Spain in a global context: developed economy with some challenges
Guest blog post by Neven Valev, Ph.D., Founder and Head of Research at www.theglobaleconomy.com.
Comparing countries is a useful exercise as it puts the national economies in global context. Whether or not a country is developed in economic and financial terms is a question that makes sense only in relative terms. This article discusses the Spanish economy as an example of how to make such an international comparison. The focus is on four key areas: economic development, financial system development, rule of law, and international trade and investment. Spain is interesting as it is a large developed economy that does, however, face challenges.
The comparison is based on several indicators published by major international organizations. Although the latest values are a few years old, these particular indicators are fundamental and move very slowly over time. The global rankings implied by them have been about the same for many years. In other words, if one looks at the long-run big picture, whether the data are from 2017 or 2010 makes little difference. The data are also accompanied by some forecasts from FocusEconomics to show the direction the economy.
Economic development. According to the latest World Bank data from 2014, the Gross Domestic Product of Spain was 1,381.34 billion USD which places Spain at rank 14 globally, i.e. Spain is one of the biggest economies in the world. Looking at the level of income, the GDP per capita was 29,718.50 USD positioning Spain at 29th place in the world. Spain enjoys a high level of income in global rankings but is below the income levels of many advanced economies. Note that FocusEconomics projects 2.5 percent economic growth for 2017 which is not bad but would hardly push the Spanish economy into higher global rankings.
GDP per capita could be considered, however, a very narrow measure of welfare. For a more comprehensive assessment, we look at the Human Development Index from the United Nations. The HDI ranges from 0 (low development) to 1 (high development) and reflects income as well as life expectancy and education. The value for Spain in 2014 was 0.876, rank 27 in the world, roughly at par with its GDP per capita ranking.
Financial system development. The most commonly used measure to gauge the development of the banking system is the level of credit to the private sector as percent of GDP. In indicates the availability of credit for businesses to implement investments and for households to acquire real estate and other big ticket items. Globally, the average value of that indicators is about 45 percent of GDP and, according to the International Monetary Fund, the value for Spain in 2014 was 129.47 percent per GDP, ranked 11th in the world. That ranking is confirmed by the number of ATMs per 100,000 people, another indicator for access to banking services. With 119.63 ATMs per 100,000 people, Spain ranks 11th in the world.
The other main component of the financial system is the stock market that, similar to bank credit, serves to channel the national savings to various investments. The size of the stock market is measured by its capitalization that reflects its size and the turnover ratio that measures its activity. The capitalization of the Spanish stock market was 71.88 percent of GDP in 2014 and its turnover ratio was 124.29 percent. These are places 19 and 5 in the world, respectively. It seems that Spain has about equally developed banks and stock market, both very advanced by international standards.
Rule of Law. The World Bank’s "Rule of Law" index captures perceptions of the extent to which people have confidence in and abide by the rules of society and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. The index has been compiled for many years and ranges from -2.5 (weak rule of law) to 2.5 (strong rule of law). How strong is the rule of law in Spain? With a score of 0.94 in 2015, Spain ranks 37th in the world. Not too bad but with quite a bit of room for improvement.
Another interesting indicator is compiled by Transparency International, an international NGO that, for many years, has pulled data from various surveys to produce a composite measure of corruption perceptions. The index ranges from 0 (pervasive corruption) to 100 (no corruption). Based on 2015 data, the value of that indicator for Spain is 58 which places Spain at position 36 in the world. Again, not horrible but not stellar performance either.
International Trade and Investment. Finally, we look at how connected the Spanish economy is to the rest of the world. In 2014, the total value of the exports of goods and services from Spain to the rest of the world was 32.55 percent of GDP. For that indicator, Spain ranks at place 99 globally. Note that if exports are greater than about 60 percent of GDP, this indicates an export-oriented economy. In contrast, values lower than about 15 percent of GDP indicate a relatively closed economy. Hence, Spain is a moderately open economy.
In terms of investment, foreign direct investment (FDI) into Spain was 34.23 billion USD in 2014 which is 2.48 percent of GDP, a level that has been sustained for many years with some ups and downs as confirmed by FocusEconomics data. We look at the percent of GDP as opposed to the dollar amounts because larger economies naturally attract greater volumes of foreign investment. Values above 4-5 percent of GDP suggest that the country is an attractive foreign investment destination. So, Spain’s value and its global rank of 104 is not spectacular.
To sum, Spain is one of largest and relatively rich economies in the world but it is mid-range in terms of income per capita when compared to other advanced economies. It has a very well developed financial system but its rule of law and corruption levels are not top notch. It is a moderately open economy in terms of trade but can achieve more in terms of foreign investment. The same indicators can be consulted for any other country in the world, as we do at www.theglobaleconomy.com.
Neven Valev is on the economics faculty of Georgia State University in Atlanta, USA, and is the founder and Head of Research of www.theglobaleconomy.com and globalpetrolprices.com that provide information on macroeconomic trends and fuel prices around the world. Neven has published over 40 academic articles on finance and international economics and has taught undergraduate, MBA, and Ph.D. students for over 20 years.
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*Guest blog posts do not reflect the views of FocusEconomics.
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Date: March 28, 2017
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