Spain’s Economy at a Crossroads: Will Reforms Bring Renewed Growth?

Pessimism about the evolution of the global economy reigns supreme amid the many signs of weakness observed worldwide. According to the 2011Annual Report on the Internationalization of the Spanish Company, an initiative of the Circle of Entrepreneurs and the Wharton School, it will be very difficult for countries to achieve the growth forecasts of the International Monetary Fund (IMF), which had called for4% GDP expansion on average in both 2011 and 2012 indeveloped economies, and a 6.4% uptick in 2011 and a 6.1% increase in 2012 among emerging nations. On the other hand, there is a growing possibility that risks such as the European credit crunch could lead to a new period of recession.

In Europe, for example, the financial and economic slump that began in 2007-2008 has mutated into a sovereign debt crisis that threatens not only weakened cyclical improvement, but even the viability of the European monetary union in its current institutional terms. Spainis one of the eurozone countries facing the most risks, and not only because of its low economic growth rate (0.7%) in 2011 and low forecast for2012 (minus 1.7%, according to the IMF). Spain is also threatened by the country's sizable  unemployed population — 22.9% of all working-age people in the nation –and the prevailing pessimism in its society. At the presentation of the annual report in Madrid on January 20, Claudio Boada, president of the Circle of Entrepreneurs, said he feared Spain“is moving toward a new recession, according to what the experts are forecasting.”

Apart from the risks associated with the precarious state of public finances in much of the developed world, “other dangers jeopardize the global economy, such as political and economic instability, drought and famine, the banking problems in the developed world, [and] the rise in inflation,” according to thereport. Emerging countries are not spared the impact of the crisis. The report advises those nations "to introduce a greater dose of macroeconomic discipline, while preventing the accumulation andworsening of imbalances and the emergence of any bubbles that could cause a sequence of uncontrolled expansion followed by a recession.”

In short, noted Mauro Guillén, a Wharton management professor and director of Wharton's Joseph H. Lauder Institute, these countries face a scenario replete with fiscal and monetary financial imbalances “at a time when the necessary coordination between the various governments does not exist. Uncertainty and distrust seem to have taken control of the markets.”

With this scenario as a backdrop, aceremony was held to celebrate the fifth edition of the annual report, an occasion attended by the Prince of Asturias and other leading figures. The objective of the gathering was to provide support for the revival of the battered Spanish economy, which attendees said will only see the light at the end of the tunnel by enacting long-awaited financial, commercial and labor reforms, and by internationalizing its companies. Prince Felipe de Borbón emphasized that the results of the annual report “confirm that those who are committed to internationalization areat the forefront of the business community, and point the way for others.”

No Dynamism without Reforms

Some large companies are serving as guides along the way. In particular, Acerinox, which manufactures stainless steel; Grifols Laboratories, a pharmaceuticals firm,and Indra, an information technology firm, were honored by members of the Circle for their progress in internationalization. So were Abengoa, a technology company focused on the energy and environmental sectors, which has implemented a thermo-solar plant in Arizona; and Iberia Airlines, whose merger with British Airways has resulted in the creation of the International Airlines Group (IAG). Both of the companies involved in IAG were awarded for their operations in 2010. Finally, three midsize companies were recognized for their success outside Spain: Europac, the leading company in the packaging sector; Pescanova, the largest firm in Spain’s fishing industry, and Viscofan, the world leader in artificial casings for the meat industry.

The importance of these enterprises and their operations has been crucial in recent times, attendees said. Given the sluggishness of domestic demand in Spain, the country’s exports have enabled itseconomy to grow in 2010 and during part of 2011, although at rates so low that unemployment has continued to rise, Guillén noted. According to the latest published figures, 5.27 million people are unemployed — an unprecedented figure for the Spanish economy. The most worrisome unemployment figures are for Spain's young people: Eurostat, the European statistics agency, reported that 48.7% of would-be workers between the ages of 16 and 24 are unemployed in Spain.

Guillén added that outbound foreign direct investment by Spanish companies recovered in 2010 and 2011,although it did not reach the same levels as before the global economic crisis because of the absence of any major foreign acquisitions by Spanish firms. "Already, some 2,800 Spanish companies have a stable presence abroad, many of which are small or midsize," he said. "In 2011, some160 companiesjoined that list, and we hope that others will become multinational companies in 2012. That will contribute to [Spain’s] greater competitiveness in international markets."

Theannual report was presented on the same day that Spain’s foreign trade data was released, noted Jaime García Legaz, Spain’s Secretary of State for Trade, who confirmed the trends described in the annual report. “Overall, for the first eleven months of 2011, Spanish exports of goods were worth close to 200 million euros, representing an increase of 16.3% over the same period in 2010.”The attendees agreed that,despite the dynamism of Spanish companies, Spain will need to enact fundamental labor and financial reforms if it is to find itsway out of the crisis. Representing the government, García Legaz said that such reforms will be undertaken in coming weeks. In the absence of such efforts, few entrepreneurs will dare to take steps to expand theirbusinesses, open a new company or hire unemployed workers "because the labor framework does not encourage them to do so," he added.

Any reforms enacted by the government should promote the ability of firms to face intense competition in international markets, according to Antonio Vázquez, chief executive of Iberia Airlines. “There has never been a time in the history of Spain when there were better employers or workers…. The only thing we need is a littlepush forward," he said.

A Two-Speed World

From the Spanish point of view, one of the most positive data points in the annual report is thatthe country’s exports to China, Latin Americaand the rest of the emerging world have increased by more25% over the last 18 months, Guillén noted. "We live in a two-speed world, in which the less developed economies are growing at higher rates — in many cases by5% or 6% — while the developed economies languish and suffer from very significant rates of unemployment."

This inequality in terms of economic growth is also evident in the area of trade. In 2009, world trade suffered a historic declineas a result of the global economic crisis, but in 2010 global exports reached record heights, but at different speeds. “In 2010, exports of developed countries grew by 12.9%, which was below the growth rate of global exports, which reached 14.5%," Guillén said. "On the other hand, developing economies and the Commonwealth of Independent States (CIS), which comprises 10 of the 15 former Soviet republics, increased their merchandise exports by 16.7%.”

In reality, that sort of unequal performance occurred evenamong developing economies, where Latin America (with growth of 6.2%), Africa (6.4%) and the Middle East (9.5%) registered growth rates well below the figure from the CIS countries. Nevertheless, in the case of these regions, which are major exporters of natural resources, the figures can be read in two different ways, observers noted: On the one hand, it is clear that in real terms, their exports grew less than those from other countries. But in nominal terms(value in dollars) the increase was much greater, thanks to the fact that products from those regions wound up selling at much higher prices in global markets because of booming demand for them. For example, according to the annual report, “In real terms, Africa's exports increased by 6.4%, but in nominal [dollar] value, they grew by 28%.”

As for real imports, developed countries also performed differently from the rest of the world. Developed countries’ importsgrew by 10.7%, down from 12.9% growth in 2009, the report said. Elsewhere around the world, import growth accelerated from 16.7% in 2009 to 17.9% in 2010. "The high prices of raw materials brought about large flows of foreign exchange into those countries that specialize in that sort of export, enabling those countries to import more products [with that foreign exchange]. This was the case in South America and Central America, where imports goods grew by nearly 23% in real terms," according to the annual report.

Guillén said that emerging economies and exporters of raw materials and energy have accumulated $1.5 trillion inreserves because of the huge trade surpluses in their current account. “This figure has twelve zeros after the 1.5,” he noted. “China by itself has accumulated one-third of these reserves, which meansthat every day, they add $1.3 billion to their mountain of dollar reserves." In addition, Guillénstated, companies in emerging economies are becoming more and more competitive. “In recent years, they have generated about 41% of all new flows of [foreign] direct investment in the world, and they already get more than 10% of all new patents for technology issued in the world.”

Given thedeterioration in the economic situation, however, “the global macroeconomic environment is not very promising," according to Garcia Legaz. Moreover, export figures for both developing countries and developed economies have been revised downward by the World Trade Organization. Its current expectations call forexports from developing countries to grow by 8.5% this year, while exports from developed nations are projected to grow by 3.7%. Last September, the WTO’s growth forecasts for overall global exports in both developed and developing countries called for an increase of 5.8%, already down from its April 2011 forecast of 6.5%.

Overall, the Spanish economy and its companies are going through a delicate period, Guillén noted. "This is not just a new change in the cycle. We are at a crossroads," he said. "The global economy changes rapidly, and our economic and business structures also have to change. Only by changing can they respond with flexibility and creativity.”

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