pksg workshop on the current crises. soas, university of london, 23rd october 2009, london from the...
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PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
1
PKSG WORKSHOP ON THE CURRENT CRISIS
SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON
FROM THE LASTING BOOM TO THE SEVERE CURRENT RECESSION. THE SPANISH ECONOMY 1994-2009
Carlos J. Rodrí[email protected]
David Padrón [email protected]
University of La Laguna
Department of Applied Economics
Campus de Guajara – 38071
Canary Islands - Spain
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2
Spanish economy1994-2009
Long-lasting strong expansion
(1994-2006)
High and stable growth
GDP GROWTH (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
3
Spanish economy1994-2009
High and stable growth
Intense job creation
Long-lasting strong expansion
(1994-2006)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
4
Spanish economy1994-2009
High and stable growth
Intense job creation
Macroeconomic stability
DÉFICIT PÚBLICO (% PIB) DEUDA PÚBLICA (% PIB) INFLACIÓN (%)
Long-lasting strong expansion
(1994-2006)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
5
Unexpected severe recession
(2007-2009)
Spanish economy1994-2009
High and stable growth
Intense job creation
Macroeconomic stability
Long-lasting strong expansion
(1994-2006)
Strong reduction in growth
GDP GROWTH (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
6
Unexpected severe recession
(2007-2009)
Spanish economy1994-2009
High and stable growth
Intense job creation
Macroeconomic stability
Long-lasting strong expansion
(1994-2006)
Strong reduction in growth
Job destruction and increasing unemployment
UNEMPLOYMENT RATE (%)EMPLOYMENT GROWTH (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
7
Unexpected severe recession
(2007-2009)
Spanish economy1994-2009
High and stable growth
Intense job creation
Macroeconomic stability
Long-lasting strong expansion
(1994-2006)
Strong reduction in growth
Job destruction and increasing unemployment
Rising public deficit
DÉFICIT PÚBLICO (% PIB) DEUDA PÚBLICA (% PIB)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
8
Unexpected severe recession
(2007-2009)
Spanish economy1994-2009
High and stable growth
Intense job creation
Macroeconomic stability
Long-lasting strong expansion
(1994-2006)
Strong reduction in growth
Job destruction and increasing
unemployment
Rising public deficit
What went wrong for this
to happen?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
9
Nothing did really went wrong; the financial crisis acelerated its end … but the recession was inevitable to some extent
The only problem is that:
Minsky was right … once again
Strong economy … but:
a) the accumulation of dissequilibriums
b) the financial crisis interrupted (temporarily?) growth
The failure was therefore two-fold:
a) Internal the understimation of the macroeconomic dissequilibriums
b) Exogenous the “regulation failure” that lead to an increasing systemic risk that later collapsed the functioning of credit markets
Did something really went wrong in Spain?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
10
PRESENTATION STRUCTURE
1. Identify the underlying factors of the strong economic growth in Spain
2. Point out the dissequilibriums and their consequences for the continuity of growth
3. Discuss some of the consequences that: a) financial deregulation, b) increasing bank competition and b) monetary unification may have for (regional) economic growth (in Spain)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
11
1. The determinants of economic boom: 1994-2006In
tern
al
Short-term price-competitiveness gains
Peseta devaluations
Employment adjustment and labour productivity growth 1990-1993
SALDO EXTERIOR
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
12
1. The determinants of economic boom: 1994-2006In
tern
al
Short-term price-competitiveness gains
Peseta devaluations
Employment adjustment and labour productivity growth 1990-1993
Low wages and inflation
Inmigrants labour force (low wages and demand estimulus)
EXTRANJEROS (% TOTAL POBLACIÓN) CRECIMIENTO SALARIAL (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
13
1. The determinants of economic boom: 1994-2006Exte
rnal
A new baseline model (EMU)
Inflations expectations / Exchange-rate risk / Stability Pact / Cohesion Funds …
Low interest rates
New investment opportunities (housing and property market)
Banks’ market estrategies
TIPOS DE INTERÉS A CORTO PLAZO, % TIPOS DE INTERÉS A LARGO PLAZO, %
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
14
1. The determinants of economic boom: 1994-2006Exte
rnal
A new baseline model (EMU)
Low interest rates
Expansion of bank credit
Competition for the market share
Easier access to international financial markets
CRECIMIENTO INTERANUAL DEL PIB Y EL CRÉDITO (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
15
2. The dissequilibriums of expansionD
isseq
uilib
riu
ms Excess demand
Inflation differential
Current account deficit
Necesidades de financiación
INFLATION (%) CAPACIDAD (+)/NECESIDAD (-) FINANCIACIÓN (% PIB)
CURRENT ACCOUNT (MILES DE EUROS)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
16
2. The dissequilibriums of expansionD
isseq
uilib
riu
ms Excess demand
Sectoral unbalances: housing and construction vs tradeables and open to international competition
Lack of non-price competitiveness
Labour productivity stagnation
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
17
2. The dissequilibriums of expansionD
isseq
uilib
riu
ms
Excess demand
Sectoral unbalances: housing and construction vs tradeables and open to international competition
Lack of non-price competitiveness
Labour productivity stagnation
High busines cycle sensitiveness of job creation (temporal contracts and construction sector)
TASA DE TEMPORALIDAD (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
18
2. The dissequilibriums of expansionD
isseq
uilib
riu
ms
Excess demand
Sectoral unbalances: housing and construction vs tradeables and open to international competition
Lack of non-price competitiveness
Labour productivity stagnation
High busines cycle sensitiveness of job creation (temporal contracts and construction sector)
Soft-capitalization (investment in housing)
Credit expansion and concentration in housing market
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
19
EVOLUCIÓN DEL CRÉDITO CONCEDIDO POR LAS ENTIDADES DE CRÉDITO A OSR, 1995-2009
(AÑO 1995 BASE 100)
EVOLUCIÓN DEL CRÉDITO DESTINADO A “CONSTRUCCIÓN Y VIVIENDA”, 1995-2009
(% SOBRE EL TOTAL DE CRÉDITO CONCEDIDO A OSR)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
20
2. The dissequilibriums of expansionD
isseq
uilib
riu
ms
Excess demand
Sectoral unbalances: housing and construction vs tradeables and open to international competition
Lack of non-price competitiveness
Labour productivity stagnation
High busines cycle sensitiveness of job creation (temporal contracts and construction sector)
Soft-capitalization (investment in housing)
Credit expansion and concentration in housing market
… The (false and) incredible belief taht (for being part of EMU) Spain had no more Balance of Payments nor “funding” problems
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
21
2.1. The dissequilibrium consequencesC
on
seq
uen
ces
(Price) competitiveness loss
Increasing financial vulnerability and systemic risk (micro and macro perspectives)
INVERSIÓN RESIDENCIAL
DEUDA SOBRE RBD, FAMILIAS (%)
DEUDA SOBRE EBE, SNF (%)
RIQUEZA DE LOS HOGARES (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
22
2.1. The dissequilibrium consequencesC
on
seq
uen
ces
(Price) competitiveness loss
Increasing financial vulnerability and systemic risk (micro and macro perspectives)
Unbalanced sectoral growth (housing and construction) reinforces pro-cyclicality
The continuity of the boom depends on price expectations for housing market and bank credit availability
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
23
2.1. The dissequilibrium consequencesFacts
… but the price of houses stop rising (fortunatelly)
VARIACIÓN INTERANUAL PRECIO DE VIVIENDA LIBRE (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
24
2.1. The dissequilibrium consequencesFacts
… but the price of houses stop rising (fortunatelly)
… and the credit stop flowing fluently (unfortunatelly for the non speculative agents) from 2006
VARIACIÓN INTERANUAL CRÉDITO A OSR (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
25
EVOLUCIÓN DE LA DUDOSIDAD, 1998-2009 (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
26
2.1. The dissequilibrium consequencesFacts
… but the price of houses stop rising (fortunatelly)
… and the credit stop flowing fluently (unfortunatelly for the non speculative agents)
… and “the Spanish party came to its end”
Source: The Financial Times
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
27
3. The economic policy response to recession in Spain
1. Fiscal and income policies to stimulate the aggregate demand
2. Public support for funding (ICO) to facilitate access to private funding for at least working capital
3. Labour market deregulation to reduce costs (wages) and facilitate firms' adjustment
Sh
ort
term
Lon
g t
erm
1. Structural change to increase global competitiveness
2. Banking consolidation a new “banking map” … what for?
3. Monetary conditions more adequate for Spain the ECB has setan interest rate too low for the Spanish economy (…)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
28
INDICE DE CONDICIONES MONETARIAS
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
29
3. The economic policy response to recession in Spain
1. Fiscal and income policies to stimulate the aggregate demand
2. Public support for funding (ICO) to facilitate access to private funding for at least working capital
3. Labour market deregulation to reduce costs (wages) and facilitate firms' adjustment
Sh
ort
term
Lon
g t
erm
1. Structural change to increase global competitiveness
2. Banking consolidation a new “banking map” … what for?
3. Monetary conditions more adequate for Spain the ECB has setan interest rate too low for the Spanish economy
4. A new and better regulation for financial markets there is the conviction that financial distress was due to a bad functioning of the market not the result of its “internal logic”
Will they work? Are they really sufficient or necessary conditions for the recovery?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
30
Fiscal and income policies they won’t last for long (increasing public debt)
Public funding (ICO) good but … very small scale
Labour market “deregulation” labour market “frictions” did not really cause the crisis / labour market deregulation is not a sufficient condition but the (only?) variable that government can manipulate in the short run to restore price competitiveness
Structural change how to do it? Easier saying than doing
Banking consolidation Spain has a sound banking system … and consolidation may be counterproductive for economic growth (…)
Will they work? Are they really sufficient or necessary conditions for the recovery?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
31
Banking consolidation ideas …
Are there “too many” banks in Spain?
Not “big enough” Spanish banks? What’s the proper size for a bank to have?
To answer these questions we have to set first another one What’s a bank for? What’s the role of banks? Bank credit vs financial markets Does it matter? Financial efficiency vs functional efficiency What is best? Re both
possible? Proximity and relationship lending Does it make a difference for
long run economic (and regional) growth?
What does the evidence tell us about the causality between finance and economic growth? Data (cross-section correlations) vs “History” (…)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
32
“despite their weaknesses, local financial institutions
were able to tap into local information networks and so
extend credit to firms that were too young or small to
secure funds from large regional or national
institutions. In addition, by raising the return to savings for
local households, they helped to mobilize significant new
resources for economic development.”
Source: Cull, Robert, Davis, Lance E., Lamoreaux, Naomi R.
and Rosenthal, Jean-Laurent (2005), Historical Financing of
Small- and Medium-Sized Enterprises. NBER Working Paper
No. 11695.
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
33
What does determine credit availability? Is it only the bank’s ability (bank’s size or banking development) to
lend?
Banking consolidation ideas … (cont.)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
34
What does determine credit availability? Is it only the bank’s ability (bank’s size or banking development) to
lend? Why is it then that the credit availability pattern is so unstable in
Spain despite having a developed banking system?
Banking consolidation ideas … (cont.)
Bank credit growth and GDPpc by regions. Expansion (1985-1990)
Bank credit growth and GDPpc by regions. Recession (1991-1993)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
35
What does determine credit availability? Is it only the bank’s ability (bank’s size or banking development) to
lend? Why is it then that the credit availability pattern is so unstable in
Spain despite having a developed banking system? Credit availability depends on supply and demand
Banking consolidation ideas … (cont.)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
36
What does determine credit availability? Is it only the bank’s ability (bank’s size or banking development) to
lend? Why is it then that the credit availability pattern is so unstable in
Spain despite having a developed banking system? Credit availability depends on supply and demand
If so, then a bigger and more developed banking system is not a sufficient condition to assure a elastic sypply of credit at all times
Credit cyles might be better understood if we consider the interaction between the stages of banking development (V. Chick) and the financial unstability hipothesis (H. Mysnky)
Banking consolidation ideas … (cont.)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
37
Financial regulation is it really feasible a global regulation? Will it be effective to avoid credit cycles or financial bubbles / maybe credit cycles and financial bubbles are to some extent unavoidable: a natural consequence of an individual profit seeking behavior …
Monetary conditions more adequate for Spain there have been always differences … and the Bank of Spain seemed not to care about it
Will they work? Are they really sufficient or necessary conditions for the recovery?
Fiscal and income policies
Public funding (ICO)
Labour market “deregulation”
Structural change
Banking consolidation
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
38
Período pre-UEM
(respecto a España, en p.p.)
ITM según la regla de Taylor para las regiones españolas
Período UEM
(respecto a UEM, en p.p.)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
39
Financial regulation is it really feasible a global regulation? Will it be effective to avoid credit cycles or financial bubbles / maybe credit cycles and financial bubbles are to some extent unavoidable: a natural consequence of an individual profit seeking behavior …
Monetary conditions more adequate for Spain there have been always differences … and the Bank of Spain seemed not to care about it
The relevant is to think of a new role for monetary and financial policy Has inflation targeting worked? What causes inflation? Monetary policy and financial stability The regulation of credit creation and expansion
Will they work? Are they really sufficient or necessary conditions for the recovery?
Fiscal and income policies
Public funding (ICO)
Labour market “deregulation”
Structural change
Banking consolidation
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
40
The recession is still here … but the economy will recover (sooner or later)
The problem is that some policy measures (such as the restructuring of banking) may have relevant consequences for future economic growth, particularly for some regions
4. What will happen?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
41
The total means more than the sum of the parts
… and every part can only make sense if located in the proper place
The maximization of some parts can result in an inadequate Bull’s shape
“Be sure you understand this … before maximizing your function”
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
42
PKSG WORKSHOP ON THE CURRENT CRISIS
SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON
FROM THE LASTING BOOM TO THE SEVERE CURRENT RECESSION. THE SPANISH ECONOMY 1994-2009
Carlos J. Rodrí[email protected]
David Padrón [email protected]
University of La Laguna
Department of Applied Economics
Campus de Guajara – 38071
Canary Islands - Spain
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
43
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
44
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
45
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
46