way as the

events of May 1968 in France and the Vietnam War accompanied the end of the previous long

cycle.

There was also conflict over the distribution of incomes at the beginning of the wave in

the 1980s, but with the advantage that the economy was undergoing an expansion and the

income to be distributed was increasing. The opposite is true today. A social consensus is once

again needed, but it is now much more difficult to forge for objective reasons, so that the

problem is by no means black and white.

3.6. Rising speculation

Assuming that the wave is running to its end, we may expect less directly productive

investments and an increase in speculative processes. And indeed the last 15 years have

witnessed ballooning financial speculation and rising investment in refuge assets like gold, land

and artworks. Investments of this kind offer scant prospects for profit unless they are

supported by real economic growth (as was the case in the 1980s) and are much more likely to

end in financial disaster. The cases of Lehman Brothers and the bankruptcy of the Icelandic

banks confirm this conclusion. It could be said that the same kind of things happened in the

1980s without catastrophic consequences, but at that time we were in the midst of an upswing


25

and speculative processes were underpinned by a much stronger outlook for real technological

growth.

The scarcity of good productive investments was the main factor fuelling the property

bubbles in the United States, Ireland and Spain. Furthermore, China may be creating the

conditions for a new property bubble, and the same could be said of some other economies.

4. Sector-based analysis of Spanish economic growth from 1980 to 2007

Having confirmed that the present crisis is closely linked with the cyclical evolution of a

long wave which has lasted from the 1980s until today, let us analyse the progress of this wave

in the different sectors of the Spanish economy and consider how it has affected economic

transformation and modernization over the last three decades.

To do this, we shall use the input-output methodology, applying the structural

decomposition analysis (SDA) technique to value added in the period 1980-2007. Applications

of this technique to changes in productivity may be found in Casler and Gallantin (1997) and

Dietzenbacher et al., (2000), and in Sánchez Chóliz and Duarte (2006) in the specific case of

Spain.

We have used a differential-type SDA to obtain the components, focusing especially on

technology. The methodology reveals four technological components, which we shall call the

technological effects on wages, labour (physical input of work) and capital, and the

substitution effect. The analysis also allows quantification of changes in wages, labour and

capital (wage, labour and capital effects). Finally, we shall calculate a scale effect as the

difference between the total change in value added (captured as a demand effect) and the

total technological effect, which is the sum of the four technological effects mentioned.

4.1. Methodology applied to the decomposition of Spanish value added and data bases

Our decomposition is based on the input-output model x = (I-A)-1y, where x is the vector

nx1 of output, (I-A)-1 is the Leontieff inverse, and y is the nx1 vector of final demand. If we call

the nx1 vector of value added v and the nx1 vector of the unit coefficients of value added c,

and if we use ^to indicate the diagonal matrix, we obtain the relation:

v = c x = c (I-A)-1 y e, with e’ = (1, 1,...,1)’

Taking into account that c can be expressed as 'clw'c' capˆ += , where w is the nx1 vector

of wages, l is the nx1 vector of labour inputs and capc is the nx1 vector of the coefficients of


26

payments to capital4, and if we substitute A by Ω(I-c), where Ω is a matrix with the same

technological structure as A but with sum 1 columns5, we can obtain expression (1), which is

the starting point for our analysis:

v = [w l + capc ] [(I - Ω (I - c )]-1 y e (1)

By differentiating (1) we obtain the following expression, which gives us the

decomposition we seek:

dv0 = dw 0 l

0[(I-Ω 0(I-c

0)]-1y 0e -c

0[(I-Ω

0(I-c 0)]-1Ω

0dw 0 l

0 [(I-Ω 0(I-c

0)]-1 y 0e

+w 0d l

0 [(I-Ω 0(I-c

0)]-1y 0e -c

0 [(I-Ω

0(I-c 0)]-1Ω

0w 0d l

0 [(I-Ω 0(I-c

0)]-1 y 0e

+dccap0 [(I-Ω

0(I-c 0)]-1y

0e - c 0[(I-Ω

0 (I-c 0)]-1Ω

0dccap0 [(I-Ω

0(I-c 0)]-1 y

0e (2)

+c 0 [(I-Ω

0(I-c 0)]-1 dΩ

0(I - c 0) [(I - Ω

0(I - c 0)]-1 y

0e

+c 0 [(I - Ω

0(I - c 0)]-1 dy

0e

The first, third and fifth addends of (2) are respectively, the wage, labour and capital

effects. The last addend is the demand effect and the rest (second, fourth, sixth and seventh)

are the technological effects on wages, labour, capital and the substitution effect, which is also

a technological effect. The sum of the first and third addends is the labour cost effect. A

negative labour cost effect implies a cost saving, which is a characteristic feature of labour-

saving innovations. Meanwhile, the sum of the labour cost effect and the capital effect is the

manufacturing effect, which reflects changes in factor costs. The first three technological

effects reflect the impact of changes in value added, and the fourth captures impacts which

are due solely to the substitution of inputs.

The following five equations, which can be deduced from (2), are used to understand the

economic meaning of the above decomposition:

e’c 0[(I - Ω

0(I - c 0)]-1dy

0 e = e’dv0 (3.1)

e’[dw 0 l

0[(I-Ω 0(I-c

0)]-1y 0e -c

0[(I-Ω 0(I-c

0)]-1Ω 0dw

0 l 0[(I-Ω

0(I-c 0)]-1y

0e ]= 0 (3.2)

e’[w 0d l

0 [(I-Ω 0(I-c

0)]-1y 0e -c

0[(I-Ω 0(I-c

0)]-1Ω 0w

0d l 0[(I-Ω

0(I-c 0)]-1y

0e]= 0 (3.3)

e’[dccap0 [(I-Ω

0(I-c 0)]-1y

0e - c 0[(I-Ω

0(I-c 0)]-1Ω

0dccap0 [(I-Ω

0(I-c 0)]-1y

0e ] = 0 (3.4)

4 Payments to capital are calculated as the difference between gross value added and payments to labour and, therefore, they represent the sum of the net business surplus, depreciation of fixed assets and output taxes. 5 The use of Ω breaks the dependence noted by Dietzenbacher and Los (2000) between ∆c and ∆(I-A)-1. The dependence of the technology matrix Ω on value added is nil.


27

e’c 0[(I-Ω

0(I-c 0)]-1dΩ

0(I-c 0) [(I-Ω

0(I-c 0)]-1y

0e = 0 (3.5)

Equation (3.1) tells us that the sum of the demand effects in all of the sectors is the same

as the total variation in value added. Therefore, the demand effects in (2) cannot be

interpreted as mere scale effects in the economy, as they also include technological impacts.

This leads us to define the scale effect as the difference between the demand effect and the

total technological effect, which captures the whole of the contribution made by technological

change.

Expressions (3.2), (3.3.) and (3.4) throw light on the meaning of three of the components

of the technological effect. Here we may observe that the sum of the wage, labour and capital

effects for all sectors of the economy is equal to the sum of the related technological effects.

In other words, they capture the same information although they take the opposite sign. The

wage, labour and capital effects measures the direct cost saving (or cost increase) on the

factors of production, while the corresponding technological effects, which take the opposite

sign, represent the productivity gain (increase in value added) associated with the cost savings

achieved. This gain is subsequently maintained because it is incorporated into the production

technology.

Finally, by taking a value of zero equation (3.5) tells us that certain inputs are increased

and others are reduced over the whole of the substitution process (the zero value is possible

because substitutions are measured using Ω). This zero sum does not in any way imply that

substitution effects are irrelevant, and indeed there may be large differences between sectors

but these are balanced out in the economy as whole. It is to be expected that these differences

will be greater the more intense the technological change.

Twenty-eight successive IO tables obtained by the authors6 were used to estimate the

annual decomposition obtained in (2) for the period 1980-2007. For these purposes, we began

with the input-output tables published by the Spanish Statistical Institute (INE) for 1980, 1985

and 1995, and the input-output tables for the period 1995-2007, which were converted to

symmetrical tables applying the industry technology hypothesis. The data for aggregate value,

gross output and labour at constant 1995 values were obtained from Euklems (2009). The 28

initial sectors in the table were then grouped into eight sectors or blocs to facilitate

presentation and analysis. Industrial sectors were grouped on the basis of the technological

criteria employed by the OECD (2009), and in services we distinguished between high

technology and other services. The sectors resulting from this process were as follows: Primary

6 Obtaining a homogeneous series of IO tables for such a long period obviously involves some difficulty, mainly due to the presence of methodological differences in the calculation of the tables and the need substitute estimates based on available information for years in which tables are not available.


28

sector (PS), Energy sector (ES), High and Medium-High Technology (HT&MHT), Medium-Low

Technology (MLT), Low Technology (LT), Construction (C), High Technology Services (HTS) and

Other Services (OS).

A series of 28 estimates were obtained for value added and 27 for each of the different

effects in the sectors and in the Spanish economy as a whole. For the sake of clarity, we shall

focus especially on the mean annual values obtained for the four sub-periods 1980-1986,

1987-1992, 1993-1999 and 2000-2007, coinciding with the upswings and downswings of the

Juglar cycles referred to above. Further information is available up request.

5. Results

5.1. Sector-based evolution of value added from 1980 to 2007

As we have seen, the evolution of the Spanish economy follows a long wave which began

in the 1960s, displaying two cycles since 1980 separated by the crisis of 1992. Value added

grew at a mean annual rate of 3% over the course of this period. This may be broken down

into two clearly expansive sub-periods (1980-1986 and 1993-1999) including peak growth of

over 6.5% in 1986, and two periods of deceleration in the economy (1987-1992 and 2000-

2007). See Chart 25. The first sub-period saw strong economic growth, which was largely

driven by reforms and the outlook for integration with the European Union. The growth rate

dropped after 1986, however, falling to its lowest point in 1992, which marked the turning

point and the beginning of fresh cycle of investment leading to growth of more than 4% in

1997, 1998 and 1999. Growth rates fell below 3% in 2001 and 2002, and although growth

continued at a smart pace it did not again rise to the levels of 1999, and still less those of 1986.

We may recall here that the long wave had already entered its downswing by this time. Fuelled

by construction, the second growth cycle lasted for a considerable time, but crisis eventually

hit the economy and negative growth appeared in 2008. The evolution of the economy and its

component sectors is shown in Table 2 and in Charts 36 and 37. We may note here that the

maximum growth rate of 6.58% achieved in 1986 in the first cycle is higher than the maximum

rate of 5.01% (1999) for the second growth cycle.

Although all eight sectors followed cyclical processes to a greater or lesser degree, the

individual evolution of each differed widely. Other Services, which includes most tourism-

related activities and public services, generated an average of more than 50% of total growth

in the period (1.63% of the 3.00% total growth achieved), making it decisive for economic

growth although less so for modernization. It also played a clearly anti-cyclical role, as may be

observed in Chart 37 and in Table 2. Thus, the mean growth rates in the sector in the two


29

expansionary periods were 1.68% and 3.16%, but these rates rose to 3.17% and 3.79% in the

two slowdowns. The most pro-cyclical sector was High and Medium-High Technology, which

displays much higher growth rates in the two periods of expansion.

Table 2. Changes in value added in the Spanish economy 1980-2007

Sector contributions to VA growth (% of total VA) PS ES HT&MHT MLT LT C HTS OS Total

Mean 1980-2007 0.10 0.11 0.20 0.12 0.11 0.29 0.43 1.63 3.00 Mean 1980-1986 0.23 0.13 0.23 0.07 0.17 0.02 0.24 0.97 2.05 Mean 1987-1992 0.18 0.10 0.04 0.02 0.18 0.32 0.58 1.76 3.18 Mean 1993-1999 0.05 0.10 0.39 0.27 0.11 0.34 0.51 1.74 3.51 Mean 2000-2007 -0.04 0.10 0.11 0.12 0.00 0.48 0.42 2.09 3.29

Sector contributions to VA growth (% of total VA for each sector) PS ES HT&MHT MLT LT C HTS OS Total

Mean 1980-2007 1.95 3.55 3.17 2.17 1.38 3.71 5.90 2.94 3.00 Mean 1980-1986 4.26 4.54 3.85 1.21 2.02 0.36 4.58 1.68 2.05 Mean 1987-1992 3.18 3.14 0.49 0.08 2.09 4.54 9.13 3.17 3.18 Mean 1993-1999 1.23 3.17 6.13 4.93 1.48 4.50 6.03 3.16 3.51 Mean 2000-2007 -0.70 3.28 1.81 2.17 0.05 5.57 4.33 3.79 3.29

Chart 36. Value added growth rates in the Spanish economy

Chart 37. Value added growth rates in the Spanish economy by sector

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Spanish economy

OS

HTS

C

HT&MHT

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Spanisheconomy

OS

HTS

C

HT&MHT


30

The sectors with a strong technology component, also made a significant contribution to

growth. Thus, High and Medium-High Technology contributed 6.6% to average total growth

and High Technology Services contributed 14.4% (0.20% and 0.43% of the 3% total achieved),

and in both cases the growth rate was above the mean for the Spanish economy (see Table 12

and Chart 37), especially in the case of High Technology which grew at almost twice the mean

national rate. This only underscores the key role played by these sectors in the development

and modernization of the Spanish economy, even if their achievement was grounded more on

technological spill-over processes and imitation than original developments. Together with

Other Services (including tourism and public services) and Construction, these two sectors

account for much of the economy’s strong rates of growth, although they have yet to rise to

the challenge of generating and applying their own R&D.

High Technology Services contributed significantly to growth in value added, especially in

the period 1987-1992, which belongs to the upswing of the long wave despite the contraction

in Spain. However, this contribution shrank in the 1990s from 17.81% in 1987-1992 to 14.5% in

1993-1999, dropping to 12.8% in 2000-2007. This decline in the contribution and the fall in the

sector growth rate in the 1980s are consistent with the high initial level of TFP followed by

ongoing decline as the long wave ran its course. The evolution of High Technology Services in

Spain thus reveals how the sector’s capacity to modernize was gradually exhausted as

innovation lost momentum in the downswing of the wave.

Table 2 also shows a gradual decline in the contribution of the Primary and Low

Technology sectors, in line with the profound changes affecting the productive model of the

Spanish economy, which became much less dependent on agriculture and on the activity of

small workshops and firms in this period. We may recall the evolution of TFP in these sectors.

Another significant feature of the Spanish economy in this period is the development of

the Construction sectors, which grew faster than the economy as a whole except in 1980-1986,

achieving average annual growth of 5.57% in the period 2000-2007. This meant that it

contributed 10.2% of total growth in the second sub-period and 9.6% in the third, followed by

a stellar 14.5% in the last sub-period. However, a large part of the growth achieved in the

latter years of the period was due to the property bubble created by the lack of other better

investment prospects.

To end, we may note that the structural features observable in 2000-2007 are startlingly

similar to those of the other period of contraction (1987-1992), including faster growth in

Other Services, falling growth rates in the High Technology Services and High and Medium-

High Technology sectors, and an even more abrupt decline in the Primary and Low Technology

sectors. This should have sounding a warning of the impending downturn, despite the mirage


31

effect of growth in the construction sector. The truth is that the crisis did not come out of

nowhere, but was already brewing as technological opportunities were gradually used up.

5.2. Structural and technological change in Spain between 1980 and 2007

Let us look now at the structural and technological changes that have occurred in the

Spanish economy through the effects defined in (2). Table 3 shows the calculation of some of

these effects expressed as percentages of output in each sector.7 Chart 38 shows the total

scale and technological effects for the Spanish economy as a whole.

5.2.1. Technological effect and scale effect

The mean scale effect for the period 1980-2007 was around 83.30.% of the demand effect

(1.18% of the mean unit increase in value added compared to 1.41%) according to the last

column of Table 3, and the mean technological effect was 16.70%. This shows that value added

in the Spanish economy grew above all due to the increase in the demand effect, consumer

spending and exports, even though it was technological modernization and rising productivity

which made this increase in demand possible. This supports the position that Spain was above

all a technological imitator throughout the wave.

As may be observed from Table 3 and in Chart 39, the sectors with the largest

technological effects between 1980 and 2007 were Energy and High Technology Services. In

the former, the technological was greatest in the first and last sub-periods, but in High

Technology Services it was largest in the first two sub-periods, and especially the second

(1987-1992). The scale effect was negative in the Energy sector and only very small in High

Technology Services, showing that growth in both sectors was due basically to technological

development. In contrast, growth in Other Services, Medium-Low Technology and the Primary

sector was due mainly to the scale effect. In the last two sectors, the scale effect served to

offset a strongly negative technological effect. Finally, the scale effect also predominates over

the technological effect in High and Medium-High Technology, although the latter is positive in

this sector. This confirms that the scale effect predominates over the technological effect in

the Spanish economy, and that innovation was highly imitative.

7 Effects are presented as percentages of output for each sector to reflect their relationship with total production costs.


32

Table 3. Changes in value added and VA components as a percentage of sector output PS ES HT&MHT MLT LT C HTS OS Total

Chan

ge in

VA

Mean 1980-2007 1.16 1.63 0.95 0.66 0.38 1.29 3.39 1.80 1.41

1980-86 2.50 2.00 1.20 0.31 0.56 0.10 2.72 1.08 0.99 1987-92 1.97 1.45 0.16 -0.01 0.59 1.66 5.45 2.01 1.55 1993-99 0.76 1.56 1.86 1.62 0.40 1.59 3.45 1.93 1.67 2000-07 -0.49 1.49 0.48 0.61 0.01 1.86 2.23 2.20 1.47

Dem

and

effe

ct

Mean 1980-2007 1.52 0.40 1.01 1.15 0.41 1.15 1.88 1.93 1.41 1980-86 1.79 -1.08 0.64 1.43 0.53 0.20 1.01 1.34 0.99 1987-92 1.62 2.28 0.64 0.64 0.74 1.91 1.53 2.10 1.55 1993-99 1.98 0.43 1.98 1.67 0.11 0.92 3.28 2.12 1.67 2000-07 0.69 0.24 0.72 0.79 0.30 1.70 1.64 2.20 1.47

Tech

nolo

gica

l eff

ect

Mean 1980-2007 -0.48 1.15 0.10 -0.43 0.10 0.25 1.91 0.27 0.24 1980-86 0.52 2.74 0.39 -1.89 -0.14 -0.08 1.87 0.13 0.02 1987-92 0.31 -1.31 -0.46 -1.11 0.18 0.27 3.82 0.38 0.24 1993-99 -1.46 0.85 0.42 0.57 0.29 0.35 0.87 -0.26 0.08 2000-07 -1.19 1.97 -0.04 0.59 0.07 0.48 1.34 0.85 0.60

Scal

e ef

fect

Mean 1980-2007 2.00 -0.75 0.92 1.59 0.31 0.90 -0.03 1.66 1.18 1980-86 1.27 -3.82 0.26 3.32 0.68 0.27 -0.86 1.21 0.97 1987-92 1.31 3.59 1.10 1.75 0.56 1.64 -2.28 1.71 1.31 1993-99 3.44 -0.41 1.57 1.10 -0.18 0.57 2.41 2.37 1.59 2000-07 1.88 -1.73 0.77 0.20 0.23 1.22 0.30 1.35 0.87

Subs

titut

ion

effe

ct Mean 1980-2007 -0.70 0.76 -0.05 -0.65 -0.15 0.00 1.52 0.05 0.00

1980-86 0.58 3.32 0.37 -1.79 -0.17 -0.16 1.61 0.05 0.00 1987-92 -0.15 -1.53 -0.59 -1.35 0.02 0.13 3.23 0.12 0.00 1993-99 -0.96 0.88 0.48 0.50 -0.10 -0.21 1.42 -0.29 0.00 2000-07 -2.17 0.04 -0.51 -0.06 -0.32 0.27 0.05 0.33 0.00

Wag

e ef

fect

Mean 1980-2007 0.45 0.20 0.52 0.31 0.31 0.05 0.47 -0.03 0.17 1980-86 0.91 -0.21 0.80 0.56 0.21 0.08 -0.12 -0.23 0.11 1987-92 1.64 0.63 0.78 0.82 0.96 0.52 0.06 0.42 0.63 1993-99 -0.60 0.76 0.44 -0.06 0.13 0.03 2.42 -0.17 0.14 2000-07 0.03 -0.30 0.09 -0.01 0.05 -0.36 -0.55 -0.08 -0.12

Labo

ur

effe

ct

Mean 1980-2007 -0.42 -0.58 -0.59 -0.29 -0.27 -0.18 -0.12 -0.19 -0.27 1980-86 -0.79 -0.68 -0.87 -0.14 -0.40 -0.72 0.21 -0.18 -0.35 1987-92 -1.41 -0.68 -0.20 0.01 -0.49 -0.45 0.21 -0.32 -0.36 1993-99 0.09 -0.62 -0.97 -0.59 0.06 0.53 -0.58 0.16 -0.06 2000-07 0.30 -0.34 -0.25 -0.40 -0.29 -0.12 -0.26 -0.42 -0.30

Labo

ur c

ost

effe

ct

Mean 1980-2007 0.04 -0.38 -0.09 0.01 0.05 -0.13 0.32 -0.23 -0.10 1980-86 0.11 -0.89 -0.08 0.42 -0.19 -0.64 0.09 -0.41 -0.25 1987-92 0.24 -0.05 0.58 0.83 0.46 0.07 0.28 0.10 0.27 1993-99 -0.50 0.14 -0.53 -0.64 0.19 0.56 1.84 -0.01 0.08 2000-07 0.36 -0.66 -0.24 -0.43 -0.19 -0.49 -0.92 -0.56 -0.45

Capi

tal

effe

ct

Mean 1980-2007 0.10 0.26 -0.09 -0.12 -0.16 0.04 -0.80 -0.15 -0.13 1980-86 0.07 1.10 0.23 0.38 0.35 0.70 -0.29 0.02 0.22 1987-92 -0.13 0.11 -0.73 -0.62 -0.72 -0.47 -0.43 -0.49 -0.51 1993-99 0.69 -0.01 0.01 0.02 -0.18 -0.30 -2.58 0.11 -0.16 2000-07 -0.25 -0.19 0.04 -0.32 -0.17 0.16 0.16 -0.29 -0.15

Man

ufac

tur

ing

effe

ct Mean 1980-2007 0.15 -0.12 -0.18 -0.10 -0.11 -0.09 -0.48 -0.38 -0.24

1980-86 0.18 0.21 0.15 0.80 0.16 0.05 -0.20 -0.39 -0.02 1987-92 0.11 0.07 -0.14 0.21 -0.26 -0.40 -0.15 -0.39 -0.24 1993-99 0.18 0.12 -0.52 -0.63 0.01 0.26 -0.74 0.10 -0.08 2000-07 0.11 -0.86 -0.19 -0.75 -0.36 -0.32 -0.76 -0.85 -0.60


33

Chart 38. Mean scale and technological effects in the four sub-periods

Chart 39. Total technological effects (mean annual values)

The weakest results for the period are found between 1980 and 1986, a period of

expansion in which the mean technological effect in the Spanish economy was practically nil

(0.08%), compared to a positive scale effect of 0.97% that was both positive and more than 12

times as great as the technological effect. Only the High Technology Services and Energy

sectors display positive mean technological effects and negative mean scale effects in this

period. The results are similar for the other expansion phase (1993-1999), revealing a low

technological effect (0.08%) compared to a scale effect of 1.59%. Once again, this tells us that

economic growth in this sub-period was generated basically by an increase in productive scale

(only the Energy sector and the Low Technology sector display negative scale effects). This

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

1980

-200

7

1980

-198

6

1987

-199

2

1993

-199

9

200

0-20

07

Technologicaleffect

Scale effect

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

PS

ES

HT&MHT

MLT

LT

C

HTS

OS

Total


34

supports the idea that Spanish technological growth was based largely on technological spill-

over and imitation.

5.2.2. Labour effect and labour productivity

Labour effects are in reality measures of labour productivity and efficiency. As such, they

are powerful indicators of technological change within each sector. Negative labour effects

show that the amount of labour required for each unit of output has decreased and that

labour productivity in the sector concerned has improved (this may also go hand-in-hand with

job losses). As shown in Table 3 and Chart 40, the Spanish economy gained labour efficiency in

each of the four sub-periods, given that mean labour effects were negative. Furthermore, the

mean effect for the whole period 1980-2007 was negative in all sectors without exception, and

the mean effect was also negative in all of the sub-periods for the Energy sector and High and

Medium-High Technology. This reveals continuous improvements in productivity in practically

all sectors of the economy, one of the key features of economic transformation in Spain over

the course of this long period, together with structural changes. We may also note that the

effects are greater in the first two sub-periods, which correspond to the upswing of the wave,

but diminish thereafter. This is confirmed by Chart 40, which shows the mean labour effects

for the sub-periods, and Chart 41, which shows the annual evolution of the labour effect.

Chart 40. Mean labour effects in the sub-periods

A more detailed examination of these results reveals that productivity gains were

particularly important in the Primary, Energy and High and Medium-High Technology sectors

(see Charts 42, 43 and 44), although improvements were achieved in all sectors of the

-1,5

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35

economy between 1980 and 2007. These three sectors are also those displaying the strongest

TFP performance (see Charts 27, 28 and 29). Meanwhile, Construction, High Technology

Services and Other Services lagged behind the mean. This is important, because it was

precisely these sectors which contributed most strongly to income growth.

Chart 41. Evolution of the labour effect in the Spanish economy (% of output)

Chart 42. Evolution of the labour effect in the Primary sector (% of output)

Chart 43. Evolution of the labour effect in the Energy sector (% of output)

-2,5

-2,0

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Spanisheconomy

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36

Chart 44. Evolution of the labour effect in the High and Medium-High Technology sector (% of output)

5.2.3. Wage and capital effects

Table 3 shows via the wage effect that wage payments per employee increased

significantly in the central years of the period, absorbing productivity gains in their entirety

between 1987 and 1992 and again in 1993-1999, so that the mean labour cost effect rose in

these sub-periods, despite the crisis of 1992. The trend changed at the beginning of the new

century with negative mean growth in 2000-2007. Chart 45 shows the mean wage effects in

the different sectors, and Chart 46 the annual evolution of wage effects for the Spanish

economy as a whole.

Chart 45. Mean wage effects in the Spanish economy by sub-periods

-3,5-3,0-2,5-2,0-1,5-1,0-0,50,00,51,01,52,0

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1982

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HT&MHT

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37

Chart 46. Annual evolution of wage effects in the Spanish economy

We may note that the evolution of wages exactly matches what should be expected in an

economic wave. They rise sharply in the upswing years (sub-period 1987-1992), and then

flatten out in the downswing, either falling or growing more slowly as the contraction plays

itself out. Mean wage growth was negative in 2000-2007, and in 1993-1999 it was 22.3% of the

mean increase for the sub-period 1987-1992. Furthermore, wages rose in all sectors of the

economy in 1987-1992 but fell in all of them except the Primary sector in 2000-2007.

The aggregate evolution of capital costs, shown in Table 3 and Chart 47, reflects a small

mean fall of -0.13% between 1980 and 2007. However, there are major differences between

sectors and sub-periods. The aggregate fall of -0.13% is somewhat less than 9% of the mean

increase in incomes, the wage effect being slightly larger on a value of 0.17%. The mean capital

costs effect was negative in the last three sub-periods, showing that the gross business surplus

has tended to fall in recent years. This is consistent with the downswing of the wave.

Chart 47. Capital effects in the Spanish economy

-1,0

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38

Negative capital effects are to some degree concentrated in the periods of contraction:

seven of the eight sectors suffered negative capital effects in 1987-1992 and five did in 2000-

2007. The most significant negative capital effects are found in the three industrial sectors in

the sub-period 1987-1992 and in the Medium-Low Technology and Other Services in 2000-

2007.

5.2.4. Substitution effect

To complete our analysis of structural changes, let us look now at the substitution effects,

as changes in demand for inputs are a good indicator of changes in the structure of an

economy. These effects are shown in Table 3 and Chart 48.

Chart 48. Substitution effects (mean annual values)

As may be observed from Table 3, the three industrial sectors and the Primary sector

display negative mean substitution effects in the period 1980-2007, which suggests that

structural transformation ran parallel to the decline in the share of the economy represented

by industry and agriculture so that the Primary and Medium-Low Technology sectors were

particularly affected. In contrast demand for inputs grew in High Technology Services and the

Energy sector, revealing the emergence of a new productive structure.

Substitution effects in High Technology Services were positive in all four sub-periods, but

they shrank in the last two, which shows that the sector was becoming less important to the

overall growth and transformation of the country. Meanwhile, negative substitution effects in

the Primary sector become ever larger over the years, highlighting its declining share in the

economy. Interestingly, substitution effects in the High and Medium-High Technology sector

are positive in expansionary periods and negative during contractions, confirming the sector’s

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39

strongly cyclical nature. The opposite is true of Construction, however, which is anti-cyclical as

mentioned above.

To sum up, the Spanish economy has shifted towards more energy intensive products,

becoming less focused on industrial production and more so on services, while construction

has increased its share of the economy and services have become ever more consumer

oriented.

To conclude, we may also observe that the productivity gains achieved by any one sector

are not necessarily related with any increase in demand for its products as inputs, as will be

seen from a comparison of the substitution effects shown in Chart 48 and the labour effects in

Chart 40. However, a close relationship may be discerned if the total technological effects

(Chart 39) are compared with the substitution effects in Chart 48, so close in fact that the

latter may be considered a good indicator of total technological change.

6. Concluding remarks

6.1. Initial conclusions

Perhaps the first conclusion we should draw from the above is to realize that our analysis

must go beyond the input-output field. Evolutionary economics and the theory of economic

cycles are necessary tools and have much to add our analysis. Furthermore, progress must be

made with the inclusion of capital stock, investments and earnings rates, as this would

improve the applicability of the results obtained and would enhance our understanding.

Our second conclusion concerns the importance of the cyclical evolution of the economy,

in particular in relation to technological booms. If we are presently in the downswing of an

economic wave, as we have tried to show, the outlook for innovation and investment is likely

to remain poor in the short run, growth rates will stay low, incomes will fall, and there will be

an urgent need for both investment in R&D and structural reforms, all of which will be

accompanied by far-reaching social change. The influence of this context is so strong that it

simply cannot be ignored in planning for the future and policy design, despite the obvious

differences between countries and regions.

Thirdly, we need to arrive at a better description of the true nature of Spain’s growth over

the last three decades. This growth was achieved mainly thanks to the process of economic

modernization driven by integration into the European Union and the development of

democratic institutions, and the continual gains in labour productivity generated by major

investments of capital and the application of labour-saving technologies have played a key role

in this process. It was investment that predominated at the beginning of the cycle, and


40

technology-based productivity gains at its end. Nevertheless, it was not home-grown

technologies which led this growth and development, which was based rather on technological

spill-over processes and imitation, favoured by Spain’s new economic and social structures.

The energy sector, high and medium-high technology and high technology services,

accompanied by construction and other services were the main drivers of the process. The

main challenges facing the country today are to encourage Spanish R&D and to continue to

benefit via exports from the wage gap with other developed nations. Contrary to widespread

opinion, however, wage cuts are not the panacea. This was never the option taken in the past

(when the reduction of labour costs was combined with investments in capital, and

technological imitation and assimilation) and it is unlikely to be so in the future, which does

not mean that the moderation of wage costs is not a valid option in the short term.

6.2. Further reflections about Spain

What can we learn from our theoretical and empirical reflections on the future of the

Spanish economy?

a) Given that we are not facing a transitory situation, but rather a structural problem

which will require far-reaching economic change, we should not expect to resolve

matters in a matter of one or two years. In this regard, it is disappointing to note how

little has been done so far to smooth the path to recovery. In other words, it is likely

that the crisis will be prolonged in Spain, and we will not emerge from it for at least

five years.

b) As the downturn looks set to last for some yet, purely Keynesian plans to stimulate the

economy, like former Prime Minister Zapatero’s Plan E, make little sense and are

highly unlikely to provide an effective solution for the crisis. This is because such

spending programmes merely eat up ever scarcer resources to maintain activities in

the short run without addressing the medium term, and they cannot produce any real

change in the situation.

c) The soaring rate of unemployment in Spain is a problem which will be very difficult to

solve without economic growth, while recovery from the crisis will depend on the

creation of a new technological paradigm, which will not happen spontaneously. This

requires structural reforms which are bound to have an impact on the criteria applied

to income distribution, and which will be neither easy nor straightforward (for much

more is needed than merely a labour-market reform or more efficient administration

of the welfare state). The crisis is a two-headed beast presenting both economic and

social aspects, and to overcome it will require active measures to create technologies,

to reallocate incomes and to mobilize the necessary resources.


41

d) One immediate consequence of this is that shying away from the necessary structural

reforms, or stonewalling, can only hinder and delay the eventual solution to the crisis.

The main problem, after all, is to decide what the necessary reforms actually are. They

may be socially painful, but they are inevitable. Unfortunately, we are facing a

situation like that of 1929, or like that revealed in France in May 1968, by the student

protests of 1969 at the University of California in Berkeley, or by the oil crisis of 1973.

And we are decidedly not on the threshold of a new period of expansion like that of

the 1950s or 1980s.

e) To cut investment in R&D at a time like this, as the present Spanish government has

done, is one of the worst possible measure it could have taken, as it runs directly

counter to the solution of the crisis and can only aggravate or prolong the downturn.

This does not, of course, mean that we should not make every effort to optimize the

use of resources.

f) There can be little sense in asking certain social groups to accept a loss of income in

the form of wage cuts and shrinking social benefits if this is not done within the

framework of a far-reaching reform of redistribution policy. The solution should be to

seek improvements in income redistribution and increase the tax take through a

comprehensive tax reform designed to achieve a much fairer system than the current

one. We must not forget that actual incomes have fallen, while additional investment

is needed in human capital and in the new technologies.

g) Longer working hours are likewise a priori a false step. This might make sense at a time

of economic growth, but not when the problem is the need to achieve a leap in

productivity, shortening the time needed to produce the same level of output.

6.3. Possible proposals for the Spanish economy

Let us end by considering some tentative proposals for the directions in which the Spanish

economy should move.

6.3.1. Support and extend the R&D system

• Investment should be maintained at current levels of GDP and gradually

increased. It is pointless to reduce the number of researchers, when the

challenge is to develop and apply new technologies.

• High quality research institutes and centres need to be created, both by the

Spanish government and by firms.

• Mutual links must be formed between researchers in the public system and

business.


42

• Stable career structures are needed for researchers, while the nation must

be assured a return on its investment (in the form of compensation for the

training received).

• A commitment needs to be made to new lines of scientific research and

technological development, probably including nanotechnology and

materials science, bioengineering, genetics, medicine, artificial intelligence,

renewable energy, climate control and telecommunications. It is not

sufficient to generate human capital. Investments in R&D must also

generate knowledge and technologies in the directions likely to be taken by

the new wave, and they must be applied in Spanish industry.

6.3.2. Far-reaching reform of the tax system

• The tax burden needs to be made fairer and more even-handed.

• Revenue collection needs to be increased. The existence of an underground

economy representing around 20% of GDP and the opportunities for more

efficient tax management would unquestionably allow the collection of

additional revenues. This will not be without difficulty, however, as it is

easier to raise taxes when the economy is growing than when taxpayers

feel threatened and poorer than they were.

• Investment in infrastructure and R&D should be increased, as well as

expenditures to improve social conditions and the welfare state.

• Measures should be taken to prevent or mitigate the possibility of

speculative excess like the Spanish property bubble.

• Equal rights must be guaranteed for all citizens to ensure that there can be

no discrimination in access to public services on grounds of income, origin

or other personal characteristics.

6.3.3. Share the available work based on fair criteria

• Working hours need to be reduced in the medium term in line with

productivity gains. This has been a constant feature of all economic waves

over the last two centuries.

• The retirement age should not be extended, although efforts need to be

made to narrow the gap between the average actual retirement age and

the legal retirement age, and to reduce the often unjustified recourse to

early retirement.

• Maximum flexibility will be needed in the distribution and organization of

work in firms, including wage adjustments, in order to prevent job losses.


43

Reduced working hours and relief contracts should be allowed. The only

limits on flexibility should be set by efficiency losses and the guarantee of a

social minimum for everybody.

• Overtime and similar working arrangements should be eliminated wherever

possible.

• Incompatibilities between posts in the public administration and private

firms should be stiffened, and exclusivity should be strengthened in the

administration.

6.3.4. Reform of the public administration

• The different levels of management in the public administration should be

cut to four, in line with the tiers of government directly elected by the

voters, removing intermediate layers of management and eliminating

duplications.

• Civil and criminal liability and penalties for wrongdoing in the public

administration should be stiffened.

• The public services need to cut waste (i.e. expenditures of doubtful utility).

• The nature of labour relations should be change in the public services in

order to eliminate “jobs for life”. It is not sufficient for public servants to

show qualifications and merit only once in their lives.

6.3.5. Political and social reform

• The electoral system should be changed to enhance transparency, control

and representation.

• Employment law needs reform to establish a wider core of civil legislation.

The role of the trade unions as public institutions should be reduced, and

they should be made more transparent and permitted to represent only

their members.

• The pension system needs reform based on three key criteria. First, benefits

should consist of two parts, one comprising a universal, common basic

income payable out of taxes, and the other proportional and based on the

contributions made by individuals over their lifetimes and distributed in line

with life expectancy. Individual contributions could be split to allow the

inclusion of a part in respect of another person. Finally, benefits must be

individual and payable only to the person holding the entitlement.

6.3.6. Spain needs to export more medium and high technology products , leveraging

the existence of the wage gap with other developed countries. Action is also


44

needed to boost exports of farm and food products and tourism, supported by

wage moderation and the application of new technologies in recent years. This

seems to be the “great white hope” of Spain’s current government, although it

should not be forgotten that any policy based on low wages will also be a short-

term, or at best a medium-term, option, and it will have to be reassessed or

replaced by an adequate R&D policy as soon as possible.

7. Bibliography

Cabrales A.; Dolado J.J.; Felgueroso F.; Vázquez P. (eds). (2009): La Crisis de la Economía

Española. Sociedad Abierta. Fedea.

Casler, S. D. and Gallatin M. S. (1997), “Sectoral contributions to Total Factor Productivity:

Another perspective on the growth showdown”, Journal of Macroeconomics, 19(2), 381 -

393.

Dietzenbacher, E. and Los, B. (2000), “Structural Decomposition Analysis with Dependent

Determinants”, Economic Systems Research, 12 (4), 497-514

Eurostat (2012): Science, Technology and Innovation in Europe 2012. Eurostat EU-Comission

Duarte, R.; Sánchez-Chóliz, J. (forthcoming): Technological components of income growth: An

application to the evolution of the Spanish economy 1980- 2007. Economic Systems

Research

Fatás-Villafranca, F.; Jarne, G.; Sánchez Chóliz, J (2012): Innovation, Cycles and Growth. Journal

of Evolutionary Economics, 22, 207-233.

Fuentes Castro, D. (2012): Labour productivity and comparison of employees in Europe.

Applied Economics Letters, 19, 7, 689-693

Fuentes Castro, D. (2013): An international comparison of the impact of the 2008 crisis on

productivity. Applied Economics Letters, 20, 13, 1263-1269.

Howitt P.; Colander D.; Leijonhufvud A.; Kirman A.; Mehrling P. (2008): Beyond (DSGE)-

Dynamic Stochastic General Equilibrium Models. American Economic Review, 98, 2, 236-

240.

Jarne, G.; Sánchez, J.; Fatás Villafranca, F. (2007): S-shaped” curves in economic growth. A

theoretical contribution and an application. Evolutionary and Institutional Economics

Review, 3, 2, 239-259


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Korotayev, A. V.; Tsirel, S. V. (2010): A Spectral Analysis of World GDP Dynamics: Kondratieff

Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and

the 2008–2009 Economic Crisis. Structure and Dynamics, 4, 1, 1-55.

http://www.escholarship.org/uc/item/9jv108xp

OECD (Organization for Economic Co-operation and Development) (2007), OCDE Surveys:

Spain, 2007. Paris: OECD Publishing, 2007/1, January 2007.

OECD (Organization for Economic Co-operation and Development) (2009),OECD Science,

Technology and Industry Scoreboard 2009. Paris: OECD.

OECD (2012): Economic Policy Reforms 2012: Going for Growth. OECD Publishing

Sánchez Chóliz, J. and Duarte, R. (2006), “The effect of structural change on the self-reliance

and interdependence of aggregate sectors: The case of Spain, 1980-1994”, Structural

Change and Economic Dynamics, 17(1), 27-45

Solow, R.M. (2008). The State of Macroeconomics. Journal of Economic Perspectives, 22, 243-

246

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http://www.escholarship.org/uc/search?creator=Tsirel,%20Sergey%20V.

http://www.escholarship.org/uc/item/9jv108xp

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