U
pon joining the European Union in 1986, Spain undertook a program of privatization
that significantly reduced the size of government and helped open the economy. This
trend continued throughout the 1990s, especially under the government of Prime
Minister Jose Maria Aznar, with liberalization of the banking, energy, and telecommunica-
tions sectors and a decline in public spending as a percentage of GDP. During his seven years
in office, Aznar has cut unemployment, cracked down on Basque terrorism, won a landslide
re-election, and presided over an economic and cultural boom. Spain has enjoyed both eco-
nomic growth and job creation, with GDP increasing by 2 percent in 2002—the fastest rate of
growth among the larger EU countries. Likewise, unemployment decreased from 22.9 per-
cent in 1995 to around 12.7 percent in 2001. Following the June 2000 elections, Aznar
embarked on an ambitious plan to open the gas and electricity markets, a process that met
with success in January 2003. The main area still awaiting reform is the labor market; Spain’s
dismissal laws remain among the strictest within the EU, and 68.5 percent of Spanish work-
ers have lifetime contracts or the promise of generous nationally mandated redundancy pay-
ments.
TRADE POLICY
Score:
2–Stable
(low level of protectionism)
The World Bank reports that, as a member of the European Union, Spain had a weighted
average tariff rate of 2.6 percent in 2001. According to the Economist Intelligence Unit, Spain
implements “EU dumping levels against third-country imports.… All foodstuff imports
must qualify under [the] 1975 foodstuff law.… The Ministry of Economy…sets annual glob-
al quotas for some items from non-EU countries (for example, cars and textiles)…. Licenses
are…necessary (and difficult to obtain) to import used machinery….”
FISCAL BURDEN OF GOVERNMENT
Score—Income Taxation: 4.5–Stable
(very high tax rates)
Score—Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Change in Government Expenditures: 3–Stable
(very low decrease)
Final Score:
4.1–Stable
(high cost of government)
Spain has reduced its top income tax rate from 48 percent to 45 percent (although this reduc-
tion is not substantial enough to affect its income taxation score). The top corporate rate is
35 percent. Government expenditures as a share of GDP decreased less in 2002 (0.1 percent-
age point to 39.8 percent) than they did in 2000 (0.3 percentage point). On net, Spain’s fiscal
burden of government score remains unchanged this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score:
2–Stable
(low level)
Based on data from the Banco de España, the government consumed 17.57 percent of GDP
in 2002. In the same year, based on data from the Ministry of Economy, Spain received 4.5
percent of its total revenues from state-owned enterprises and government ownership of
property.
SCORES
Trade Policy
2
Fiscal Burden
4.1
Government Intervention 2
Monetary Policy
2
Foreign Investment
2
Banking and Finance
2
Wages and Prices
2
Property Rights
2
Regulation
3
Informal Market
2
Population: 41,837,894
Total area: 504,782 sq. km
GDP: $737.2 billion
GDP growth rate: 2.0%
GDP per capita: $17,620
Major exports: raw materi-
als, machinery, capital goods,
energy products, consumer
goods
Exports of goods and ser-
vices: $225.5 billion
Major export trading part-
ners: France 19.2%, Germany
11.6%, UK 9.7%, Italy 9.4%, US
4.4%
Major imports: machinery
and equipment, fuels, chemi-
cals, consumer goods
Imports of goods and ser-
vices: $241.9 billion
Major import trading part-
ners: France 16.5%, Germany
16.4%, Italy 8.9%, UK 6.4%, US
4.1%
Foreign direct investment
(net): $3.6 billion
SPAIN
R
U
S
S
I
A
FINLAND
AUSTRIA
ITALY
SPAIN
SWEDEN
NORWAY
GERMANY
FRANCE
PORTUGAL
HUNGARY
ROMANIA
BULGARIA
TURKEY
DENMARK
POLAND
BELARUS
UKRAINE
CZECH
SLOVAK
GREECE
CYPRUS
NETH.
BELGIUM
IRELAND
SERBIA/
MONT.
ALBANIA
MOLDOVA
LITHUANIA
LATVIA
ESTONIA
LUX.
BOSNIA
CROATIA
SLO.
SWITZERLAND
MACEDONIA
GREENLAND
ICELAND
Canary Islands
ARMENIA
GEORGIA
SYRIA
IRAQ
U. K.
Q U I C K S T U DY
363
2002 Data (in constant 1995 US dollars)
SPAIN
Rank: 27
Score: 2.31
Category: Mostly Free
2.54 2.73 2.50 2.40 2.41 2.51 2.49 2.41 2.31
5
4
3
2
1
'04
'03
'02
'01
'00
'99
'98
'97
'96
'95
Present & Past Scores
2.31
(Best)
(Worst)
MONETARY POLICY
Score:
2–Stable
(low level of inflation)
From 1993 to 2002, Spain’s weighted average annual rate of
inflation was 3.18 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score:
2–Stable
(low barriers)
Spain maintains few restrictions on foreign investment. The
government allows up to 100 percent foreign ownership in
most sectors and is liberalizing regulations on capital move-
ments. For the most part, prior investment approval is not
required. Foreign investment in the air transport, radio, min-
erals, mining, television, gambling, telecommunications, pri-
vate security, and national defense sectors faces some restric-
tions. The government does employ its power to restrict
unwanted investment. According to the Economist
Intelligence Unit, “The government demonstrated in May
2000 that it was willing to use its ‘golden share’ in formerly
state-owned public services to block foreign investment: it
prevented a planned merger between the now-privatised
Telefónica and KPN, a Dutch telecoms firm in which the
Dutch government held a 43.25% stake. The golden share
gives the government the right to intervene in operations that
it considers of national interest.” There are no restrictions or
controls on resident or non-resident foreign exchange
accounts, repatriation of profits, and proceeds from invisible
transactions. Current transfers are not restricted but must be
declared to deposit institutions. The Bank of Spain requires
reporting on most credit and lending activities.
BANKING AND FINANCE
Score:
2–Stable
(low level of restrictions)
Spain’s banking and financial sectors are diverse, modern,
and fully integrated into international financial markets.
Integration into the European Union has forced Spain to open
its banking system to banks from other EU members. The
government has also made progress in opening the banking
system to foreign competition by removing restrictions on
investments from non-EU investors, but foreign competitors
face substantial challenges from competitive domestic rivals
and low margins. Spain’s retail banking sector is dominated
by the Banco Bilbao Vizcaya Argentaria (BBVA) and Banco
Santander Central Hispano groups, which account for almost
80 percent of banking assets. Foreign firms are governed by
the same conditions that apply to domestic interests with
regard to access to the financial system. The government pro-
vides financing through the Official Credit Institute for
industrial restructuring and to smaller firms. Spain’s stock
market has developed rapidly, and Madrid now has the
European Union’s fifth largest stock market.
WAGES AND PRICES
Score:
2–Stable
(low level of intervention)
The government has removed most price controls. According
to the Economist Intelligence Unit, “Price fixing has all but
disappeared except in sectors still controlled by the national
government: farm insurance, stamps, public transport, elec-
tricity, natural gas/butane/propane and medicines. Regional
governments also control a few prices locally.” Spain also
affects agricultural prices through its participation in the
Common Agricultural Policy, a program that heavily subsi-
dizes agricultural goods. According to Timbro, a Swedish
think tank, “EU consumers pay roughly 80–100% more for
their food than would be the case in a mature free-market
regime.” The government mandates a minimum wage.
PROPERTY RIGHTS
Score:
2–Stable
(high level of protection)
Property is relatively safe from government expropriation.
The judiciary is independent in practice, but bureaucratic
obstacles at the national and state levels are significant. The
Economist Intelligence Unit reports that “contractual agree-
ments are secured although the legal system can be painfully
slow, and enforcement becomes a tortuous process when con-
tracts are not honored. Out-of-court settlements are com-
mon.”
REGULATION
Score:
3–Stable
(moderate level)
Although the government has streamlined its regulatory
regime, the Economist Intelligence Unit reports that “bureau-
cratic steps are considerable both at the national and state
levels, and many civil servants are un-cooperative, though
generational change is helping make dealings with the pub-
lic sector somewhat more agile.” Spain has the full array of
European Union environmental regulations but does not
enforce them effectively. One key area needing reform is the
labor market, which is known for its rigidity. According to
the EIU, “Despite the loosening of labour restrictions, chiefly
by lowering the cost of dismissals, a recent study found that
Spanish dismissal compensation was still by far the most
generous [among]…the countries surveyed. In all, payments
approached 200% of basic annual compensation.”
INFORMAL MARKET
Score:
2–Stable
(low level of activity)
Transparency International’s 2002 score for Spain is 7.1.
Therefore, Spain’s informal market score is 2 this year.
364
2004 Index of Economic Freedom