Tuesday, January 5, 2010
Spain's grim future
Martin Wolf rightly forecast difficult times for Spain. Is the country prepare for it? Can developing countries, particularly from Latin America, learn from its experience? We can expect four or five years of very low growth, but institutions, political parties and citizens do not seem to accept it.
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I am always intrigued by the economic situation in Spain. To read The Economist, you'd think the entirety of Spain's problems stem from its restrictive labour practices and 'insider/outsider' trade-union model. However, one wonders how much worse the unemployment figures (currently 4m or 20% of the workforce are unemployed) would have been without such restrictive passages? Perhaps this high rate of union coverage (which protects around two-thirds of the workforce) will be enough to siimulate sufficient demand to see Spain through the difficult times rightly predicted by Mr. Wolf.
Whether Latin America can learn anything from Spain is an interesting question. Certainly, the Spanish economic model of recent years is evidence that no country should commit as many resources to one sector as Spain did to construction; and nor should it rely too heavily on consumer spending to stimulate aggregate demand. Whether the various countries of Latin America have anything to learn from the Spanish insider/outsider model of trade union formation depends on how labour markets operate in each country in the region. Given the extreme atomisation of labour markets in some Latin American countries, I suspect that lessons from the Spanish (labour market) experience would be limited.
Finally, regarding the point about political parties and citizens not accepting the situation facing them, I think this is the same in many deficit countries right now. Certainly, the argument in the UK this week between the Prime Minister and the Treasury would suggest that our PM for one is either in denial about the depth of cuts to be made (despite the possible danger for long-term interest rates on UK government debt), or he really does think, as some in PSOE do, that future growth will resolve current difficulties. Whether citizens accept four or five years of low growth or not is hard to decipher. Judging by the rapid rise in the household saving ratios of the UK and US, I would say that the majority of individuals now realise that consumption must, to some degree, be sacrifised if household balance sheets are to be repaired.
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