An economy built on sand must be rebuilt on education

Too much of the Spanish economy over the past 30 years has been built, literally, on sand. At their peak in 2006 the housing and tourism sectors accounted for close to 25 per cent of gross domestic product (GDP).

The country needs an economy based much more on exports and direct investment abroad. This would make it more competitive and productive and generate stable employment in a country now suffering from a 20 per cent jobless rate.

The spectacular collapse of the construction sector (1m fewer people are working in it than in 2008 and there are about 1m unsold homes) brutally exposed the vulnerability of a lopsided economic model based on bricks and mortar.

Construction and related activities generated hundreds of thousands of jobs (many of them held by immigrants), but contributed little to value added because of low productivity.

Spain’s current crisis is almost entirely home-made.

For more than a decade, the political class was happy to encourage phenomenal growth of the property sector without giving thought to the bubble being created or what would happen after it burst.

The housing bubble started during the government of the conservative Popular Party (1996-2004) and intensified under the Socialists, who broke their promise to end tax deductions for home purchases, although they have changed their minds again in recent months.

The number of housing starts in 2006 (865,561) was more than France, Germany, the UK and Italy combined.

The explosive growth of the property sector had a big knock-on impact on the rest of the economy and caused corruption among politicians to flourish, particularly as a result of reclassification of land by town halls. More than half the increase in total tax revenue between 1995 and 2007 came from the property sector.

For many analysts, it was, to borrow the title of a novel by Gabriel García Márquez, a chronicle of a death foretold. The only question was when the slump would happen; the international credit crunch was the trigger.

There is another path to prosperity – through international expansion.

The country has a core of multinationals, such as the Santander financial group, Telefónica (telecommunications) and Iberdrola (renewable energy), and there are also successful medium-sized companies that have expanded abroad. Geographical diversification enabled them to weather the severe downturn in their domestic market.

Spain’s outward investment stock was $602bn at the end of 2008 (the latest figure), 37.5 per cent of GDP, compared with Italy’s $517bn (22.5 per cent of GDP).

In GDP terms, outward investment stock was 12 times higher than in 1990.

Most of the investment is in the European Union and Latin America, increasingly in the US and very little in Asia, despite its growing importance in the global economy. There is thus considerable scope for further increases.

The export sector, however, is lacklustre. Between 1988 and 2009, the contribution of external demand to GDP growth was positive in only six years, two of which were recession years (1993 and 2009) when companies were forced to sell abroad to offset the contraction in their home market.

In “normal” years, buoyant domestic demand sucks in imports and – coupled with the traditionally low level of exports of goods and services (around 25 per cent of GDP) – generates a big trade deficit (7.9 per cent of GDP in 2008) and intensifies the current account deficit (9.5 per cent in 2008).

Another indicator of the low export capacity is their amount in per capita terms: $5,355 compared with $8,330 in Italy and $16,175 in Germany, according to the 2009 World Development Indicators.

The cornerstone of a knowledge-based economy, and, thus, one capable of exporting more, is education.

With one of every three people aged between 18 and 24 not completing basic secondary education (double the EU average); poor results in the OECD’s Pisa tests in reading, mathematics and scientific knowledge; no university among the world’s top 150 in the main rankings (up to 35 per cent of students drop out before graduation and only about one-third complete their studies on time); and research and development spending of 1.35% of GDP, way below that of the most advanced economies, Spain is going to have to make a Herculean effort to improve its education system and it is perhaps not surprising that high tech products account for only 5 per cent of manufactured exports.

A decade is needed before the positive effects would be felt, and a start has not yet even been made thanks to the squabbling political class.

The export sector is also hampered by the country’s image abroad, which is out of line with reality. Foreign views are still predominantly forged by stereotypes (fiestas, and bullfighting). This affects consumer’s perception of the quality of products. Only one company, fashion retailer Zara, is in Interbrand’s top 100 global brands.

Fiscal adjustments are necessary to reduce Spain’s dependence on the construction sector, but they are not enough. Deep structural reforms are needed for it to become a strong, export-oriented economy.,dwp_uuid=084669ca-71cb-11df-8eec-00144feabdc0.html