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José Luis Oreiro

Professor, Department of Economics, University of Brasilia

Jesus Ferreiro Aparício

Professor at the Faculty of Economics of the University of the Basque Country

The recent visit of the President of the Government of Spain, Pedro Sanchez, to Brazil is a good opportunity to revisit the obstacles to the economic development process that both countries face. In the period between 1990 and 2022, the ratio between the GDP per capita of Spain and Brazil, measured in purchasing power parity, remained stable, at around 2.6 times. This means that the GDP per capita growth rate in both countries was similar, around 1.43% p.a during this period.

In the period 1995-2007, Spain shows a faster growth of its GDP per capita, increasing from 2.60 to 2.90 the ratio between its GDP per capita and the Brazilian GDP per capita. The international financial crisis of 2008, however, represented an interruption in its development process for Spain, with GDP per capita remaining stagnant until 2022 at levels lower than those observed in 2007. Brazil, on the other hand, goes through the 2008 Crisis relatively unscathed, maintaining a reasonable pace of growth, until fall into the great recession of 2014-2016, which would result in a seven-year period of stagnation.

In 2023, the Spanish economy, like the Brazilian one, showed remarkable dynamism, especially when compared to its European partners. While for the European Union and the Eurozone, the European Commission forecasts a growth rate of 0.6% in 2023, Spain would have grown at a rate of 2.5%, behind only Croatia and Malta. As far as job creation is concerned, it would have grown by 1.1% in the euro area and 1% in the European Union, well below Spain, whose job creation (1.9%) is only lower than that of Ireland, Croatia and Malta.

These good figures, which make Spain one of the economic locomotives of Europe, hide its markedly cyclical nature. If we look at the behaviour of the Spanish economy from a long-term perspective, the conclusion we reach is very different, that is, a clear loss of dynamism over the last two decades.

As a result of its entry into the European Union in 1986, the Spanish economy gained a strong boost that led it to bring its real per capita income closer to the European average. Thus, between 1986 and 2005, Spain’s real GDP per capita increased by 76%, which meant that in 2005 it reached 78.5% of the Euro area average and 92.7% of the European Union average.

The outbreak of the International Financial Crisis of 2008 marked a turning point in Spain’s economic development process. From 2008 to 2023, Spain’s real GDP per capita would have grown by only 3.8%, well below the average of the eurozone (9%) or the European Union (13.5%), meaning that in 2023 Spain’s per capita income would have fallen to 75% of the eurozone’s per capita income and 83.1% of the European Union’s per capita income. Thus, if in 2007 Spain occupied the 13th place in the ranking of European Union countries (including the United Kingdom) by per capita income, in 2023 its position was 15th, having been surpassed by Cyprus and Malta. In fact, if the European Commission’s forecasts come true, in 2025 the Spanish ranking would fall to 16th place, being overtaken by Slovenia.

Reversing this process must be a central task for the Spanish economic authorities and for society as a whole. The poor results in terms of productivity growth can be explained, among other factors, by the growing weight of low-productivity sectors, such as tourism, the current engine of the Spanish economy, and by the loss of weight of the industrial sector, and by a model of competitiveness in which competitiveness prevails through costs based on low wage costs.  This is fostered by a labour market in which non-standard contracts and employment (temporary, permanent-discontinuous, part-time) continue to be overweighted and discourages investment in physical and human capital and innovation processes.

Spain, like Brazil, has undergone an intense process of deindustrialization, with the share of the manufacturing industry in GDP falling from 17% in 1997 to just over 11% in 2022, a level that has been more or less stable since 2011.  In Brazil, the behavior of the manufacturing industry’s share in GDP was more erratic. Between 1997 and 2004, the share of the manufacturing industry increased from 13% to 15% of GDP, in a positive and expected response to the end of the exchange rate anchor in January 1999. From 2005 onwards, the process of deindustrialization began again, with the share of the manufacturing industry falling from 15% in 2005 to 11% of GDP in 2022. 

When we look at the data of the manufacturing industry by technological intensity, some interesting contrasts appear. While the share of medium and high-tech industries in the GDP of the manufacturing industry in Spain increases from 31% in 2007 to 40% in 2022, thus showing that deindustrialization in Spain has affected low-tech industries more intensely; in Brazil, the share of medium and high-tech industries in the manufacturing industry GDP fell from 35% in 2007 to 31% in 2022, indicating that in the Brazilian case it is the sophisticated part of the manufacturing industry that is being most affected by deindustrialization.

Another similarity between the Spanish and Brazilian cases is the reduction in the pace of capital accumulation in the last 15 years. In fact, gross fixed capital formation in Spain fell from just over 30% of GDP in 2007 to 21% in 2022, a drop of 9 p.p. of GDP. In Brazil, the investment rate fell from 20% of GDP in 2007 to 15% to 16.5% of GDP in 2023.

The low dynamism of the economies of Brazil and Spain in the last 15 years seems to have a common denominator, the combination of deindustrialization and a reduction in the pace of gross fixed capital formation. This outcome is far from a mystery. Growth in labor productivity requires investment in new machinery and equipment that incorporates new technologies. It turns out that the manufacturing industry is the most intensive sector of activity in machinery and equipment. So if industry doesn’t grow, neither does investment, so productivity doesn’t increase. Without productivity growth, manufacturing industry loses competitiveness in the medium and long term even in a scenario of anemic growth in real wages. So we have a vicious cycle of low investment-deindustrialization-low investment. This is the nature of the middle-income trap that affects both Brazil and Spain.

The original portuguese version of this article is published at https://valor.globo.com/opiniao/coluna/espanha-e-brasil-desafios-comuns.ghtml