The Post-Franco Period, 1975-1980s
Franco's death in 1975 and the ensuing transition to democratic rule diverted Spaniards' attention from their economy. The return to democracy coincided with an explosive quadrupling of oil prices, which had an extremely serious effect on the economy because Spain imported 70% of its energy, mostly in the form of Middle Eastern oil. Nonetheless, the centrist government of Adolfo Suarez Gonzalez, which had been named to succeed the Franco regime by King Juan Carlos, did little to shore up the economy or even to reduce Spain's dependence on imported oil, although there was little that could be done as the country had little in the way of hydrocarbon deposits. A virtually exclusive preoccupation with the politics of democratization during the politically and socially unstable period when the new constitution was drafted and enacted, absorbed most of Spain's politics and administration at the expense of economic policy.
Because of the failure to adjust to the changed economic environment brought on by the two oil price shocks of the 1970s, Spain quickly confronted plummeting productivity, an explosive increase in wages from 1974 to 1976, a reversal of migration trends as a result of the economic slump throughout Western Europe, and the steady outflow of labor from agricultural areas despite declining job prospects in the cities. All these factors contributed to a sharp rise in the unemployment rate. Government budgetary deficits swelled, as did large social security cost overruns and the huge operating losses incurred by a number of public-sector industries. Energy consumption, meanwhile, remained high.
When the Spanish Socialist Workers' Party government headed by Felipe González took office in late 1982, inflation was running at an annual rate of 16%, the external current account was US$4 billion in arrears, public spending was large, and foreign exchange reserves had become dangerously depleted. In coping with the situation, however, the Gonzalez government had one asset that no previous post-Franco government had enjoyed, namely, a solid parliamentary majority in both houses of the Cortes (Spanish Parliament). With this majority, it was able to undertake unpopular austerity measures that earlier governments had not.
The Socialist government opted for pragmatic, orthodox monetary and fiscal policies, together with a series of vigorous retrenchment measures. In 1983 it unveiled a program that provided a more coherent and long-term approach to the country's economic ills. Renovative structural policies—such as the closing of large, unprofitable state enterprises—helped to correct the relatively poor performance of the economy. The government launched an industrial reconversion program, brought the problem-ridden social security system into better balance, and introduced a more efficient energy-use policy. Labor market flexibility was improved, and private capital investment was encouraged with incentives.
By 1985 the budgetary deficit was brought down to 5% of GNP, and it dropped to 4.5% in 1986. Real wage growth was contained, and it was generally kept below the rate of inflation. Inflation was reduced to 4.5% in 1987, and analysts believed it might decrease to the government's goal of 3% in 1988.
Efforts to modernize and to expand the economy together with a number of factors fostered strong economic growth in the 1980s. Those factors were the continuing fall in oil prices, increased tourism, and a massive upsurge in the inflow of foreign investment. Thus, despite the fact that the economy was being exposed to foreign competition in accordance with EC requirements, the Spanish economy underwent rapid expansion without experiencing balance of payments' constraints.
In the words of the OECD's 1987-88 survey of the Spanish economy, "following a protracted period of sluggish growth with slow progress in winding down inflation during the late 1970s and the first half of the 1980s, the Spanish economy has entered a phase of vigorous expansion of output and employment accompanied by a marked slowdown of inflation." In 1981 Spain's GDP growth rate had reached a nadir by registering a rate of negative 0.2%; it then gradually resumed its slow upward ascent with increases of 1.2% in 1982, 1.8% in 1983, 1.9% in 1984, and 2.1% in 1985. The following year, however, Spain's real GDP began to grow strongly, registering a growth rate of 3.3% in 1986 and 5.5% in 1987. Although these growth rates were less than those of the economic miracle years, they were among the strongest of the OECD. Analysts projected a rise of 3.8% in 1988 and of 3.5% in 1989, a slight decline but still roughly double the EC average. They expected that declining interest rates and the government's stimulative budget would help sustain economic expansion. Industrial output, which rose by 3.1% in 1986 and by 5.2% in 1987, was also expected to maintain its expansive rate, growing by 3.8% in 1988 and by 3.7% in 1989.
A prime force generating rapid economic growth was increased domestic demand, which grew by a steep 6% in 1986 and by 4.8% in 1987, in both years exceeding official projections. During 1988 and 1989, analysts expected demand to remain strong, though at slightly lower levels. Much of the large increase in demand was met in 1987 by an estimated 20% jump in real terms in imports of goods and services.
In the mid-1980s, Spain achieved a strong level of economic performance while simultaneously lowering its rate of inflation to within two points of the EC average. However, its export performance, though increasing, raised concerns over the existing imbalance between import and export growth.
Read more about this topic: Economic History Of Spain