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I ESADE Alumni Annual Conference in Madrid

29/11/2006 (dd/mm/yyyy) | Madrid

Pedro Solbes, Second Vice President and Minister of Economy and Finance of Spain, gave a talk on the main challenges for the Spanish economy in the medium and long term. Mr. Solbes also chaired a round table featuring José María Ramírez Pomatta, President of Mutua Madrileña, Carlos Losada, Director General of ESADE, and Pedro Navarro, Vice President of ESADE Alumni. 

After the round-table discussion, Mr. Solbes took the floor. He began his remarks by reviewing the elements that had helped create favourable short-term economic prospects in Spain. He went on to explain that, despite the positive indicators, "we must deal with basic issues such as macroeconomic imbalances, productivity and changing our economic growth model in order to preserve and improve the economy in the coming years". 

Containing inflation

Of all the macroeconomic imbalances, Mr. Solbes argued, inflation is among the most important in the medium term, since "it has shown worrying behaviour at certain times" in recent years. Mr. Solbes pointed out that the economy has nevertheless been able to contain inflation. He shared two conclusions he had drawn regarding the situation: "First, the Spanish economy has made significant progress in terms of dynamism and flexibility. It is capable of absorbing major inflation shocks. Second, when dealing with situations of this sort, we must focus on structural measurements of inflation and not on the general price index. Still, reducing inflation remains a "high-priority goal". The current rate of 3% is a full percentage point higher than the EU average. To achieve this goal, the government has introduced measures aimed at making fundamental changes: "increasing productivity and making the economy more flexible". According to Mr. Solbes, some sectors are already seeing the effects of these measures. A more flexible economy will be able to "respond dynamically to significant increases in the aggregate demand and in the supply without causing major imbalances". 

Foreign deficit
According to Mr. Solbes, demand policy is important in this increasingly dynamic economy: "Taking into account the expansive trends in Spain and the monetary policy of the EU, we need to take a more restrictive stance with our fiscal policy: the imbalance between supply and demand, as defined by the foreign deficit, can be seen in the Spanish economy's need for financing, which has reached the truly amazing figure of 8% of the GDP". Mr. Solbes offered an explanation for what is happening in Spain. "Unlike other countries, the problem is not due to a low savings rate". Rather, the growing need for financing "can be attributed to a sharp increase in the investment rate, which has reached 30% of the GDP". Investors are therefore making a considerable effort. Most of these investments are from foreign countries - especially the EU, where the liquidity and interest rates during this period have been generally favourable to the Spanish economy, although there have been some adverse effects as well. Mr. Solbes acknowledged the dysfunctions that the accumulation of foreign capital may generate, but declared that "in net terms, it is good for Spain" because the capital is invested, thereby increasing the country's productive capacity. 

The challenge of productivity

According to Mr. Solbes, many of Spain's long-term challenges, such as "correcting the public pension system and increasing the labour force participation rate", will be related to the ageing population. Many other challenges will be related to productivity - a crucial issue for economic development in the coming years. "Our current economic growth pattern can only go so far", declared Mr. Solbes. "Our economic policy must focus on other elements, such as developing factors of production", because that is the only way to encourage dynamic productivity behaviour. These elements are concentrated in two "particularly important" areas: education and research and development (R&D). 

Unfinished business

Mr. Solbes discussed education in terms of its economic impact: "The creation of human capital is an essential element in the development of a society, since it determines the extent to which workers are increasing their competitiveness". The data paint a discouraging picture of both the current situation and the developments in recent years: "At least in relative terms, Spain's education system is not making progress. It is being outpaced by our economic growth". What can be done about this problem? Mr. Solbes declared that an influx of money would "partially" solve some of the structural inadequacies of the education system and listed a few of the deep-seated causes of these deficiencies: "The lack of incentives for teachers, the lack of a culture of results that would produce incentives in the education system, society's attitude toward education, and the transfer of educational needs that should be satisfied at home to the school system". 

Investing in R&D

In the area of research and development, ?the current situation is unsatisfactory", said Mr. Solbes. "Spain spends around 1% of its GDP on R&D. This is a very low rate, compared with countries such as the United States... We are not doing enough to prepare for a future in which technology will play a fundamental role".
Mr. Solbes analysed the positive effects of R&D: "It helps improve the country's productive capacity and, together with innovation, generates continuous expansive momentum for the economy. The results of these activities create new needs among the general public and give the economic system the ability to satisfy those needs". He also pointed out several obstacles to effectively promoting R&D in this country: the lack of inclination to innovate among Spaniards, the lack of financing available and the inadequate interaction between scientists and companies. According to Mr. Solbes, an effective R&D policy must be comprehensive and must simultaneously influence multiple variables. It must increase the pool of available researchers, strengthen the links between the scientific and business worlds, increase the commercial attractiveness of research activity, strengthen the country's incipient research-oriented venture-capital sector, and promote the values of innovation among the general public. To address these needs, the Spanish government has introduced Ingenio 2010. This programme aims to increase Spain's investment in innovation to 2% by 2010, with over half of the money coming from the private sector.

Mr. Solbes ended his comments on an optimistic note: in order for the Spanish economy to become more stable and sustainable, business owners and the rest of society must be willing to collaborate.




Sr. José María Ramírez Pomatta
President of Mutua Madrileña
Dr. Carlos Losada
Director General of ESADE
Sr. Pedro Navarro
Vice president of ESADE Alumni

"Spanish Economy: challenges of mid and long term"

Given by:
Pedro Solbes,
Second Vice President and Minister of Economy and Finance of Spain

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