THE foreigner who visits Spain for the first time is apt to be surprised not only by the contrast in the landscape and the colorful diversity of the inhabitants but also by the striking economic differences between various regions and classes. The wealthiest province of Spain, for example, has a standard of living five times higher than that of the poorest. For Westerners, Spain is a land of shocking inequalities, and this explains the contradictory reports on the economic situation which travelers bring home.

Any judgment of the Spanish economy is bound to be superficial unless it makes due allowance for the peculiarities of Spain’s geographic and historical development. Next to Switzerland, Spain is the European country with the highest average elevation, and it receives an average rainfall of only 15 inches a year. Furthermore, the rain usually comes in downpours and in the autumn or winter, when it is scarcely a boon to the crops.

Notwithstanding such adverse natural circumstances, which are only partially offset by the fertility of one or two specially favored regions, the Spaniards have energetically wrestled with their environment. The mountainous areas of Spain exhibit terraced plots, evidence of the earnest toil of her peasants, while broad stretches of the eastern seaboard still use efficient irrigation systems which go back more than ten centuries, to the time when they were introduced by the Moors.

The effect of the Civil War

From the economic point of view, the Civil War represented an attempt to give the whip hand over the national economy back to elements hostile to its modernization. The landed gentry, fearful of land reform; the army, top heavy with officers; the Church, hit by certain clauses in the Republican constitution and by the expropriation of the property of the religious orders — all had a vested interest in turning back the clock.

At the end of the Civil War the principal generals and military chiefs were installed on the boards of directors of numerous firms or came to occupy managerial posts at the heads of the various state-controlled bodies which were created to intervene in the economic life of the nation. To broaden the scope of these possibilities, the Institute Nacional de Industria was created and its directorship entrusted to a former member of the armed forces, in order to ensure an effective redistribution of income in behalf of the groups that were to share in the booty.

Strict trade regulations favored the accumulation of profits derived from import-export licenses, which were reserved for friends of the regime. The granting of licenses for the importation of foreign cars became a basic means of bestowing political gifts. Licenses were likewise instituted for the creation or expansion of industrial enterprises and were granted on the same monopolistic basis to the favored. Should a financial group which had been excluded from the booty solicit the required permit, the permit would be denied, and if the business were a good one, it would be undertaken by the Instituto Nacional de Industria itself or by persons enjoying official favor. Thus, it is hardly surprising that Nicolás Franco, the brother of the chief of state, should emerge as one of the principal financiers of Spain.

Since the Civil War, the Spanish economy has continued to be characterized by the maintenance of unnecessarily inflated armed forces, by the distribution of material advantages to the military, by a high proportion of expenditure on the defense setup, and by lavish outlays on unproductive installations and luxurious public buildings. There has been more than a little muttering at the cost of monuments like the immense crypt carved into the hillside of the Valle de los Caidos to commemorate those fallen in the Civil War, or the workers’ universities at Gijon, Tarragona, and Cordova, whose lavish installations are in striking contrast to the humble living standard of their graduates.

This spoils system had certain inevitable consequences. In the first place, it was incompatible with a free-market economy, since its purpose was to ensure a maximum transfer of income to the persons or groups held in favor by the regime.

In the held of agriculture, minimum and maximum quotas were laid down for the surface acreage to be devoted to specific crops. The distribution of fertilizers was controlled by officials who also handed out permits for the importation of tractors, selected seed grains, and other items. In industry, aside from the permits needed to establish or expand factories, foreign capital was limited to a 25 per cent share in any one firm, according to a law dating from 1939. (This ratio has since been raised to 50 per cent, and even to 100 per cent in certain cases, as a result of the recently adopted stabilization program.) In business and trade, price limits, as well as import and export licenses, were established, giving rise to a flourishing black market in which the beneficiaries were sure of rapid profits.

Post-war slump

Operating on such principles, the Spanish economy could not achieve brilliant results. From the end of the Civil War in 1939 until 1950, the country went through a terrible slump, with the national income figures sinking below those of 1935.

In these years there was an increase of about one million in Spain’s farming and livestock-raising population. Nevertheless, agricultural output declined substantially, and there was steady rationing of food and also electricity, gasoline, and numerous industrial products. Because only luxury apartments and houses had been built, by 1955 there was a housing shortage of a million homes.

The official explanation for all this is that it resulted from the effects of the Civil War and of the economic blockade to which Spain was subjected after the Potsdam Conference. But there is no doubt that the economic policy pursued at home was responsible for many of the ills that have been blamed on foreign circumstances.

If top priority had been assigned to the manufacture of machines and capital goods, the Spanish economy would not be suffering as it is today from antiquated plant equipment, which, in the steel and textile industries, is thirty years out of date; and the Spanish railroads would not have found themselves in such a grim state of ruin. Luxury apartments, built with the aid of subsidies, would have made way for mass housing for the poorer classes. And if the economy had not been rigged for the sharing of the spoils, the electricity and steel industries would have been favored over industries like shipbuilding and aluminum.

New blood in the economy

In 1951, a new government took office and immediately freed the sale of food products and abolished rationing. The results were quickly apparent. In that year the national income rose by 17.5 per cent, a rise admittedly favored by the first loan made by the American ExportImport Bank.

Since then the Spanish national income has risen uninterruptedly with the sole exception of 1953. The rise has averaged around 5 per cent a year, and since the Spanish population has been increasing at the rate of about one per cent a year, this has meant an improvement in the standard of living of 4 per cent a year — one of the highest rates in the world.

This has been accompanied by a notable increase in savings, and in recent years about 18 per cent of the value of the gross national product has been invested — a ratio higher than that of England, France, or the United States and close to that of Greece and Turkey, which are in a state of development similar to Spain’s.

This progress has, of course, been facilitated by American aid. which to date has amounted to some $1.2 billion. Yet this aid, dispensed over the years 1954 to 1959, amounted to only one eighth of the Spanish national income in 1959, and it has not played a decisive part in investments. It has, on the other hand, been of immense help in overcoming the problems of Spain’s unfavorable balance of payments.

Though the Spanish government’s policy underwent a profound change in 1951 when the new program of liberalization was launched, most of the old regulations and stumbling blocks to industry and foreign trade remained: import licenses, permits for the creation or expansion of enterprises, limitations on foreign capital, and the work regulations introduced at the end of the Civil War. These regulations, in effect, prohibit the firing of workers, because the authorization to lay them off is granted only after the fulfillment of practically impossible conditions. If the rationing of electricity, for example, reduces working hours, companies must continue paying wages with only a slight reduction, and if the demand for a product declines, it is impossible to reduce production until the firm is on the verge of bankruptcy.

New stabilization program

Despite Spain’s entry into the Organization for European Economic Cooperation in 1959 and the strong aid obtained from international agencies and the U.S. government to launch a program of stabilization, these anomalies of the Spanish economy have not yet disappeared, nor has unemployment compensation been provided for. The Spanish economy since 1951 has continued to suffer from its shackles, but the impetus of the producers — managers and workers alike — has been too great to permit a continuation of the spoils system.

To keep the Spanish economy on an even keel, a strict control over foreign exchange was necessary, for the terrible cold wave which froze the citrus trees in February of 1956 made the situation catastrophic. When the stabilization program of July, 1959, was introduced, the Spanish institute of Foreign Moneys had reserves of just $2 million and had accumulated short-term debts of $50 million.

In recent months Spain has adopted a stabilization program in line with those programs prevailing in the advanced countries of the West. Inflation has been halted. and the exchange value of the peseta has been preserved, notwithstanding the liberalization of foreign trade. This advance has been a victory for the modernizers.

The force of public opinion

Meantime, the Spanish people were showing mounting alarm at Spain’s absence from European programs of cooperation. The government had authorized the creation of pro-European groups, and although it prohibited their meetings from time to time, it could not keep them from exerting a certain political pressure. When the free convertibility of European currencies was introduced in December of 1958, the reaction of Spanish public opinion was so strong that the government was forced to check with the chambers of commerce and other bodies, some of them state-controlled. The replies to their inquiries left no doubt that Spanish leaders of industry were resolutely in favor of a change of economic policy.

The catastrophic drop in Spain’s reserves, the pressure of public opinion, and the lure of the financial aid which it hoped to obtain induced the government to launch its stabilization program. This decision was considerably influenced by the often reiterated opinion that inasmuch as the Civil War had liberated Spain from Communism, its leaders had a solid right to considerable foreign aid, like that obtained first from Argentina and later from the United States.

It was now the turn of the international organizations to repay the moral debt incurred. But this time the aid was granted only upon the fulfillment of certain conditions which struck at the spoils economy. The most important discussions held between the Spanish government on the one side and the International Monetary Fund and the O.E.E.C. on the other revolved around foreign trade and the sums earmarked for the Instituto Nacional de Industria and other state organizations.

Recently, the O.E.E.C. has published a report on the results of the stabilization program’s first year. This document recognizes the “undeniable success” achieved in the short-term cleanup process, but it aims a number of criticisms at the maintenance of price controls, the regulations hampering industrial activity, limitations on foreign investments, lack of freedom in the labor market, and the volume of imported capital goods. It remains to be seen what influence these international organizations will have in promoting the modernization of the economy.

The Spanish economy still does not pay enough attention to the subtleties of economics, especially to the principles of supply and demand or the adaptability of supply to price relationships, or the paramount influence of these in foreign trade. One cannot, for example, export until the home market has been supplied, and the fact that exports would lead to an increase in foreign exchange and to an expansion of exportable production is ignored.

Another favorite notion is that one can finance as much investment as one likes by quietly manufacturing the necessary money; and the resultant rise in prices is explained as simply the nefarious work of speculators. When the stabilization program was launched, a tariff was imposed on Spain’s principal exports on the grounds that this was necessary in order to cut down the extraordinary profits that would be made by exporters. There was no realization that such profits might stimulate an expansion in the output of oranges, minerals, and other products.

In today’s economy the authoritarian regulations of the post-war period have been abolished, but their replacement by the ordinary forces of the market place has not been permitted. The direction of the economy thus lacks effective methods. Even so, the economic situation is at last rapidly improving, and the Spaniards are relying on the international organizations to assist them in their progress toward a more rational economy. But they will have to depend on themselves in order to terminate the fiscal policies which converted the once proud Spanish Empire into a decadent economy.