Marta Cabellos, Ruyi (Luisa) Chen, Rosa Medina, Victoria Ramos, Jara Romero

The determinants of competitiveness and its indicators for the Spanish

economy
Nowadays, we live in a rapidly innovative and globalized world in which each day new
technology is incorporated. The capability of an economy to adapt its economic agents and
its medium and long-term growth is what evaluates the competitiveness of a determined
economy. However, this concept is somewhat controversial among economists since its
definition and instruments have changed over time.

There are two main studies of competitiveness. The first is of a traditional nature, based on
trade and its determinants such as exchange rate, prices, and costs. On the other hand, we
have the structural competitiveness study, which focuses on production and its determinants
with the goal of increasing welfare in an economy.

The main topic of the article is the analysis of the competitiveness of the Spanish economy
from a broad position containing both approaches and its recent developments in Spain.
The concept of competitiveness has been traditionally described as the ability of an economy
to maintain or sustainedly increase its presence in world markets, including the domestic
market, but has been severely criticized due to the conception of a strictly competitive game,
in which one country’s share can only be increased at the expense of that of other countries.
This could lead to exchange rate devaluations and protectionist policies, which result in a
decline in real wages and welfare. Furthermore, this approach highlights the impact of relative
costs and prices on trade, related to competitiveness. Nevertheless, some developments in
international trade, have remarked the limitations of an analysis of the competitive position
focused exclusively on the study of relative costs and prices, allowing firms to compete
through product differentiation and in the influence of technological and human capital.
Later, this debate reached other aspects linked to the capability of increasing the welfare of
the economy.
2. The concept of competitiveness and the relevant indicators for monitoring it
However, the definition of competitiveness considers long-term perspectives, and it is related
to the factors of productive efficiency, in which technological improvement is key to
increasing productivity in the long term by adopting foreign innovations through trade and
international investment flows and the capacity to guarantee that their results are scattered
throughout the production organization. Simultaneously, these factors are also closely linked
to the quality of training and education, the provision of infrastructure, the administrative
capacity of the organizations, and, consequently, to the institutional environment that is
competitive and flexible enough to generate innovation and its spread among the economic
system.
Regarding the study of competitiveness, we can distinguish two approaches: the traditional
approach and the structural approach. For each of them, we can find its indicators of
behaviour and its determinants.

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The indicators that estimate the international competitiveness of the economy are the trade
balance, export shares, and import penetration in the domestic market, while explanatory
factors include measures of the effective exchange rate and deflators, as well as costs that
estimate the profitability of exporters and producers of goods that can be traded.
Furthermore, there are indicators linked to welfare and productivity. The most important
variable of the welfare of the economy and competitiveness is GDP per capita, as it has an
impact on the employment rate, population, and labour productivity.

In relation to the degree of competition and the regulation of goods and market factors, the
information available is quite poor, even though the labor of the OECD institution, that has
tried to obtain an indicator that allows comparisons between different countries. Lastly, it is
really difficult to find comparable data regarding the strategic capacity of firms as well as
regarding the quality of the business environment, and the institutions that include it, contain
a really odd indicator relating to this sector.
Competitiveness is analysed at the aggregate level, based on the behaviour of the economy
as a whole and on two specific sectors which are manufacturing and market services.
The focus on manufacturing is due to the importance of considering the pattern of production
and trade specialization in Spanish manufacturing, in order to adapt to changes in
international demand. Moreover, technological adaption is crucial, as the most recently
introduced products have a more dynamic demand and an increase in growth potential and
require more highly skilled workers. On the contrary, low-technology sectors require more
unskilled workers.
On the other hand, the market services sector has gained importance regarding value added
and employment. It plays a key role as a supplier of productive inputs to other industries, and
it has a direct effect on determining the growth potential of the economy as well as the level
of economic welfare. Moreover, due to the increase of some internationalization services, it
has increased its influence in trading. However, this analysis still presents some deficiencies
due to huge gaps in statistical data as they lack comparability and quality.
An overall view

It has been observed that there are many factors that determine a country’s trade. For
instance, changes in relative prices, costs, and margins, have an impact on short-medium run
decisions. It is observed that as Spain has become its transition to enter to the EU, the trade
balance has worsened. However, it also needs to mention that the competitiveness of a
country is not measured by its trade results, but its capacity to sustainedly increase the level
of its population welfare.
The peseta ex-change rate was sharply devalued in the first half of the 1990s, leading to a
significant expansion in merchandise trade at the international level. This enabled the balance
of goods and services trade to improve significantly between 1993 and 1998, with a surplus
in some years and a share of goods exports reaching 2% of the world market and 4% of the
euro area. The external balance at constant prices returned to deficit after entry into the euro
area and adoption of the euro, which has continued to increase even during the cyclical

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correction of 2001 and 2002. In 2002, the deficit on goods and services trade is 2% of real
GDP, while the merchandise deficit is 6%. However, the share of goods exports has remained
below the relative weight of Spanish GDP, showing the persistence of positive differentials in
price and cost growth despite the reduction in inflation. Moreover, Imports doubled their
share of domestic markets in the 1990s, reaching the average level in the euro area, but have
been checked in the first few years of the current decade due to cyclical weakness.
The most important details to notice are that changes in relative prices, costs and margins
have a significant impact on a country's trade. During the 1990s, the impact of the
depreciation of the peseta exchange rate offset the differential between price and cost
growth in the Spanish economy. However, from 1999, with Monetary Union in place, the
consumer price and unit labour cost indices appreciated against the euro area, while the
relative prices of exports remained practically unchanged. Subsequently, during the first few
years of this decade, most of the indices have risen in relative terms. The process of real
convergence of the Spanish economy with the EU accelerated in the second half of the 1990s
and has continued during the last few years of cyclical slowdown. Output per head in 2002
was 84.5% of the EU average, and productivity was more moderate than on average. This has
reduced the competitive advantages that the Spanish economy has traditionally derived from
its labour costs per unit of output over its main trading partners. Subsequently, most indices
have risen in relative terms.
The Spanish economy has made a considerable effort to bring its levels of physical, human,
and technological capital into line with EU countries, but the distance is still considerable.
Total factor productivity (TFP) captures both changes in productivity and the influence of
other factors. However, it is based on estimates subject to controversy and equipment
investment has been weak, potentially affecting potential output. The country has also
experienced a significant increase in R&D expenditure since the mid-1990s, reaching 1% of
GDP in 2001. However, this percentage is still behind the average levels observed in the EU.
Activities relating to the new information and communication technologies (ICT) still have a
comparatively small presence in the Spanish productive structure. Human capital is still far
from reaching the levels seen in other European countries, although the distances are
considerably smaller when the comparison focuses on the youngest strata of the population.
One of the elements that has helped to change the competitive environment of the Spanish
economy has been the greater commercial and financial openness. However, there are still
legal and administrative barriers that should be eliminated to enable the Spanish economy to
achieve its full growth potential.
The competitiveness of manufacturing
Although the importance of the manufacturing output falls in the advanced economy, the
analysis of the competitiveness in this sector is still important.

The Spanish economy has an external deficit in the industry, which has become bigger, and
due to the regulations in the export capacity increases the presence in the world markets, as
they did in the past.

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As a measurement of this type of competitiveness are costs and prices, and recently the unit
of labor costs of Spanish manufacturing have risen higher than EU countries, because of
higher growth of compensation per employee and lower productivity gains. This has taken
place in a more competitive environment, obligating the domestic producers of tradable
goods to set their prices according to the international markets, which means a decision on
their operating margins.
In the mid-1990s of the Spanish economy, the lower growth of the productivity of the industry
reflects a notable employment creation. Moreover, there are other influences, highlighting
the incorporations of technological processes (according to OECD, on the R&D expenditure of
this sector).
Although the increase of technology in the manufacturing process, traditional industries
continue to account for a higher proportion of the production and exportation, compared to
the EU. On the other hand, those industries that have high technology are the principal
channel of transmission of the technological process, while Spain having less capacity to
generate technology domestically, has a lower proportion in the relative share of imports.
According to all the points mentioned before, related to the capacity to produce high-
technology goods is concerned, the Spanish economy needs an innovation drive. Other
industries, that have more mature products, need to continue in their modernization and
differentiation of the products. This is due to, the advantage of the high number of natural
resources and cheap labor force, which were the base of the development of these industries,
and Spain has been overtaken by the recently industrialized countries.
Another essential factor is the capacity to attract foreign capital, for the modernization
process, due to the role that plays the investment in the integration of innovative
technological processes.

The competitiveness of market services

Following to the market services It could be stated that in recent years the services market
has undergone quite important changes in terms of employment and its competitiveness.
However, it is still confronted with some issues of market structure and the degree of
regulation, among others. It is also pleasant to mention the complications that some products
need to be sold abroad, which diminishes their competitiveness, although with technological
advances and industrial liberalisation, this is changing since the last decades.
The service sector in which Spain stands out with respect to the EU is tourism, during the last
few decades the Spanish government has been implementing some improvements in order
to increase the productivity of tourist services and making them more attractive.
However, it should be highlighted that the costs that Spanish institutions invest in the sector
are not as efficient as possible with respect to the growth of the EU, as well as influencing the
costs of national producers.

It is also worth mentioning the importance of tourism in Spain's balance of payments, as it

allows for the adjustment of trade imbalances that can occur, and as Spain is one of the most

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attractive EU countries in terms of tourism, this allows Spain's tourism sector to be of great
relevance in terms of Spanish GDP and main income receipts.
In recent years, it can be seen in the data that there has been a decrease in the inflow of
foreigners to Spain, one of the causes could be the current international uncertainty as well
as the high inflation rates, which means a loss of competitiveness for the Spanish market, so
it is necessary to correct the mismatch of productivity and unskilled labour in order to
maintain the tourism model and numbers as before.

The graphs show a decrease in the trade deficit, partly due to the development of imports
and the appearance of innovative companies that are committed to a more competitive
model, however, in the area of technologies, Spain falls far behind its competitors.

CONCLUSION
In conclusion, it is difficult to find comparable data regarding the strategic capacity of firms
as well as regarding the quality of the business environment, and the institutions that include
it. Competitiveness, as we said, is analysed at the aggregate level, based on the behaviour of
the economy as a whole and on two specific sectors which are manufacturing and market
services. The focus on manufacturing is due to the importance of considering the pattern of
production and trade specialization in Spanish manufacturing, in order to adapt to changes in
international demand.
For instance, changes in relative prices, costs, and margins, have an impact on short-medium
run decisions. The peseta exchange rate was sharply devalued in the first half of the 1990s,
leading to a significant expansion in merchandise trade at the international level. This enabled
the balance of goods and services trade to improve significantly between 1993 and 1998.
Moreover, Imports doubled their share of domestic markets in the 1990s. The most important
details to notice are that changes in relative prices, costs and margins have a significant
impact on a country`s trade.
The service sector in which Spain stands out with respect to the EU is tourism, during the last
few decades the Spanish government has been implementing some improvements in order
to increase the productivity of tourist services and making them more attractive. The tourism
sector is a strong variable to take into consideration in Spain’s balance of payments, as it
allows for the adjustment of trade imbalances that can occur, this allows Spain's tourism
sector to be of great relevance in terms of Spanish GDP. In recent years, with the decrease in
the inflow of foreigners to Spain, meaning a loss of competitiveness for the Spanish market,
so it is necessary to correct the mismatch of productivity and unskilled labour in order to
maintain the tourism model and numbers as before.