Secretary-General

Spain after the crisis: a new growth model

 

Remarks by Angel Gurría, OECD Secretary-General

Madrid, Spain

Ladies and gentlemen,
It is a pleasure to be with you on the occasion of Revista Capital’s 10th Anniversary.

In these uncertain times, economic magazines with the quality, rigour and professionalism that characterise Capital are more important than ever. They are essential to inform the public and advance the policy debate on the reforms needed to put Spain on a new path.


The crisis will have lasting effects in the Spanish economy despite ongoing efforts

As you are well aware, Spain is facing its longest and deepest recession in 50 years. While the depth of the recession has been broadly similar to other advanced OECD economies in terms of real GDP, the rise in unemployment and the deterioration of government finances have been steeper.

Importantly, the government response has been appropriate, which helped mitigate the worst effects of the crisis. This includes an ambitious consolidation programme to reduce the public deficit and measures to restore confidence to the financial sector, including extensive stress tests on banks measures to strengthen the resilience of the “cajas”. Progress was also made on structural reforms, especially those concerning the labour market.

Despite these encouraging responses, the crisis has left its mark on the Spanish economy. The downsizing of the construction sector, while still incomplete, is largely permanent. The current account deficit may have improved, but the debt burden of the private sector, especially among households, is still high, limiting the contribution private consumption can make to future economic growth.

Yet, these challenges present Spain with tremendous opportunities. The crisis struck at a time when the bases that had triggered the Spanish economic miracle were already showing signs of exhaustion. The crisis has opened up new windows of opportunity; now is the time to forge a new economic model for 21st Century Spain.


The three pillars of reform for a new growth model

To realise this transformation, Spain needs to take bold steps. Given the current context, let me stress the importance of reforming the pension system. The Government’s plan to roll out the pension reform before the end of the year is key to ensuring the long-term sustainability of public finances and guaranteeing that today’s workers can enjoy the benefits of retirement in 20 years.

But here, I will concentrate on three key policy areas that need particular attention to bring about a new growth model for the Spanish economy: the labour market, education and regulatory reform.

Labour Market
The labour market is a key priority; especially given Spain´s record unemployment levels among OECD countries.

No modern economy can afford to have 1 in 5 active workforce members unemployed. In the Euro area, more than 50% of those who became unemployed during the crisis are Spanish, and more than one in four unemployed workers have been jobless for more than one year.

Bringing the unemployed back to work would strengthen the pace of Spain´s economic recovery, improve social well-being and help lower poverty. It would also have important additional benefits for the Spanish economy in the longer-term: lower unemployment is necessary to improve government finances; help households pay their mortgage debt; and contribute to maintain the soundness of the banks and their ability to fund business investment.

The labour market reform approved by parliament a few weeks ago is a significant step forward towards addressing some of the longstanding weaknesses of the Spanish labour market. It reduces the excessive protection of workers on permanent contracts and it makes it easier for firms to set wages according to their economic conditions.

Nevertheless, important structural weaknesses in Spanish labour market institutions must still be addressed in order to effectively combat chronic unemployment. Much work needs to be done to make public employment services more effective in finding jobs for the unemployed. To improve incentives for better placement, central government funding to regional employment services could depend on indicators of placement success.

More can also be done to strengthen requirements from benefit recipients. Measures need to be put into place to encourage job seekers to look for work more intensively; to curb subsidised routes into early retirement; and to link contributions paid more closely to pension benefit entitlements.

When it comes to combating unemployment, two groups deserve special attention. The first one is immigrants, the segment of the workforce most severely affected by the economic downturn. The integration of immigrants in the labour market can be improved by promoting the recognition of foreign qualifications, increasing language training and teaching new skills. This would also constitute a powerful antidote against the excessive concentration of immigrants in the construction and tourism sectors.

The other group deserving particular attention is younger workers. Unemployment levels amongst this group top 40% and skills are often poorly utilised.

Education

Indeed, youth unemployment brings me to the second key area where we should focus our efforts: Education. The transformation of Spain´s economic model can only take place if the education system trains tomorrow’s workforce adequately. Education is the ultimate solution to prevent the intergenerational persistence of unemployment.

Our research shows that youth unemployment particularly affects those without full secondary education. Steps to reduce the high number of pupils who leave school aged 16 without qualifications are urgent. In Spain, an additional challenge is the quality of secondary education. Spanish 15 year-olds still perform significantly below the OECD average in all PISA assessed domains. The most striking shortfall is reading.

Two reforms are particularly necessary to unleash the potential that education has to help move the economy towards a sustained growth path. The first one relates to the need to enhance professional training. Despite recent progress, enrolment levels in professional training (Formación Profesional) are still considerably lower than the 44% OECD average and the 52% average in the European Union.

Steps to facilitate access to intermediate vocational education degree courses (Formación profesional intermedia) are particularly important. This should include reducing unnecessarily high grade repetition among pupils who have the basic literacy and numeracy skills to enrol in vocational courses. It is also necessary to make intermediate vocational courses more attractive, by ensuring that they are relevant to local businesses and labour markets.

The other important reform relates to the need to improve linkages between higher education and business. A knowledge economy needs to ensure that the competences accumulated by young people match the labour market’s demands. Our most recent data shows that 44% of Spanish university graduates between 25 and 29 years old are employed in jobs that require lower skill levels than they possess. This contrasts with the 23% average of OECD countries.

Spanish universities need to match their curricula to the needs of tomorrow´s economy. But public and private employers also have a role to play here. Unfortunately many of Spain’s best and brightest graduates have to leave this country to pursue research careers abroad, particularly in high-tech sectors. To increase graduate retention in Spain, the institutional framework for firm-based continuous education needs to improve.

Regulatory reform
Which brings me to the third challenge for Spain’s new growth model: that of creating an efficient regulatory framework to support firm creation and boost the innovative capacity of the economy.

Despite figuring amongst the OECD countries with longer working hours, Spain's productivity has lagged. This is due to lack of flexibility, limited innovation and a narrow focus on sectors with little value added for the rest of the economy.

Improved productivity will increase Spain’s ability to compete in the global economy, but it can also contribute to solving important macroeconomic problems, such as the persistent current account deficit or the health of public finances.

Regulatory reform can help solve this. Efforts must be directed towards building a culture of entrepreneurship and fostering both public and private innovation.

Business access to R&D promotion schemes involving different ministries and regions could be simplified. The capacity to manage and transfer technology should also be improved through greater networking and consolidation among the many existing intermediaries. In addition, public investment and procurement could be enlisted to modernise urban infrastructure (transportation, water, sewage, energy) with a view to stimulating innovation in the business sector.

This needs to be supported by good regulation. Removing regulatory burdens on competition in product markets is key to strengthening competitiveness of businesses abroad.

Spain has already made good progress in product market reform over the past decade, notably in opening up to international competition and foreign direct investment. Further progress will be made once the Ley de Economía Sostenible is approved, and the regulation of network industries becomes more effective.
But the current difficult economic situation calls for further steps. For example, qualification-related entry requirements in professional services are stricter than in many European countries. Easing such requirements can strengthen the competitiveness of businesses that use these services as intermediate input and offer more opportunities for university graduates.


A new growth model needs to be sustainable

Last but not least, this new growth model needs to be sustainable.

The ongoing conversion to "green industries" is a welcome development, and Spain should maintain its edge here. Spain has been at the forefront of showing that green is compatible with growth. The goal to obtain 20% of primary energy supply by 2020 from renewable sources is a reasonable one, and Spain should maintain its lead in the development of solar and wind technologies. However, much needs to be done to create a stable framework that will encourage private investment in this sector.

No 21st Century growth model can neglect the challenge of climate change. Consumption and production subsidies for fossil fuels that damage the environment are serious obstacles to a new green growth model. Spain is still subsidising domestic coal production for power generation, although less heavily than in the past. The subsidies now in place, and the limited taxation on fossil fuels, do nothing to promote the transition to new sources of renewable energy.

Finally, sustainable economic growth also requires sustainable use of scarce natural resources. Pricing the use of such resources is a useful policy tool to encourage efficient use. This also reduces pressure on government finances, because it does away with the need to subsidise behaviour that helps reduce the consumption of such resources.

In Spain, a resource that is particularly scarce in many regions is fresh water. Making sure that prices for water use reflect cost adequately can help mobilise private sector funding to upgrade water infrastructure, providing some stimulus for investment, as well as water savings. Water policies will be analysed in depth in our forthcoming Economic Survey of Spain, which will be release later this year.


Conclusion

Ladies and gentlemen,
The transition from bricks to brains will not be an easy one, but it is certainly a transformation that the Spanish economy needs to undergo. Let us benefit from the current context to undertake the necessary reforms to make this happen.

If we continue to look at our reflections in today’s national mirror, our benchmark will be set by yesterday’s policies and standards. But if we broaden our horizons, and look beyond our national boundaries to learn what others are doing, we may get valuable lessons on how to start building tomorrow’s economy.

Spain has a number of advantages: a much internationalised economy, leading multinationals, a vibrant and well-qualified young generation and the world’s second most spoken language. Not to mention a thriving and welcoming culture, or the best football team in the world! As one of the success stories of the 20th Century, Spain needs to prove its ability to transform and modernize itself once again, building on its unparalleled strengths.

As a privileged forum for sharing best practices in all the areas that will be critical to transform Spain’s economic model –employment, education, innovation and green growth— the OECD stands ready to assist Spain in this major endeavour.

I hope that in 10 years time, when we reunite to celebrate yet another successful decade for Revista Capital, we will be able to proudly say: Spain rose to the challenge, and it succeeded.
Thank you very much

 

Related Documents

 

Visit of the OECD Secretary-General to Spain (Madrid, 4-5 October 2010)

 

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