Good morning, I'm Hélène Baudchon. In the first part of this podcast focused on the issue of productivity in Spain, we described the evolution of productivity over the past 25 years. In this second part, we will discuss the factors that explain Spain’s low productivity level. Guillaume, in your article published last February, you listed a number of elements, three if I am not mistaken. Can you explain them to us?
Of course, I would first like to say that these factors do not operate in isolation from each other. There is an interaction, or even a training effect, between the factors I will mention.
First of all, we have what we might call composition effects. This is mainly due to the fact that the Spanish economy has, over the last 25 years, focused on service activities that are generally less source of productivity: these are distributive trades (retail, wholesale, catering, hotels) or public services (education, health).
Low productivity in these sectors has come from the fact that they are labour-intensive sectors.
Yes, indeed. The share of non-industrial employment in the country increased from 80% in the late 1990s to 90% in 2022. Conversely, employment in industry, from which much of the productivity gains flow, has declined, as a result of the waves of relocations that affected Spain and a large part of Western European countries.
I am making a slight digression here, but it is worth recalling that the last phase of deindustrialisation that Spain has faced, which extends roughly from the late 1990s up to the Covid-19 crisis, has been among the most important in Europe.
This has been the subject of one of your previous Ecoconjoncture, which I also invite all the auditors to discover. “ Spain: the tortuous path to reindustrialisation” was the title of your article published in September 2021.
That's right.
Just to give you a figure, the share of industry (excluding construction) in GDP in 2019 fell below the 15% threshold (14.7%). If we go back at the end of the 1990s, it was almost 20%. The size of the industry in Spain is among the third lowest in the EU, roughly three points below the EU average
The Spanish economy is now functioning mainly based on the performance of sectors whose size has increased over the last two decades and whose productivity levels are lower.
That’s it for the first cause, what is the second factor that explains the Spanish productivity deficit that you identified?
There is chronic underinvestment in so-called intangible assets. Intangible assets include R&D expenditure, investment in computer software and databases, or intellectual property rights, royalties. R&D is now central to generating significant productivity gains for a company and a country in the medium and long term.
This point on intangible investments is important and raises the question of how they are integrated into the national accounts. What do we count? What is not counted? Does it change the productivity picture?
In the EcoConjoncture, we tried to broaden, if I may say so, the investment figures by integrating other types of intangible investment, which are not currently included in the national accounts data from which the GDP measure is derived, but which are still investments likely to increase the productivity of any companies. These include training expenditures, advertising and market research, and organizational capital. If all these elements are included, however, intangible investment would still not rise to 5% of GDP in Spain, while it would exceed 10% of GDP in France and the United States, for example.
Overall, the expansion of the gross fixed capital formation measure included in the national accounts would indicate an even larger investment deficit in Spain.
Very interesting, therefore, this does not solve the problem. Intangible investment, composition effect. That makes two factors explaining the Spanish productivity deficit. There's one missing.
The third element highlighted in the article is the decline in public investment. As a percentage of GDP, public investment fell from 5.2% in 2009 (peak) to 2.7% in 2021. Spain now has one of the lowest rates of public investment among OECD countries.
However, there can be a significant synergy between public and private sector investments; the former often support or contribute to the emergence of new sectors and activities, and thus ultimately support the development and productivity of private enterprises.
This fall in the weight of public investment is equivalent to a fall of almost half. How can this be explained?
First, it is the consequences of the fiscal austerity policies implemented by the authorities following the two major economic crises of 2008 and 2011. The category of “Economic affairs”, which accounts for the largest share of government investment, has been particularly affected by these policies. The fall was significant: expenditure on this item is now only slightly higher than in the early 2000s, and almost 60% lower than the historic peak of 2010.
However, these budget cuts are not sector specific. All branches were affected, notably transport (-65% compared to 2010) and the energy sector (-80%).
Thank you Guillaume for all this information. This is the end of this second episode on the factors underlying the low productivity in Spain. In the third and final episode, we will ask the question if a recovery in productivity is possible. Can we be optimistic? This is explained in the last episode. See you soon.
