Introduction: A Millennial View of Spain’s Development

Abstract

This Introduction provides an overview of the evolution of Spain over almost a millennium, distinguishing two major epochs, with 1850 as the turning point. The first, which corresponds to the pre-industrial era, evinces long fluctuations in average income and its distribution and no long-term net gains, while the second reveals a sustained increase in GDP per capita accompanied by a profound structural transformation and substantial changes in income distribution.

1.1 Introduction

The hockey stick is a popular depiction of economic evolution over the very long run, portraying a picture of persistent stagnation, interrupted only by the Industrial Revolution, which triggered widespread modern economic growth in the last two centuries.¹ The conventional explanation for the stagnation of average incomes prior to 1820 is the Malthusian view, in which land is in fixed supply, capital accumulation and technological change proceed, if at all, very slowly, and any increase in output per head prompts a direct response of population that cancels said increase.²

Does the historical evidence for the case of Spain support such a dichotomy between stagnation and growth? Let us take a look at Fig. 1.1. It represents the evolution of absolute and per capita GDP³ from the de facto end of the Reconquest in the late thirteenth century to 2020.⁴ Absolute GDP improved over time (220-fold up the present) but exhibited strong fluctuations until the nineteenth century, and only trebled up to 1820. The crucial issue however, is what happened to the evolution of GDP per person. Average income multiplied by more than 20 times over the last 750 years, but most of this gain was achieved in the last 200 years, and per capita GDP increase was about one-fifth from the 1270s to 1820. Such a small gain over half a millennium seems, at first sight, to provide support for the stagnation hypothesis. However, closer examination reveals that far from having a flat performance, per capita GDP exhibited growing and shrinking phases until the early nineteenth century. Could it be argued, then, that preindustrial Spain conformed to a Malthusian pattern?

Fig. 1.1

Absolute and per capita real GDP, 1277–2020 (1970=100, natural logs). Sources: https://frdelpino.es/investigacion/en/category/01_social-sciences/01_spanish-economy/02_historical-perspective-spanish-economy/

A related issue in the historical literature is Spain’s poor performance relative to north-western European countries. A glance at Fig. 1.2 shows that Spain currently belongs to the lower part of the OECD ranking, below most western European countries.⁵ When did such unexceptional position originate? Historians concur that Spain’s backwardness has deep roots, but do not agree as to when it originated. Was it in the autarchic early Francoism? Was it during the nineteenth century transition to a liberal society? Or did it, perhaps, result from the decline of Imperial Spain in the seventeenth century or, even further back, from the Black Death (1348)?

Fig. 1.2

Spain’s relative per capita in 2017 (GEKS $2017) (World Bank, ICP, 2017)

Answering these questions requires a very long-term view. For the sake of simplicity, I will distinguish two epochs, with 1850, as the dividing line. The first one, a period of long and deep fluctuations in average incomes and, the second, of sustained improvement in per capita GDP that resulted in the current level of affluence.

1.2 Economic Change over Half a Millennium

This section draws on Álvarez-Nogal and Prados de la Escosura (2013) and Chap. 2.

A glance at Fig. 1.3 shows three phases of economic expansion as measured by GDP: (1) from the de facto end of the Reconquest (mid-1260s) and, perhaps, earlier from its push forward in the late eleventh century, until the Black Death (1348); (2) from the second quarter of the fifteenth century, accelerating between the 1520s and 1560s, to a peak by 1570; and (3) from the late seventeenth century recovery that gave way to an expansionary phase in the eighteenth century that resumed after the Peninsular War interlude. Population followed suit but at slower pace, except from 1570 to the early 1620s, when it continued expanding while GDP shrank.

Fig. 1.3

Real absolute and per capita GDP and population, 1277–1850 (Hodrick-Prescott Trend) (1850/1859=100, natural logs). Source: See the text and Table 2.3

GDP per capita shadowed GDP evolution, although at slower pace during the growing phases, and moved hand-in-hand with population, but for short episodes (i.e., the first quarter of the seventeenth century). However, unlike absolute GDP, the gains achieved in per capita GDP during each growing phase were reverted during the next shrinking phase, so no net gains resulted over the long run. This was the case after the Black Death and during the post-1570 decline, and that is why per capita income levels reached by the early 1340s and 1570 were only superseded in the early nineteenth century.

In this recurrent growing and shrinking process over half a millennium, two distinctive epochs could be distinguished. The first one, up to 1570, corresponds to a high land–labour ratio, pastoral, trade-oriented economy, led by towns, and helped by the relatively abundance of specie, in which real wages and consumption were relatively high. Economic expansion was largely based on a commodity (wool) whose production was well suited to the relative abundance of land and was helped by the spread of transhumance s grazing land was won from the Muslims. A vibrant commercial sector supplied international markets and, as rising living standards stimulated urban industry, domestic markets as well.

After the collapse of the 1570s, a new equilibrium was reached in the mid-seventeenth century, which lasted until 1820. Crops then played a central role, while wool, trade and urban activity ceased to be the engines of growth in a poorer and gradually more densely populated society.

Did these changes affect income distribution? The long-term evolution of income inequality can be estimated using two measures: the ratio between nominal land rent and wage rates, which captures the returns to land and labour, respectively, and the ratio between nominal output per capita and wage rates (the so-called Williamson index), which compares the returns to all factors of production per capita with the returns to labour per worker. An increase in the Williamson Index means that average individual returns improve relative to those at the bottom of the distribution. An improvement in either of these two indices signifies an increase in inequality.

Figure 1.4 reveals that inequality moves with per capita income. However, until the early sixteenth century, income was more evenly distributed; but as Spain became a more rural society, inequality increased.

Fig. 1.4

Real per capita GDP and inequality, 1277–1850 (Hodrick-Prescott Trend) (1790/1799=100, natural logs). Source: See the text and Table 2.3

How does Spain’s performance compare with that of Western European economies? At the time of the Black Death, average income levels in Spain were above those of the North Sea Area (Netherlands and the United Kingdom) and France (Fig. 1.5). By 1570, at the height of its imperial expansion, Spain’s GDP per capita was still higher than that of the United Kingdom and France, but much lower than that of the Netherlands or northern Italy. As a result of the economic collapse from the 1570s to mid-seventeenth century, Spain fell behind. In the early eighteenth century and, later, after the Napoleonic Wars, Spain’s growth was not strong enough for it to catch-up. It is worth noting, though, that average income in preindustrial Spain, was, but for exceptional periods, always more than twice the World Bank’s absolute poverty line.⁶

Fig. 1.5

Comparative real per capita GDP, 1277–1850 (Hodrick-Prescott Trend) (Geary-Khamis $1990, natural logs). Source: See the text and Table 2.3

In the attainment of a relatively high living standard before the Black Death, a high land/labour ratio was undoubtedly an important element. Nevertheless, openness to foreign goods and ideas was crucial for Spain to take advantage of its privileged position at the crossroads of the European and Muslim economies. It was the combination of the two factors that enabled Spain to achieve a relatively prosperous position in Europe before its expansion into the Americas.

A question remains unanswered, however. Why did Spain, a frontier economy that did not obey Malthusian forces, alternate phases of growing and shrinking, so no significant long-run net gains in living standards were achieved? In order to provide explanatory hypotheses, let us focus on three episodes that proved decisive: the Black Death, the decline of Imperial Spain, and the Napoleonic Wars.

1.2.1 The Black Death

The Black Death was the deadliest pandemic in recorded history. It differs from other epidemic experiences in terms of the extent and severity of the shock over a very short period of time, and the recurrent reappearance of the disease.

A widely held view of the economic impact of the Black Death is based on the Malthusian interpretation. The demographic expansion of the High Middle Ages (1000–1340s) would have brought Europe’s population close to its maximum potential, given capital endowment and technological constraints, increasing pressure on natural resources. This fragile equilibrium was broken when deteriorating climatic conditions reduced harvests and led to subsistence crises that facilitated the spread of disease (Postan, 1973).⁷

In spite of the widespread acceptance of the Malthusian interpretation in Spanish historiography, this was far from being the case.⁸ Indeed, while the demographic impact in Spain was comparatively moderate—between a third and a half of the population was wiped out in Western Europe compared to a quarter in Spain (Álvarez-Nogal et al., 2020)—the economic effects were more severe and per capita income fell sharply.

As Fig. 1.3 shows, per capita GDP was higher before than after the plague. The Black Death (1348) resulted in a sharp decline in per capita GDP until the 1370s, which continued at slower pace thereafter until reaching a trough in the early fifteenth century. A recovery phase followed, although it reversed during the late 1460s to early 1470s, as civil war and social unrest spread across Castile and, by 1500, average income levels were still well below pre-Plague ones. In the case of population, the contraction was milder (Chap. 2, Fig. 2.12).

The intense recovery in north-western European countries after the Plague contrasts with Spain’s decline (Fig. 1.5). The European behaviour appears to be in line with the Malthusian prediction: as population fell due to the Plague, the survivors’ average income rose. The Black Death led to a change of demographic regime in Europe that set the grounds for the Great Divergence between western Europe and Asia (Broadberry, 2013; de Pleijt and van Zanden, 2016), while their different responses to the Plague initiated the ‘Little Divergence’ between European countries (Pamuk, 2007; Jedwab et al., 2022; Prados de la Escosura and Rodríguez-Caballero, 2022).

Spain’s exceptional behaviour in the European context was a consequence of being a frontier economy. A frontier economy is defined by an abundance of natural resources and a shortage of labour, where economic activity is organised around the exploitation of the abundant resource. The frontier in Spain was literal and originated during the Reconquest. The instability of borders and the high land-labour ratio favoured the development of a pastoral system that was intensive in land use and low in labour use (MacKay, 1977). The territories incorporated to the Christian kingdoms (mainly Castile) from the eleventh century onwards relieved any potential demographic pressure in the north (Rodriguez, 2011), and the increase in the land/peasant ratio helps explain the rise in output per worker (Oliva Herrer, 2007).

Spain had one of the lowest population densities and one of the highest urbanisation rates in Europe. This means that the amount of land available per worker was much higher than in the rest of Europe. Far from living at subsistence levels, peasants in pre-Black Death Spain were part of a highly integrated and relatively wealthy economy in which commercial links between towns and the countryside were very intense.

The frontier economy helps explain why the Black Death, despite its comparatively milder demographic impact in Spain, had devastating effects on an economy organised around a fragile system that was highly sensitive to changes in the scarce resource, labour. The demographic shock destroyed trade networks and isolated an already sparse population, with the consequence of reducing the ability to maintain per capita production levels.

Meanwhile, in north-western Europe, the Black Death reduced demographic pressure on resources, raised land- and capital-labour ratios, and led to higher returns to labour vis-à-vis land or capital and higher relative prices for non-agricultural goods. Cheaper capital and labour scarcity led to lower interest rates and higher wages that incentivised physical and human capital accumulation and stimulated labour-saving technical innovation, and female participation (Pamuk, 2007). The fact that factor proportions (high land-labour ratios, and, hence, high non-agricultural relative prices) in post-Plague Western Europe (Pamuk, 2007) were similar to those existing in pre-Plague Spain helps explain why the Black Death had such negative consequences in Spain.

The years following the Black Death in Spain witnessed an increase in inequality, as the remuneration of labour decreased more rapidly than proprietors’ gains. Figure 1.4 shows that inequality experienced a substantial increase, reaching a peak, while conversely per capita income shrank. This finding is at odds with the experience in most of Western Europe, in which the effects of the Plague produced an intense reduction in economic inequality (Scheidel, 2017; Alfani, 2021). Nonetheless, inequality fell sharply again in Spain between the late 1370s and the 1420s and remained at lower levels for the rest of the fifteenth century.

1.2.2 The Rise and Decline of Early Modern Spain

Why Spain fell behind after 1570 remains unclear. Explanations tend to be highly speculative, stressing the insecurity of property rights and the impact of absolutism on trade and colonial extractive institutions (Acemoglu and Robinson, 2012; North, 1989), the fragmentation into different urban and regional political and fiscal institutions that would have hindered market integration (Grafe, 2012), and the negative impact on the most dynamic (tradable) sectors of the Dutch Disease caused by American silver (Forsyth and Nicholas, 1983; Delichman, 2005). The resulting image is one of a weak government subject to powerful local elites, insecure property rights, trade barriers, and distortions in resource allocation.

However, before addressing these grand interpretations, an assessment of the immediate drivers of Spain’s decline—agricultural performance, urban activities, public finance, trade and credit—is a prerequisite.

One possible explanation for Spain’s decline in the late sixteenth and early seventeenth centuries could be the unintended consequences of its efforts to maintain its European empire (Álvarez-Nogal and Chamley, 2016). As of 1570, fiscal pressure on urban activities, the driver of the commercial and industrial expansion earlier in the century, rose, in order to finance increasingly expensive wars in Europe (the Low Countries rebellion of 1567 and open war after 1573 and the Lepanto battle in 1571) plus domestic conflict (the Moorish uprising in the Alpujarras in 1569).

A specific event merits consideration. The main taxes were not collected directly by the king but via cities and, in 1574, the king’s proposed increase of consumption taxes (alcabalas) was rejected by the Castilian cities. This led the king to stop payments to the Genoese bankers between 1575 and 1577, a decision that had a trickle-down effect, driving local banks into bankruptcy and impacting negatively upon small traders and merchants. Fiscal conflict between cities and the king led to the destruction of local markets from 1570 onwards. Eventually, the cities accepted the doubling of the alcabalas, opening the way to successive tax increases, including additional taxes on consumption goods, wine, meat, oil and vinegar, the so-called millones. Thus, the Monarchy’s success in defeating the cities’ resistance led to subsequent increases in consumption tax until the 1660s.

In addition, monetary alterations, especially the devaluation of the vellón—a copper currency that up to 1602 included a lower proportion of silver—also contributed to preventing recovery (Álvarez Nogal, 2005). Monetary instability and military conflict in the central decades of the seventeenth century—war with France (1635–1659) and Portuguese (1640–1668) and Catalan (1640–1652) rebellions—heightened the pressure on the economy. Over time, all this placed an unbearable burden on the most dynamic sectors, triggering de-urbanisation and the collapse of average real incomes from which early modern Spain never fully recovered.

The case of agriculture helps to confirm that a Malthusian narrative is not appropriate in the case of early modern Spain. Trends in agricultural output per worker and the labour force evolved hand in hand, rather than in opposite directions, as postulated by the neo-Malthusian model, so when population and labour declined or grew, labour productivity did so too, and this pattern lasted until mid-nineteenth century. Moreover, land rent and labour productivity in agriculture also moved together.

Increasing ruralisation resulting from higher taxation on urban activities between 1570 and 1650 did not lead to greater agricultural efficiency. On the contrary, as the tax burden increased, incentives to cultivate the land were reduced and agricultural activities and crops stymied.

How does the experience of Spanish agriculture compare with those of Western Europe? In the early sixteenth century, output levels per worker in Spain and Italy were significantly higher than in Britain and Holland, but they declined late in the century and throughout the seventeenth century (Table 1.1). Meanwhile, labour productivity experienced a remarkable improvement in Britain and, especially, in Holland, as output increased and the share of the labour force in agriculture declined. During the eighteenth century, in spite of Spain’s partial recovery, the North-Sea countries forged ahead. The divergence between Spain and the North Sea Area (England and the Low Countries) after the 1570s can be explained by the fact that, while in the North Sea area urban progress increased the incentives for peasants to demand new urban goods and services and thus stimulated an agricultural revolution, in Spain, lack of urban stimulus led to a decline in labour productivity and labour force in agriculture.

Table 1.1 Comparative agricultural labour productivity (1910 £ per worker, British relative prices)

1.2.3 The Napoleonic Wars

The Napoleonic Wars (1793–1815) are usually depicted as a major juncture in European history. For Spain, the wars with France and Great Britain, the Napoleonic invasion of the Peninsula, and the loss of the colonial empire coincided in time. Moreover, the transition to the liberal regime triggered by these events appears longer and more costly in Spain than in other European societies.

The Peninsular War had very negative short-run economic consequences in Spain. The demographic impact represented a fall in population to 1 million short of its potential and its direct effects were half a million casualties, around 5% of the population, the bloodiest conflict in Spain’s modern history. The effects upon agriculture were ambiguous. On the one hand, lack of enforcement of Ancien Régime institutions allowed producers to increase cultivation and pay lower land rents. On the other, war confiscations hit livestock reducing the stock of capital as well as calorific consumption. The war afflicted the industrial sector by reducing consumption, increasing transport costs and input prices, and diverting productive investment. Services were also disrupted and international trade collapsed, as did Government revenues. The monetary system was also disrupted and became unstable. As a consequence, GDP per head fell, with an uneven impact across regions, and income inequality increased.

The Peninsular War also sparked the fight for independence in Spanish America. The empire reinforced the absolutist monarchy, as colonial revenues (a substantial share of total income) reduced the need to raise taxes in the metropole, and allowed for a concentration of power without the need to negotiate extensively with its subjects and institutions.

The loss of the colonies had negative effects on trade, manufacturing and government revenues, but the upper bound impact on GDP (around 5%), industrial employment (below 7%) and capital accumulation (around 13%) was much smaller than assumed and unevenly distributed, mainly restricted to specific regions and economic sectors. However, by facilitating the fall of absolutism, the loss of the colonial empire may have contributed significantly to the transition to liberalism in Spain.

The institutional changes that started with and followed the Peninsular War were part of the liberal revolution which brought with it a redefinition of property rights that changed the population status from subjects to citizens equal before the law, the liberalization of commodity and factor markets, and the Parliamentary control of public revenues and expenditure. It was, nonetheless, a long process fraught with difficulties and partial reversals.

The empirical evidence on the post–war era suggests that the Napoleonic Wars constituted a defining moment in Spanish history. However, the relevant question seems to be whether in the absence of war, the Enlightenment elite would have carried out the reform of the absolutist state, initiating a gradual transition towards a liberal society. Sound public finance and international integration into the commercial and financial world, plus the spread of liberal ideas prior to the war suggest a positive answer, while the connections between absolutism and the colonial empire and the difficulties and reversals faced by liberal reformers endorse a negative response. The statistical analysis of macroeconomic series suggests that had pre-war trends persisted in the early nineteenth century, the important gains achieved would not have been possible.

A glance at the post-Napoleonic Wars era reveals a discontinuity in any dimension of social and economic activity. Population expansion accelerated, nearly doubling its pace in the late eighteenth century, while the rate of urbanization increased remarkably. Agriculture became more efficient, gradually oriented towards expanding Western European markets, and consumption per head improved. As for manufacturing, while traditional industries collapsed, modern industries continued to adopt new technologies. The more competitive and flexible sectors adapted to new circumstances with the economy expanding steadily, except during the Carlist War (1833–1839), and population growth was accompanied by a sustained increase in GDP per head and a reduction in income inequality (Fig. 1.4). Nonetheless, despite faster growth and higher levels of per capita income than ever before, Spain gradually fell behind north-western European countries (Fig. 1.5).

To sum up, although the economic consequences of the Peninsular War in Spain were clearly negative in the short term, the Napoleonic Wars triggered a complex transition from an absolutist empire to a modern nation. The liberal reforms redefined property rights and gradually shifted the control of the executive to the parliament. The long-term consequences were a more efficient allocation of resources and sustained economic growth, despite serious obstacles (civil wars and military takeovers) that deferred the transition.

1.3 Modern Economic Growth and Its Distribution

This section draws on Prados de la Escosura (2017) and Chaps. 3–5.

If we accept Simon Kuznets’s (1966: 1) definition of modern economic growth as a sustained increase in output per head and worked hour, accompanied by population expansion and structural change, its beginnings in Spain can be traced back to the mid-nineteenth century (Fig. 1.6).

Fig. 1.6

Absolute, per capita and per hour worked GDP, 1850–2020: volume indices (2010=100, natural logs). Sources: Table 4.8

Let us first consider the evolution of Gross Domestic Product. Absolute GDP has increased over 50-fold since 1850, which implies a cumulative rate of growth of 2.3% per year. As its progress was far from steady, four different phases may be distinguished: from the mid-nineteenth to the mid-twentieth century; the ‘Golden Age’ (early 1950s to 1974); from the end of General Franco’s rule (1975) to the eve of the Great Recession (2007); and from then to the present. In the phase of fastest growth, the Golden Age, GDP grew nearly 5 times faster than in the previous 100 years and almost twice as much as from 1975 to 2007. From 2008 onwards, GDP stagnated as a result of the Great Recession (2008–2013) and Covid pandemics.

This sustained increase in the production of goods and services over 170 years was the result of a profound transformation in the way resources were allocated. On the demand side, the share of total consumption (private and government) declined slowly from a high level and only fell below 80% of GDP in the late 1950s, dropping to three-quarters in the 2000s. Behind the gradual decline of the late twentieth century lies a sustained fall in private consumption offset by a rise in government consumption that intensified from the 1980s onwards, as the welfare state expanded and a centralized state gave way to a regional state (Fig. 1.7).

Fig. 1.7

Consumption and investment (% GDP) 1850–2020 (current prices). Source: Prados de la Escosura (2017), updated dataset https://frdelpino.es/investigacion/en/category/01_social-sciences/01_spanish-economy/02_historical-perspective-spanish-economy/

Investment fluctuated at around 5% of GDP through the nineteenth century, except during the railway construction boom from the late 1850s to the mid-1860s, when it nearly doubled (Fig. 1.8). From the turn of the twentieth century, a long-term rise brought investment to a peak in the mid-2000s (30%), falling below one-fifth after the Great Recession. As a result, the net capital (wealth) stock-GDP ratio reached a peak value of four by 2013, multiplying 2.7 times from the 1850s to the 2010s and doubling in the last half a century (Chap. 3, Fig. 3.17).

Fig. 1.8

Gross fixed capital formation and trade (% GDP), 1850–2020 (current prices). Source: Prados de la Escosura (2017), updated dataset https://frdelpino.es/investigacion/en/category/01_social-sciences/01_spanish-economy/02_historical-perspective-spanish-economy/

Spain’s integration into global markets increased over time. A gradual rise in openness (exports and imports of goods and services as a share of GDP) stabilised in the early twentieth century, followed by a gradual decline as of the 1920s that deepened in the late 1930s and 1940s. A cautious exposure to international competition started in the mid-1950s, accelerating after the reforms associated with the 1959 Stabilization and Liberalization Plan and, again, after the end of Franco’s regime, reaching two-thirds of GDP in the late 2010s. Moreover, imports and investment appear to be correlated, suggesting an association between international trade and capital formation that stimulated economic growth.

On the supply side, changes in the composition of GDP and employment followed the same patterns but differed in intensity over time, reflecting relative labour productivity differences across economic sectors. In a first stage, the share of agriculture contracted, especially in the 1920s and from 1950 to 1980, and industry expanded to reach 30% of GDP around 1960 (Fig. 1.9). In a second stage, from 1980 onwards, the relative decline continued in agriculture and extended to industry, while the service sector, whose share of GDP and employment had remained relatively stable until the mid-twentieth century, accelerated to represent nowadays about three quarters of both GDP and employment (Fig. 1.10).

Fig. 1.9

Gross value added by economic activity (% GDP), 1850–2020 (current prices). Source: Prados de la Escosura (2017), updated dataset https://frdelpino.es/investigacion/en/category/01_social-sciences/01_spanish-economy/02_historical-perspective-spanish-economy/

Fig. 1.10

Employment by economic activity (%), 1850–2020 (hours worked). Source: Prados de la Escosura (2017), updated dataset https://frdelpino.es/investigacion/en/category/01_social-sciences/01_spanish-economy/02_historical-perspective-spanish-economy/

But to what extent did a larger amount of goods and services impact on individuals’ living conditions? Changes in GDP can be decomposed into those of GDP per capita and population. Since the population trebled, real GDP per capita experienced a 16-fold increase (at a yearly rate of 1.6%) and drove the expansion of absolute GDP from 1850 (Fig. 1.6). Per capita GDP doubled its initial level in the first 100 years, growing at 0.7% per year. Its pace then accelerated to 5.3% per year during the Golden Age, so by 1975 per capita income was 3.6 times higher than in 1950. Although the economy decelerated, down to 2.5% per year over 1975–2007, per capita GDP in 2007 more than doubled its level in 1975. Then, it shrank during the Great Recession (2008–2013) and the Covid pandemics, so per capita GDP is nowadays back to mid-2000s levels.

Albeit following an evolution similar to that of western European countries, Spanish per capita GDP grew at different pace (Fig. 1.11) Growth was slower from 1880 to 1920 and during the World Wars, while the 1920s acceleration was offset by the Great Depression and the Civil War (1936–1939), failing to recover during the autarchic 1940s. Hence, the sustained long growth since the mid-nineteenth century fell short of that of Western countries. Conversely, growth was faster in Spain in the late twentieth century, with particular intensity in 1960–1974 and again since the late 1980s. Per capita GDP growth has come to a halt in the twenty-first century.

Fig. 1.11

Spain’s relative* real per capita GDP, 1850–2020: Main countries (GEKS $2017) (%) *Spain as a % of each country’s per capita GDP. Sources: https://frdelpino.es/investigacion/en/category/01_social-sciences/01_spanish-economy/02_historical-perspective-spanish-economy/

Thus, Spain’s position relative to the main Western countries evolved as a broad U-shaped curve, falling behind until 1950 before catching-up until the early 2000s, except for 1976–1985, the years of Spain’s transition from dictatorship to democracy, and lagging behind in the new century. Nowadays Spain’s position vis-à-vis the United States, Germany and France is similar to what it was in the mid-nineteenth century, only narrowing the gap with Great Britain.

If the comparison is carried out now with the population-weighted average of the countries which today belong to the OECD, the European Union, and the Eurozone, respectively over the last half a century, two distinctive phases of catching up are observed: up to 1975 and from 1986 to 1992. Thus, Spain stopped converging in 1992 and has been lagging behind since 2001. By 2020, Spain had returned to its relative position in 1975 (Fig. 1.12).

Fig. 1.12

Spain’s relative* real per capita GDP, 1970–2020: Main clubs (GEKS $2017) (%) * Spain as a % of each Club’s per capita GDP. Source: World Bank, ICP (2017); Conference Board (2023). Spain, as Fig. 1.11

1.3.1 Accounting for Per Capita GDP Growth

GDP per capita depends on the output obtained per hour worked (labour productivity) and the number of hours worked per person. GDP per hour worked and per capita increased over time, while the number of hours worked per person shrank and is largely accounted for by the reduction in hours worked per full time equivalent worker. This means that GDP increased more per hour worked than per capita and that long-term gains in output per capita result exclusively from improvements in labour productivity. Moreover, acceleration phases of GDP per capita and per hour worked match each other, i.e. the 1920s or the Golden Age (1950–1974).

The long-run synchronised behaviour of GDP per hour worked and per person was interrupted, however, after 1975. Thus, in periods of sluggish (1975–1985) or negative (2008–2020) per capita GDP growth, labour productivity accelerated; and from 1986 to 2007, when per capita GDP growth intensified, labour productivity slowed down. The Spanish economy would have been unable to combine job creation and improved productivity, which suggests that sectors which created new jobs in expansionary phases (construction and services, in particular) failed to attract productive investment and technological innovation.

But what drives the rise of labour productivity? In the long run, capital deepening (that is, capital services per hour worked) accounted for up to one-half of labour productivity growth, while efficiency gains (total factor productivity [TFP]) accounted for one-third, with human capital contributing the rest (Chap. 4, Table 4.6). Thus, more and better use of capital per hour appear to be complementary. Furthermore, the main spurts in capital deepening and total factor productivity tend to coincide, i.e. railway construction (1850–1880), electrification (1920s and 1950s), or the adoption of new technologies (1950–1974).

A closer examination reveals that from 1850 to 1950 (except for the 1920s) and from the late 1980s to the present, capital deepening drove labour productivity growth, while in the 1920s and from the early 1950s to the late 1980s, efficiency gains in the use of available resources represented the main force behind labour productivity growth.

How can one explain, then, the counterintuitive result that since Spain’s accession to the European Union the main source of labour productivity growth has been physical capital deepening rather than TFP?

One might think that as the economy approached the technological frontier, achieving higher levels of efficiency became more difficult. Moreover, structural change, i.e. the shift of resources from sectors with low labour productivity to sectors where it was higher (e.g. from agriculture to industry) that contributed to rising labour productivity until the late 1980s, had already taken place. Thus, Spain would have exhausted its potential to close the productivity gap with advanced countries and efficiency gains would have slowed to match their pace.

However, the fact that TFP growth from 1990 to 2019 has been systematically lower in Spain than in OECD countries with higher labour productivity levels in 1990 challenges this hypothesis. Low R&D spending and under-investment in intangible capital (intellectual property) and in specific-technical change and human capital, together with restrictions on competition through regulation in product and factor markets, appear as more promising research hypotheses.

1.3.2 Growth and Distribution

How have the fruits of modern economic growth been distributed? Let us start by comparing the evolution of the share of property income (which includes returns to capital and land) in GDP and the Gini, that is, functional and personal distribution, respectively.⁹ We observe their parallel evolution until the early 1950s, when they started diverging, and while the property share shows an upward trend, the Gini index falls and, then, stabilises (Fig. 1.13).

Fig. 1.13

Property share (% GDP) and the Gini, 1850–2021. Source: Property share, Table 4.11; Gini, Table 5.1

How can this discrepancy be explained? Let us consider a simple model in which there are only two social groups, owners (recipients of capital and natural resource returns) and workers, with no overlap between their components (i.e. no worker is an owner and vice versa). In this context, the increase (decrease) in inequality would come either from greater (lesser) dispersion within each of these two groups or from the increase (decrease) in the distance between the average incomes of the two groups. The share of property (capital and land) in GDP would provide information about the inequality derived from the gap between the average incomes of the two groups, owners and workers.

In early stages of economic development, inequality would stem from the gap between the average incomes of owners and workers, most of whom would be unskilled and living near subsistence—which is why David Ricardo (1817) associated the personal distribution of income with its functional distribution. However, as the economy develops and the labour force moves from rural to urban centres and from agriculture and traditional services into industry and modern services, the number of skilled workers increases, as does the dispersion of labour incomes; however, in a later stage, most workers will be skilled and, therefore, the dispersion of their incomes reduced. This evolution would correspond to the one described by Kuznets (1955), who included the role of social security, that is, the welfare state, as an additional driver of the decline in income dispersion.

The close evolution of the property share and the Gini (Fig. 1.13) suggests that, until the 1950s, the property share would have been the main force behind the evolution of personal income distribution (the Gini). However, this was no longer the case from the mid-twentieth century onwards.

Economic growth since the mid-1950s led, on the one hand, to a larger share of capital income, as capitalisation of the economy increased, and, on the other, as labour became largely skilled, to a lower dispersion of labour income, which became the driving force of income distribution. This helps explain the reduction of the Gini coefficient, in which redistribution also plays a part, as the Gini reflects inequality of disposable income, that is, after taxes and transfers (post-fisc), unlike the pre-fisc property share.

The evolution of personal income distribution, measured by the Gini coefficient, presents the shape of a wide inverted U with a peak in 1916 (Fig. 1.13). Different phases can be observed in the evolution of inequality. A long-term rise took place between the mid-nineteenth century and World War I. Then, a sustained reduction in inequality took place during the 1920s and early 1930s, stabilising in the years of the Civil War (1936–1939). The decline in inequality was reversed during the 1940s and early 1950s. Inequality fell in the late 1950s and again in the early 1970s. From the mid-1970s onwards, inequality stabilised, fluctuating within a narrow 0.31–0.35 Gini range.

In a comparative perspective, Spain matched the evolution of OECD countries during the last century and a half, with an intermediate level of inequality, but within the European Union, Spain currently belongs to the upper inequality quartile (Chap. 5, Fig. 5.10).

How can we account then for the alarm generated in recent times by a perceived rise in inequality? Is this perception adjusted to reality, or does it simply derive from the fact that our tolerance threshold to inequality is now much lower than in the past?¹⁰ One explanatory hypothesis would be the deterioration of the welfare state due to public spending cuts during the Great Recession. This interpretation expands the view that democracy has failed to reduce inequality in Spain (Torregrosa Hetland, 2015). One way to test this proposition is to compare the evolution of inequality (the Gini) before and after taxes. The difference between the two measures provides an idea of whether there has been progressive redistribution, i.e. whether the ‘market’ Gini has been reduced as a result of progressive taxation and social transfers. It can be shown (Chap. 5, Fig. 5.9) that the trend has been towards progressive redistribution and that the Great Recession did not interrupt this. In fact, the increase in progressive redistribution from 2007 to 2013 shows how the automatic mechanisms of the welfare state provide for greater redistribution in times of crisis.

It could be argued, however, that the impact of an increase in inequality on well-being is not the same when the average income rises and when it falls. Thus, a fall in real net national disposable income per person of 13%, coupled with a rise of three percentage points in the Gini, as was the case during the Great Recession, could have represented a very negative effect on welfare.

The comparison between the actual and the maximum potential inequality (i.e. Milanovic’s (2016) ‘inequality extraction ratio’ [IER]), provides a measure of the impact of inequality on well-being.¹¹ The higher the ratio, the more negative the impact on well-being. It can be observed that the IER has fluctuated around one-third since the mid-1970s, far lower than the 0.5 value of the late nineteenth century or the early 1950s (Fig. 1.14). Hence, the impact of inequality on well-being would have been lower in recent decades and would not support the claim of the Great Recession’s negative effect.

Fig. 1.14

Actual/maximum potential inequality ratio, 1850–2021. Sources: See the text

A more detailed impact of distribution changes on well-being is offered by the so-called ‘growth incidence curve’, which instead of only considering average inequality, as the Gini does, measures how, in a given period, the different percentiles of the distribution evolved. In Fig. 1.15, we observe that, from 2007 to 2016, the fall in real income between percentiles 50th to 25th, that is, for the lower middle class (defining the middle class as the population between the 25th and 75th percentiles) ranges from −0.5 to −8.7% with −3.2% average (s.d. 2.8) while below the 25th percentile income contraction ranges between −8.8 and 49.3% with −20.4% average (s.d. 12.3). Therefore, a closer look at disaggregated evidence supports the widespread perception of a negative impact on welfare.

Fig. 1.15

Inequality: growth incidence curve, 2007–2016. Real per capita household income change across percentiles of the income distribution (%). Source: LIS, kindly provided by Branko Milanovic

What is the reason for such a strong effect on well-being, when in aggregate terms inequality increased moderately? Although a precise answer requires further research, labour market rigidities, with adjustments via quantity, in times of crisis do not seem unrelated to such a dramatic situation.

1.4 Concluding Remarks

Over the last 170 years, real income per person has improved remarkably in Spain, driven by increases in labour productivity, derived from a more intensive and efficient use of physical and human capital per worker. In this process, exposure to international competition has been a stimulus, associated with increases in investment and convergence with more developed countries.

Moreover, the most dynamic phases of the last 100 years have been accompanied by a reduction in economic disparities in Spanish society, so modern economic growth can be associated with an improvement in the material well-being of its population.