The Franco Era, 1939-75
Spain emerged from the civil war with formidable economic problems. Gold and foreign exchange reserves had been virtually wiped out, the massive devastation of war had reduced the productive capacity of both industry and agriculture. To compound the difficulties, even if the wherewithal had existed to purchase imports, the outbreak of World War II rendered many needed supplies unavailable. The end of the war did not improve Spain's plight because of subsequent global shortages of raw materials, and peacetime industrial products. Spain's European neighbours faced formidable post-war reconstruction problems of their own, and, because of their awareness that the Nationalist victory in the Spanish Civil War had been achieved with the help of Adolf Hitler and Benito Mussolini, they had no inclination to include Spain in any multilateral recovery programs or trade. For a decade following the Civil War's end in 1939, the wrecked and isolated economy remained in a state of severe depression.
Branded an international outcast for its pro-Axis bias during World War II, Francisco Franco's regime sought to provide for Spain's well-being by adopting a policy of economic self-sufficiency. Autarky was not merely a reaction to international isolation; it was also rooted in more than half a century of advocacy from domestic economic pressure groups. Furthermore, from 1939 to 1945, Spain's military chiefs genuinely feared an Allied invasion of the peninsula and, therefore, sought to avert excessive reliance on foreign armaments.
With the war devastation and trade isolation, Spain was much more economically backward in the 1940s than it had been a decade earlier. Inflation soared, economic reconstruction faltered, food was scarce, and, in some years, Spain registered negative growth rates. By the early 1950s, per capita gross domestic product (GDP) was barely 40% of the average for West European countries. Then, after a decade of economic stagnation, a tripling of prices, the growth of a black market, and widespread deprivation, gradual improvement began to take place. The regime took its first faltering steps toward abandoning its pretensions of self-sufficiency and towards a transformation of Spain's economic system. Pre-Civil War industrial production levels were regained in the early 1950s, though agricultural output remained below prewar levels until 1958.
A further impetus to economic liberalization came from the September 1953 signing of a mutual defense agreement, the Pact of Madrid, between the United States and Spain. In return for permitting the establishment of United States military bases on Spanish soil, the administration of President Dwight D. Eisenhower administration provided substantial economic aid to the Franco regime. More than US$1 billion in economic assistance flowed into Spain during the remainder of the decade as a result of the agreement. Between 1953 and 1958, Spain's gross national product (GNP) rose by about 5% per annum.
The years from 1951 to 1956 were marked by much economic progress, but the reforms of the period were implemented irregularly, and were poorly coordinated. One large obstacle to the reform process was the corrupt, inefficient, and bloated bureaucracy. By the mid-1950s, the inflationary spiral had resumed its upward climb, and foreign currency reserves that had stood at US$58 million in 1958 plummeted to US$6 million by mid-1959. The growing demands of the emerging middle class—and of the ever greater number of tourists—for the amenities of life, particularly for higher nutritional standards, placed heavy demands on imported food and luxury items. At the same time, exports lagged, largely because of high domestic demand and institutional restraints on foreign trade. The peseta fell to an all-time low on the black market, and Spain's foreign currency obligations grew to almost US$60 million.
A debate took place within the regime over strategies for extricating the country from its economic impasse, and Franco finally opted in favor of a group of neoliberals. The group included bankers, industrial executives, some academic economists, and members of the Roman Catholic lay organization, Opus Dei.
During the 1957-59 period, known as the pre-stabilization years, economic planners contented themselves with piecemeal measures such as moderate anti-inflationary stopgaps and increases in Spain's links with the world economy. A combination of external developments and an increasingly aggravated domestic economic crisis, however, forced them to engage in more far- reaching changes.
As the need for a change in economic policy became manifest in the late 1950s, an overhaul of the Council of Ministers in February 1957 brought to the key ministries a group of younger men, most of whom possessed economics training and experience. This reorganization was quickly followed by the establishment of a committee on economic affairs and the Office of Economic Coordination and Planning under the prime minister.
Such administrative changes were important steps in eliminating the chronic rivalries that existed among economic ministries. Other reforms followed, the principal one being the adoption of a corporate tax system that required the confederation of each industrial sector to allocate an appropriate share of the entire industry's tax assessment to each member firm. Chronic tax evasion was consequently made more difficult, and tax collection receipts rose sharply. Together with curbs on government spending, in 1958 this reform created the first government surplus in many years.
More drastic remedies were required as Spain's isolation from the rest of Western Europe became exacerbated. Neighboring states were in the process of establishing the EC and the European Free Trade Association (EFTA—see Glossary). In the process of liberalizing trade among their members, these organizations found it difficult to establish economic relations with countries wedded to trade quotas and bilateral agreements, such as Spain.
Spanish membership in these groups was not politically possible, but Spain was invited to join a number of other international institutions. In January 1958, Spain became an associate member of the Organisation for European Economic Co- operation (OEEC), which became the Organisation for Economic Co-operation and Development (OECD) in September 1961. In 1959 Spain joined the International Monetary Fund (IMF) and the World Bank. These bodies immediately became involved in helping Spain to abandon the autarkical trade practices that had brought its reserves to such low levels and that were isolating its economy from the rest of Europe.
In December 1958, after seven months of preparation and drafting, aided by IMF, Spain unveiled its Stabilization Plan on June 30, 1959. The plan's objectives were twofold: to take the necessary fiscal and monetary measures required to restrict demand and to contain inflation, while, at the same time, liberalizing foreign trade and encouraging foreign investment. The plan's initial effect was deflationary and recessionary, leading to a drop in real income and to a rise in unemployment during its first year. The resultant economic slump and reduced wages led approximately 500,000 Spanish workers to emigrate in search of better job opportunities in other West European countries. Nonetheless, its main goals were achieved. The plan enabled Spain to avert a possible suspension of payments abroad to foreign banks holding Spanish currency, and by the close of 1959 Spain's foreign exchange account showed a US$100-million surplus. Foreign capital investment grew sevenfold between 1958 and 1960, and the annual influx of tourists began to rise rapidly, bringing in very much needed foreign exchange.
As these developments steadily converted Spain's economic structure into one more closely resembling a free-market economy, the country entered the greatest cycle of industrialization and prosperity it had ever known. Foreign aid took the form of US$75 million in drawing rights from the IMF, US$100 million in OEEC credits, US$70 million in commercial credits from the Chase Manhattan Bank and the First National City Bank, US$30 million from the Export-Import Bank of the United States, and funds from United States aid programs. Total foreign backing amounted to US$420 million. The principal lubricants of the economic expansion, however, were the hard currency remittances of one million Spanish workers abroad, which are estimated to have offset 17.9% of the total trade deficit from 1962 to 1971; the gigantic increase in tourism that drew more than 20 million visitors per year by the end of the 1960s, accounting by then for 9% of GNP; a car industry that grew at a staggering compound rate of 21.7% per year from 1958 to 1972; and direct foreign investment, which between 1960 and 1974 amounted to an impressive US$7.6 billion. More than 40% of this investment came from the United States, almost 17% came from Switzerland, and the Federal Republic of Germany (West Germany) and France each accounted for slightly more than 10%. By 1975 foreign capital represented 12.4% of all that invested in Spain's 500 largest industrial firms. An additional billion dollars came from foreign sources through a variety of loans and credit devices.
To help achieve rapid development, there was massive government investment through key state owned companies like the national industrial conglomerate Instituto Nacional de Industria, the mass market car company SEAT in Barcelona, the shipbuilder Empresa Nacional Bazán. With foreign access to the Spanish domestic market restricted by heavy tarrifs and quotas, these national companies led the industrialisation of the country, restoring the prosperity of old industrial areas like Barcelona and Bilbao and creating new industrial areas, most notably around Madrid. Although there was considerable economic liberalisation in the period these enterprises remained under state control.
The success of the stabilization program was attributable to a combination of good luck and good management and the impressive development during this period was referred to as the "Spanish miracle". Between 1959 and 1974, Spain had the next fastest economic growth rate after Japan. The boom came to an end with the oil shocks of the 1970s and government instability during the transition back to democracy after Franco's death in 1975.
Read more about this topic: Economic History Of Spain