Spain finds itself at a crucial moment in 2008: the era of spectacular growth that began some fifteen years ago is reaching its peak. It is now time to restructure the economy and lay the foundation for the second transition. To do this, Spain should find new ways to grow by analyzing which sectors it should develop, as a function of its strengths as a country, in accordance with international market opportunities. The author says that it is very important to open up sectors that, through clusters, add a lot of gross value, just as successful countries like Israel and Ireland did.

(From Madrid) THE ECONOMIC RESTRUCTURING that carried Israel forward, from top to bottom (meaning, from the political system to the market and the educational community), is truly impressive; a success case indeed. Israel was a country that, from its birth in 1948, had based its economy on the exportation of fruits and vegetables (its famous Jaffa oranges) and basic industries (textiles, chemicals and mechanical metals). Yet, in the 1980s, Israel began to focus on high technology, and it is today home to the highest concentration of technological enterprises outside of Silicon Valley. Both Microsoft and Intel’s prime Research and Development centers outside of the United States are located in Haifa. Furthermore, Cisco’s sole Research and Development center is in Israel, and Motorola’s center dedicated to such affairs (which happens to be the largest one in the world) is also in the country. Half of Israel‘s exports are high technology products, an area in which the State has played a central role.

“Lotus, Intel, Microsoft, Oracle, Pfizer, IBM… have their centers of exportation to all of Europe in Ireland“ Up until recently, Ireland was the poorest country in Europe, but in scarcely a decade it has transformed itself into one of the richest countries in the world. During the 90s, its GDP grew on average by nine percent. How did it achieve this? Among other things, by constructing clusters, or business concentrations, in the high technology and pharmaceutical sectors: Lotus, Intel, Microsoft, Oracle, Pfizer, IBM and American Home Products all have their centers of exportation to all of Europe in Ireland. How did they do it? By means of a social agreement between the businessmen and workers that supported economic liberalization, European help and, especially, the elimination of: obstacles to the creation of new firms, deregulation of the telecommunications industry and capital laundering. This was done by means of a strong investment in education within the framework of political predictability.

THE SUCCESS OF THE FIRST SPANISH TRANSITION

“Things have truly been done very well. The proof is that Spaniards live infinitely better today than their parents and grandparents did” Spain has completed its first transition with great success. If we observe the Spanish economy from a historical perspective (not from the perspective of the past five centuries, but rather since the 1980s, prior to its entry into the European Union) and then look at what it is today in 2008, we could say that the glass is full. Who would have imagined three of four decades ago that Spain would be where it is today? No one.

This did not happen by accident; things have truly been done very well. The proof is that Spaniards as a whole live infinitely better today than their parents and grandparents did. There is little room for doubt.

“Multinational Spanish businesses have had excellent results, due in large part to the recovery of the Latin American economies” The country has forged ahead, leaving behind centuries of isolation and intolerance, and respecting and accepting investment as one of the pillars of growth. Furthermore, Spain is a democracy in which laws are applied in a uniform and just manner, and it maintains good relations with the rest of the world, which generates genuine economic development. In other words, Spain is distributing its growth equitably. All of this has occurred within the framework of a coherent State policy, and with Europe‘s total support.

Multinational Spanish businesses have had excellent results (for example, the Santander Group earned 9 billion Euros in 2007), due in large part to the strong recovery of the Latin American economies, and the emergence in the area of a new middle class, which demands services. Let’s remember that for the past five years Latin America’s GDP has been growing on average by five percent, without interruptions. This is excellent news for Spain.

SPAIN IS REACHING ITS PEAK

“Today Spain imports much more than it exports. It currently has the highest foreign deficit in the Euro zone, some 8.8 per cent of its GDP” With this being said, it seems obvious that Spain finds itself at a crucial moment in 2008: the era of spectacular growth that began some fifteen years ago is reaching its peak, and it is now time to lay the foundation for the second transition.

Practically all of the serious economic journals in the world (The Economist, The Wall Street Journal, The Financial Times and Harvard Business Review), as well as the investment banks on Wall Street, offer the same diagnosis: the Spanish economy’s growth, which has been above the European average for the past few years, remains very dependent upon construction and consumption, and both of these sectors are flagging considerably.

“Zapatero’s new government must continue a mid-to-long term strategy to diversify production and steer Spain away from a situation in which it depends solely on the strength of construction and consumption” Today Spain imports much more than it exports, and it currently has the highest foreign deficit in the Eurozone, some 8.8 per cent of its GDP. Besides, production costs in Spain are too high for it to compete with either the new members of the European Union, or China and India.

What is more, the companies are facing difficulties, stemming from the sub-prime mortgage crisis in the United States, aside from an increase in the Euro and the price of oil, which is flirting with 110 dollars per Brent barrel. Moreover, the price of raw materials is on the rise (due to the incorporation of 400 million Asians into the world market, which has driven demand down), and therefore there is inflation, not only in Spain, but in all of Europe. This translates to a reduction in competition.

ZAPATERO’S CHALLENGE

Zapatero’s new government must continue a mid-to-long term strategy (Zapatero himself will not see its own results) to diversify production and steer Spain away from a situation in which it depends solely on the strength of construction and consumption.

“Clusters have the advantage of boosting productivity” To do this, it is necessary to identify which sectors Spain should work to develop, by analyzing both its strengths as a country and the strengths of each region, and the opportunities that the international market offers. It is important to develop sectors that add a lot of gross value, which demand skilled workforces and require that the success factor not only be the cheap workforce. Developing a new sector (or an underdeveloped sector) is a great challenge and requires different players to come together.

CLUSTERS BOOST PRODUCTIVITY

Spain has to identify exactly what to develop through clusters, just like Israel and Ireland did. “Universities must reform themselves, and focus on educating their students in such a way so that they produce more of the requisite profiles” A cluster is a geographic concentration of adjacent industrial firms and institutions, which both compete with each other and cooperate together. This involves the existence of active channels for commercial transactions and communication, specialized infrastructure, and a shared labor market and services. All of this causes the companies to face common opportunities and threats.

What is the advantage? It boosts productivity. Why? Because it improves access to employees and suppliers and specialized information, complements the involved agents and provides access to public institutions and goods. Furthermore, it reduces coordination costs and increases competition between businesses.

“Spain’s second transition depends greatly on the creation of conditions that can considerably increase the country’s innovation and competition, from top to bottom” In Spain, businesses must collaborate among themselves in order to be able to do together what one could not do alone, for example: investment in R&D (especially the small and medium enterprises, as the majority are SMEs), and approaching the big leading companies so as to foster cooperation (a balance between competition and collaboration). The political system (the government and the opposition) must work hard on the matter of subsidies to support the sectors to be developed. Universities must reform themselves and focus on educating their students in such a way so that they produce more of the requisite profiles (more technical and specialized profiles are necessary, as well as an education system that can adapt to the market). The State can once again assume its role in infrastructural matters, in order to provide the sectors to be developed with the necessary infrastructure (supporting the real-estate groups and in this way avoiding their collapse). Aside from all of this, it is necessary to promote research, starting in the research centers themselves, and connect to interest groups more.

Spain, a country with important investments in emerging countries, lacks an integral think tank (or an action tank) to deal with these up-and-coming economies. Therefore, the excellent foundations and institutions that have been created in the past few years must give their support to this task.

CHANGING WORK HABITS

Finally, it is time to change work habits. In Spain, people work more and more hours, yet the numbers show that it is Europe’s most unproductive country. I know that it is difficult, but Spain must Europeanize its work schedules.

The state should promote these processes and lead the way, with the help of businesses and the academic community. My analysis is that Spain’s second transition depends greatly on the creation of conditions that can considerably increase the country’s innovation and competition, from top to bottom. The political system, businesses, entrepreneurs and the education system must provide each other with mutual support in order to lay the groundwork for the second economic transition. In that respect, the idea of clusters could be useful.

Spain has demonstrated great maturity in the recent years. Today it is at its height and it can begin to start its second economic transition towards success, just like Ireland and Israel did. In today’s world there are no magical recipes; successful countries have a lot in common: they are pragmatic and they know that success is always complex and requires a lot of education, creativity, tolerance, investments, and innovation.