How Spain transitioned to high-income status

BAS editor William Chislett

Anyone who has been following Spain over the last 50 years or so cannot but be amazed at how infinitely more prosperous the country has become.

When I bought a second home in Buendía, a Spanish village in Castilla La Mancha, in 1976, there was no running water (it had to be collected in large containers from a spring), the streets were unpaved, the primary school was rundown, phone calls were made in a cabin near the town hall via an operator who was the daughter of one of the bar owners, and almost every time there was a thunderstorm the electricity went off. Most of the impoverished villagers worked the land or were in construction.  I will never forget walking in one of the streets and seeing a man plucking a sparrow, which I assumed he would cook.

For many years now there has been running water for the 408 residents, all the streets are paved, there is an automatic telephone exchange (fiber internet is being installed), a modern primary school and a health centre. Many of the villagers drive smart cars.

Spain is one of very few nations (South Korea being another example) that have successfully transitioned from middle-income (per capita GNI of $1,036 to $12,535) to high-income status (see Figure 1). The latest figure for Spain’s per capita GNI is $30,330 (2019).

Figure 1. Spain and South Korea’s real per capita GDP

Source: Maddison Project Database (Bolt, Inklaar, de Jong, and van Zanden, 2018).

In 1960 there were over a hundred middle-income countries.  By the end of the century only a dozen of them had attained high-income status. Most have remained stuck in the middle-income trap. How Spain managed not to do this, seemingly against all the odds, is well told by Oscar Calvo-González, a Spanish economist at the World Bank, in his enlightening book Unexpected Prosperity (OUP).

The path to prosperity began long before Spain joined the EEC in 1986, which brought the country bountiful structural and cohesion funds.  It was also more than a bounce-back from the devastating 1936-39 Civil War. Spain did not recover its pre-War level of economic output until 1953. The 1940s were years of hunger, autarky and ostracism by the international community because Franco had taken the side of the Axis powers.

The brutally repressive dictatorship, consolidated by the US as of the 1953 military bases agreement, gave Spain stability. Washington’s embrace of Franco during the Cold War was  psychologically important, though it provided little financial assistance. The stability (a ‘peace of the cemeteries’ for the exiled political opposition) enabled long-term planning, encouraged gross capital formation to take off and made macroeconomic management predictable.

This is not a justification of that regime, but we should not forget that between 1812 and 1935 Spain suffered 53 coups, seven constitutions and three civil wars. By the time Franco consolidated his position as head of government in 1939, there had been 145 heads in the previous 100 years. Peace is one of the prerequisites for prosperity.

Between 1950 and 1980, when the foundations of prosperity were laid, Spain’s real per capita income quadrupled.  By comparison, it had taken the entire previous century to double. Per capita income went from 27% to 57% of that in the US during these 30 years. Spain caught up with both the US and the UK in infant mortality rates, and rapid urbanization was managed, largely without the by-product of the slums that are common in many middle-income countries today.

Economic development went so well that Sir Nicholas Henderson, the outgoing British ambassador to France, predicted in his controversial valedictory dispatch of March 1979 that if Britain’s economic decline continued Spain would overtake the UK in GDP per head by the end of the 20th century. (It did not happen.)

Political stability alone does not explain Spain’s take-off. An important factor was that both the public and private sectors drove investment, and not just the former, as in the case of  communist countries. The rate at which new private companies were created, which had averaged around 1,400 a year in the first half of the 20th century, tripled to 4,500 in the 1960s. Taking into account the significant population growth, particularly in the 1950s and 1960s, fuelled by the baby boom that followed the Second World War, the creation of new firms rose from six per 100,000 population to 14 during this period.

Benidorm beaches

Tourism, which has played such a key role in the economy, was largely private-sector led. The number of visitors skyrocketed, from less than half a million in 1950 to over 20 million a year by 1970 (83.5 million in 2019). Spain’s share of the global tourism market rose from less than 2% to over 12% during those two decades.

The 1959 Stabilisation Plan was key. Multiple exchange rates were abolished, the peseta heavily devalued, wages frozen, and there was some liberalisation of trade. The peseta became convertible with major currencies. Restrictions on foreign direct investment were eased and economic policy became export-oriented. These and other reforms achieved a wrenching turnaround in economic policymaking, from 20 years of autarkic and statist orientation to a more open and market-friendly approach. 

Calvo-González argues that these reforms were driven by political stability rather than economic instability.  The growth dividend from better economic policies was large. According to Calvo-González, they accounted for much of the increase in per capita growth over the next 15 years. ‘Spain proves the case that there can be high returns from getting policies right, or more precisely, from correcting bad policy mistakes.’ Trade openness (exports+imports) more than tripled between the 1940s and the 1960s to 17% of GDP.

Unemployment, however, remained high in the 1960s, forcing people to emigrate.  Fortunately this was a time when the rest of western Europe was expanding: some 1.5 million Spaniards sought work in Germany, France, Switzerland, and other countries.  Buendía’s population peaked at almost 1,900 in 1950, when villagers began to migrate both within Spain and further afield. By 1970, 3.3 million Spaniards were estimated to be living abroad, the equivalent of one-quarter of Spain’s working population at that time.

One can only speculate what might have happened to the political stability much vaunted by Franco if this ‘escape valve’ had not existed.

Originally published by the Elcano Royal Institute.