INTRODUCTION 1960-2006: key and brilliant period, convergence with Europe Scheme: General characteristics of the long-term economic growth Causes of this growth Structural changes Macroeconomic problems

Average annual growth rate of per capita income (%) SPAIN EUROPE 1960-2006 3.1 2.5 1960-1974 6.1 3.5 1975-1985 0.5 2.1 1986-today 2.8 1.9 1985-1992 1992-1996 1.4 1.2 1996-2006 2.4

Same stages as in Europe, but more intense Growth → open trade 1960 (P. de E.) and 1986 (EU) Crisis → institutional changes 1975 (transition) and 1992 (Maastricht) New tendency since 1996: Spain grows with Europe in crisis

(NO natural resources or institutions) Y = L(1-α) * K(α) * et Y = f ( L , K , TP ) (NO natural resources or institutions) Y = L(1-α) * K(α) * et Why income grows? 1. Growth of production factors (L and K) 2. Improvement of its productivity (TP)

Labor (L) Y / Pop. = Y / L * L / Pop. (∆ Y / Pop. = ∆ Y / L + ∆ L / Pop.) Europe and Spain: only productivity USA: productivity + employment Why? USA has had greater productivity International competition (is not easy to choose) Markets less flexible (in Europe and Spain)

Real per capita income and labor productivity of labor force in Spain, 1961-2006 (annual variation rates)

Capital (K) Y = L(1-α) * K(α) * et Y / L = [L(1-α) * K(α) * et] / L Y / L = (K / L)α + et ∆ (Y / L) = α ∆ (K / L) + ∆ TP

Capitalization of the economy ∆ (K / L) The most important variable of economic growth in poor countries Spain in the 1960´s: Foreign capital Labor force was relatively expensive Industrial sector was more important in GDP Infrastructures (EU) Changes since 1980: Less foreign capital Capital becomes more relatively expensive Service sector becomes more important: hard to capitalize

Contribution of physical capital to the increase of labor productivity in Spain, 1961-2006 (annual variation rates)

Technological progress (∆ TP) Overcome diminishing returns of capital Increased in Spain during last years because: Increase in capital, makes labor force more skilled and qualified Increase in human capital Increase in technology (but still insufficient in Spain) Others: trade openness, change in productive structure, law and institutions, control of inflation

Structural changes Changes in productive structure Trade openness Changes in Public Administrations Best income distribution