12.01.2021
The need for an ambitious structural reform strategy*
"The productive model in the post-pandemic period. How can we improve the
productivity of our economic system and use the reconstruction fund to this
end?"/Cercle d'Economia
Pablo Hernández de Cos
Governor
*English translation of the original speech in Spanish
Good evening, ladies and gentlemen.
Allow me to begin by thanking Cercle d'Economia and, in particular, professors Xavier Vives
and Núria Mas, for their invitation to participate in this session. I also appreciate the fact
that Cercle has placed the analysis of the post-pandemic productive model centre-stage in
this event.
Since the start of the COVID-19 crisis we have focused on tackling the enormous
shortterm challenges this unique situation has posed. It has warranted unprecedented measures
in various economic policy areas (monetary, financial, fiscal...), both domestically and
internationally, and of course at the European level.
With the horizon set by vaccine availability, and taking into account the fact that the
economic effects of the vaccine roll-out will not be immediately discernible (meaning
exceptional measures will have to remain in place for some time), it is important in parallel
to address the medium-term challenges for our economy.
It is as yet difficult to accurately assess the extent to which the changes caused by the
pandemic will be durable. However, some of the changes under way look to be structural,
such as those arising from further and greater digitalisation and the impact on productivity.
As to the possible damages caused by the pandemic (such as greater unemployment and
inequality, and the public finances shortfall), they all have a bearing on aspects where, prior
to this crisis, the Spanish economy was already clearly falling short.
Thus, the extraordinarily complex scenario resulting from the pandemic makes it all the more
necessary to define an ambitious structural reform agenda. These reforms were, as I say,
already necessary before this crisis. Our economy's poor productivity dynamics, the high
rates of structural unemployment and temporary employment, and the challenges
associated with population ageing, increasing inequality and climate change had all been
clearly identified.
Adding to these challenges are others emerging as a result of this crisis, such as those
relating to the possible rolling back of globalisation and to the acceleration of digitalisation
in the economy.
Further challenges requiring an international response before this crisis should also be
added. They include the need to complete Economic and Monetary Union and to promote
European and global multilateralism.
And nor must we forget the need to design a public finances restructuring strategy for
gradual implementation once the pandemic is behind us.
One important effect of an economic policy strategy that incorporates the application of
structural reforms and the embryonic design of a fiscal consolidation process is that it would
allow the expansionary effects of the short-term public support measures to be boosted.
And such measures are, as I say, still necessary. We should not underestimate the
favourable impact such a strategy would have on the credibility of our economic policy, on
agents' expectations about our growth capacity and, in sum, on agents' spending and
investment decisions in the short term.
Two other considerations are also worth pondering here.
First, many of the structural reforms needed are geared to increasing our economy's
adaptability. In a post-crisis setting that is so uncertain and subject to such potentially
significant changes, gaining in adaptability is crucial.
Second, one of the most positive developments regarding the economic policy response to
the current crisis has been its forcefulness at the European level, particularly following the
approval of the recovery funds.
In my view, these funds can and should be used to finance some of the structural reforms,
in addition to priority being given to financing projects that seek to enhance our medium
and long-term growth.
I shall now go into greater detail on the content of the reforms required to ensure that the
Spanish productive model can offer all Spaniards a more prosperous horizon. As a guiding
principle for some of these reforms, I shall use the consequences that our economy's
structural problems cause for our younger generations.
Today's youth will experience much of our country's need to adapt to the post-pandemic
situation. And it will be they, too, who will perceive to a greater extent in the years ahead
how successfully or not we face these challenges as a society.
***
Any structural reform strategy in Spain has to depart from an acknowledgement of three
facts.
First, the main determinant of the Spanish economy's low potential growth is its scant
productivity growth. In the past 20 years, total factor productivity has averaged annual
growth in Spain of 0.2%, far behind countries such as Germany and the United States.
Moreover, although our productive structure is skewed towards sectors of activity that
usually post low productivity growth, our lower productivity compared with other European
countries is seen in virtually all sectors.
Further, our unemployment rate has been persistently very high and higher than that of other
developed countries. Specifically, since 1980, the average unemployment rate in Spain has
stood at almost 17%.
Finally, we should be mindful that the current recessionary episode began with a higher level
of inequality than that in place at the end of the previous expansionary cycle. There is every
suggestion this crisis will see a further increase, since it is affecting to a greater extent
groups which, generally, were earning relatively low incomes.
These facts are, moreover, closely interconnected. Low productivity and high
unemployment do not only give rise to lower economic growth; they are also a source of
inequalities. It is difficult to conceive a sustainable reduction in inequality in Spain without
an improvement in productivity or without a reduction in unemployment. For example, the
higher productivity gains are, the greater the possibilities of increasing wage levels and the
quality of jobs created, and the greater too the resources for funding public policies.
Enhancing productivity dynamics calls for action in several areas.
First, we have to improve our human capital and, therefore, our education system, which
is currently weighed down by a very high early school leaving rate and by relatively low
quality levels.
Indeed, compared with other developed economies, a high number of young people in
Spain continue to leave the education system with only basic studies.1 In addition, the
unemployment rate of Spanish graduates is almost double that in the euro area. The
proportion of graduates working in high-skilled jobs is also lower. Moreover, these
differences cannot be attributed to our young people choosing different university courses
than their counterparts of other nationalities.2
Beyond the effect of a productive structure skewed towards low-skilled services or of an
education system only tenuously connected to the business world, these data evidence
quality problems in the system. By way of illustration, the core academic competencies of
Spanish university-educated adults3 are lower than those of their European counterparts, in
particular in the case of maths skills.4 Moreover, according to the Academic Ranking of
World Universities (ARWU), no Spanish universities are among the top 100 globally, and
there are only seven among the top 400.5
It is also quite possible that the health crisis (in particular the suspension of face-to-face
classes at the height of the crisis) may have affected academic performance or the learning
of non-cognitive skills, since online learning is not a perfect substitute for presence-based
education.6 These effects can vary greatly depending on social strata, because of the
differing penetration of communication technologies in households and of parents' different
educational levels, which in some cases may have detracted from the support needed for
online learning.
All these shortcomings, along with the need to tackle the challenges posed by globalisation,
technological progress and task automation, point to the advisability of reconsidering the
1
Thus, 32% of men and 23% of women aged 25-29 are estimated to have left school having completed compulsory
secondary education at most, at some distance from the respective figures of 17% and 14% for the euro area countries
on average.
2
See B. Anghel, S. Puente and A. Regil (2020), "The employment status of tertiary education graduates in Spain: a euro
area comparison", Box 6 of the "Quarterly Report on the Spanish Economy", Economic Bulletin, 4/2020, Banco de
España.
3
Based on the OECD's PIAAC report.
4
In this case, the competencies of Spanish graduates are not higher than those of secondary school-educated adults
from certain European countries such as Denmark, Sweden, Slovakia, the Netherlands and Austria.
5
This ranking is constructed drawing on indicators that measure the quality and quantity of universities' scientific
production. By comparison, France, Germany and the United Kingdom have 19, 27 and 34, respectively, among the top
400.
6
See H. Cooper, B. Nye, K. Charlton, J. Lindsay and S. Greathouse (1996), "The Effects of Summer Vacation on
Achievement Test Scores: A Narrative and Meta-Analytic Review", Review of Educational Research, in R. J. Alexander
(2001), Culture and pedagogy: international comparisons in primary education, Oxford, Blackwell, which shows the
international evidence indicating that reductions of one year's schooling (180 days) entail declines in academic
performance measured in standardised exams. This effect is associated above all with students from a more
underprivileged background. See also K. Alexander, D. Entwisle and L. S. Olson (2007), "Lasting consequences of the summer
learning gap», American Sociological Review, Vol. 72, pp. 167-180.
institutional design of the education system, and of curriculum content and the very nature
of learning.
The goals should be to promote individualised and early pupil orientation; to improve the
recruitment of teaching and research staff and to tie funding of the system to targets of
excellence, at the university level; and, in respect of vocational training, to allocate resources
for the redesign of the system so as to achieve a better mix of general training and practical
experience in companies.
Technological capital is another key underpinning of any growth strategy. The Spanish
economy also falls short here. The proportion of innovative firms in Spain is much smaller
than the percentages observed in France, Italy and Germany, and the weight of public and
private investment in R&D is 26% and 54% of GDP, respectively, lower than the European
average.
This gap is due, at least in part, to certain structural characteristics that restrict the
innovative capacity of firms in Spain. These include the shortfall in available human capital,
to which I have referred, and the productive structure's bias towards
low-technologicalcontent sectors. But one key factor requiring particular attention is access to both public
and private financing for business projects with a high innovative content.
The high uncertainty normally characterising the results of investment in R&D&I, and the
lengthy time horizon until such results materialise, warrant general government acting as a
catalyst in the related financing, especially in the field of basic research. This is all the more
so given the positive - and potentially disruptive - effects that certain investments in these
areas may have on the population as a whole. An economic crisis like the current one makes
this particularly relevant, given that the experience of previous crises indicates that, as is
the case with productive public investment, firms' investment in innovation usually falls
significantly at times of uncertainty and financial hardship. This reduction has a negative
bearing on long-term growth.
However, possible public measures here should not be confined solely to providing for a
bigger budgetary outlay. Changes to promotion and career arrangements in research to
encourage the recruitment and development of new high-potential researchers would
likewise be desirable. Also, a restructuring of the public organisations that promote
innovation could be considered, in an attempt to harness synergies and strengthen
resource-allocation mechanisms between centres on the basis of academic excellence.
Increased productivity also requires improvements in the business environment,
competition and business dynamism. The economic literature shows that market
structure and the business environment play an essential part in the correct functioning of
markets for goods and services and are a key determinant in the degree of efficiency and
productivity of the economy. In turn, these aspects are governed by regulation.
In this respect, the Spanish economy is characterised by the small size of its firms, and it is
precisely in the SME sector that a sizeable negative productivity differential is observed
relative to European firms.
Boosting the growth of SMEs would not only raise their productivity but would also bolster
the financial soundness of the business sector. The present crisis has once again
highlighted the fragility of small firms in a downturn.
Accordingly, we need to ensure that the goals sought by all those regulations that introduce
some degree of discrimination by firm size are compatible with competition and do not pose
obstacles to business growth.
In addition, further efforts must be made to improve the regulatory framework so as to bring
it into line with the best practice of our European peers. The available indicators show that
there is room for improvement as regards the steps to be followed to set up new businesses,
the regulation of some sectors (such as retail trade, certain transport segments and some
professional services) and even the functioning of the judicial system. Moreover, in such a
decentralised country as Spain, it would also be appropriate for the regional and local
governments to put their different regulations on a common footing, in order to adapt their
requirements to best practice and reduce the obstacles to market unity.
Lastly, one key aspect of business dynamism stems from the regulation of insolvency
arrangements. In this case also, the Spanish system is less efficient than that of our fellow
Europeans.
Swift and simplified administrative procedures to increase the efficiency of the debt relief,
insolvency and restructuring processes should be put in place. Debtors in financial difficulty
should be able to access a preventive restructuring framework that would allow them to
continue to pursue their business activity while they are still viable.
Speed of resolution in these situations is also essential to minimise the losses deriving from
falls in asset values when these processes drag on. More appropriate procedures and
incentives are also needed to avoid suboptimal levels of liquidation of firms and destruction
of the productive system.
This reform is particularly important in the present setting, in which both personal and
business insolvencies are expected to increase, in light of the scale and nature of the shock
that we are currently undergoing. And even more so in a setting in which the short-term
economic policy response means that the amounts owed to general government by firms in
difficulty will foreseeably be much higher than in previous crisis periods.
The low productivity of the Spanish economy is also connected with some of our labour
market problems. This is the case, for example, of the high level of temporary
employment, which over the last decade has averaged 25.2%, compared with 13.9% in
the euro area.
The negative impact of temporary employment on productivity is connected with the lower
level of accumulation of work experience and the limited incentives for firms to train their
temporary workers.
Apart from its effects on productivity, the high level of temporary employment also has
persistent negative consequences for lifetime earnings, inequality and decisions to leave
home or have children.7 Indeed, temporary employment has a particularly harsh impact on
young people.8
In addition, younger workers record the highest rates of part-time work and shorter contract
duration. These trends are also observed in other European economies and could, therefore,
have a certain structural component linked to the impact of globalisation, digitalisation or
robotisation.9
For all these reasons, it is essential that the duality of the Spanish labour market be reduced.
To this end, employment protection mechanisms must be reviewed, to make the necessary
protection for workers compatible with flexibility for firms. In particular, I believe it would be
appropriate to explore, for instance, employment contracts with termination costs that rise
over time, which would reduce the artificially high protection discontinuities between
workers with different years of experience.
Also worthy of attention are mixed models. These combine the possibility of workers
building up part of their termination costs in a fund in advance, while they are working, with
an amount of severance pay in the event of termination that increases with years of
experience.
Apart from the high level of temporary employment, the most negative characteristic of the
Spanish labour market is, without doubt, the high unemployment rate (and in particular
the excessive persistence of unemployment). For example, at end-2019, almost 43% of the
unemployed had been seeking employment for more than a year.
Unemployment is particularly high among people with lower levels of education and young
people. Thus, in this group, the unemployment rate stood at 30.5% in 2019 Q4, well above
the euro area average of 16.3%. The present crisis is also having a particularly harsh impact
on low-skilled employment and on young people, given that they are more likely to have
temporary contracts and to be employed in those sectors that have borne the brunt of the
measures taken to contain the pandemic, and also because the tasks involved in this kind
of work do not lend themselves to teleworking.10 As a result, in 2020 Q3 the unemployment
rate among young people stood at 40.4%.
The importance of this high youth unemployment rate should not be underestimated, given
that the available evidence shows that spells of unemployment at the start of working lives
7
J. I. García-Pérez, I. Marinescu and J. Vall Castelló (2020), in "Can Fixed-term Contracts Put Low Skilled Youth on a
Better Career Path? Evidence from Spain", The Economic Journal, doi:10.1111/ecoj.12621, find that comparing young
people (of similar characteristics) who joined the labour market just before temporary employment contracts were
liberalised with those who joined it just after, almost 30 years later, the second group records 7% lower labour income
than the first group.
8
See S. Puente and A. Regil (2020), "Intergenerational employment trends in Spain in recent decades", Analytical
Articles, Economic Bulletin, 2/2020, Banco de España.
9
See, for example, D. Acemoglu and D. Autor (2011), "Skills, tasks and technologies: Implications for employment and
earnings", Handbook of Labor Economics, no. 4, pp. 1043-1171; R. Feenstra and H. Gordon (1999), "The impact of
outsourcing and high-technology capital on wages: estimates for the United States, 1979-1990", The Quarterly Journal
of Economics, 114(3), pp. 907-940; and D. Comin, A. Danieli and M. Mestieri, "Demand-driven labour market
polarization", mimeo.
10
See B. Anghel, A. Lacuesta and A. V. Regil (2020), "Transferability of workers' skills in sectors potentially affected by
COVID-19", Analytical Articles, Economic Bulletin, 2/2020, Banco de España; and B. Anghel, M. Cozzolino and
A. Lacuesta (2020), "Teleworking in Spain", Analytical Articles, Economic Bulletin, 2/2020, Banco de España.
may have quite persistent effects, for example weighing on the productivity of the workers
concerned throughout their working lives, thus making it difficult for them to recover their
income levels.11 For this reason, it is particularly important that economic policies are geared
insofar as possible to incentivise employment for this group of workers.
It is also important to note that the COVID-19 crisis is having a very uneven impact by sector
of activity. Some of these dynamics may ultimately give rise to permanent changes in the
sectoral composition of the economy and, therefore, in the employment needs of the
different productive sectors.
The sectors hardest hit by the pandemic have a higher proportion of workers with low levels
of education and involve a lower proportion of tasks involving information technology and
numeracy and literacy skills. This may make it difficult for these workers to be employed in
other productive sectors that enjoy better growth prospects in the near future.
In consequence, it is essential that Spain reinforces its active employment and training
policies. Mechanisms must be put in place to ensure that the unemployed are provided with
individual monitoring and guidance, based on statistical profiling techniques that are able
to match the unemployed with the vacancies available.
In addition, continuous training should be reinforced and it would be desirable to maintain
the possibility of using training contracts, granting as much flexibility as possible both to
young workers and to the firms hiring them. Lastly, the hiring incentives currently in place
should be reviewed and priority given to those earmarked for workers with lower education
levels, with continuous assessment of their effectiveness.
The present crisis has also prompted an economic policy response that seeks to protect
workers who have lost their jobs as a consequence of the pandemic, the main instrument
being the short-time work and temporary layoff arrangements. These allow workers to
preserve not only their income but also their employment relationship, as they can return to
the same job when the economic situation improves.
Parallel to these measures, in a setting in which there may be significant and persistent
changes in firms' demand, and also important sectoral transformations, it is important to
ensure that the various flexibility mechanisms that firms have in the current legal
framework function correctly. These internal adjustment levers, appropriately calibrated to
the present situation, are a valuable means by which to safeguard the viability of many firms
and, therefore, their workers' jobs.
Policies that seek to improve productivity and to reduce unemployment and temporary
employment should also serve, as I have said, to address the challenge posed by growing
inequality.
Here too it should be noted that young workers have less protection in cases of involuntary
unemployment, as they have had less time to build up rights, both to unemployment and
severance pay, not only because of their age but also because of their higher level of
temporary employment,12 which translates into significant differences in the amount of
severance pay received.
Even among the unemployed who receive their full unemployment benefit, and among those
who fail to reach the minimum previous experience threshold necessary but can apply for
unemployment assistance, the rates of cover differ considerably by age.13
The employment protection and household income support measures approved during the
crisis should help ease the vulnerability of the households most affected.
In addition, in coordination with the regional government schemes already in place, the
recently approved minimum income scheme could help reduce the level of extreme poverty.
As envisaged in the regulations, this will require continuous assessment of the effectiveness
of the eligibility criteria established for providing support to the most vulnerable groups, and
of the incentives that this measure creates as regards helping the beneficiaries enter the
labour market.
Another important question, in relation to inclusion policies, concerns rental housing
affordability problems for certain groups, particularly young people. This is a global
phenomenon, especially apparent in the metropolitan areas of the advanced economies.
As a result of the reduction in their ability to save and job insecurity, this phenomenon has
again particularly affected young Spanish people.14 From 2014 to 2017, the percentage of
owner-occupier households whose head of household is under the age of 35 declined by 8
pp, to 41.3%. Also, the rise in the demand for rental housing was not accompanied by a
commensurate increase in supply. Hence, among other consequences, the price of rentals
has increased considerably, making housing less affordable for this group.15
International evidence shows that policies to increase the supply of rental housing are the
most effective way of tackling these problems. In particular, many countries have opted to
combine the introduction of public guarantees with tax incentives for private sector rental
housing development. Also, it is crucial to guarantee legal certainty for owners.
Moreover, we should not forget the need to press ahead with efforts to reduce the gender
gap. This would suggest measures conducive to a better work-life balance, increasing the
support for households and improving labour market opportunities, especially for young
12
This explains why the percentage of young unemployed persons who receive unemployment benefit is much lower,
specifically 21% for the under 25s, compared with 47% for the unemployed in the 25-44 age group. If the rights to
unemployment benefit of workers of different ages are estimated in a random sample of workers registered with the
social security system in 2019, the estimated average compensation for workers under 26 is €64, compared with an
average of €1,050 for those over 45.
13
Ranging from 5% for unemployed persons under 25 to almost 30% for those over 45. In this case, the eligibility and
length of cover criteria are more complex, but once again the comparison by age continues to show a strong bias in
favour of older workers. Thus, for example, a young unemployed person with no dependants and with less than six
months' previous work experience is not eligible for unemployment assistance. By contrast, any unemployed persons
over 52 who have received all the employment benefit to which they are entitled can receive unemployment assistance
indefinitely until they reach retirement age.
14
See Banco de España (2019), "Survey of household finances (EFF) 2017: methods, results and changes since 2014",
Analytical Articles, Economic Bulletin, 4/2019.
15
D. López-Rodríguez and M.a Ll. Matea (2019), "Recent developments in the rental housing market in Spain", Analytical
Articles, Economic Bulletin, 3/2019, Banco de España.
single mothers, precisely the group most affected economically by the decision to have
children.
***
In addition to these issues that are specific to the Spanish economy, we should also address
some far-reaching challenges common to most advanced economies, such as the transition
to a more sustainable economy and population ageing.
As regards the first of these factors, fiscal policy must play a leading role in the strategy for
tackling climate change and smoothing the transition to a more sustainable economy.
The role of fiscal policy should be to discourage the most environmentally harmful activities
(ideally through an internationally harmonised tax system), while boosting the public and
private investment needed to develop cleaner technologies and alleviate the social costs of
transition.
Other policies may also supplement fiscal policy in achieving these targets. Specifically, it
is incumbent upon the financial sector to play a significant role in this area.
For this purpose it is crucial that climate change risks are incorporated into the
decisionmaking process. The development of environmental stress tests by supervisors will be a
useful instrument here, as will too the international harmonisation of a taxonomy to provide
transparency on activities that contribute to the transition to a low carbon economy.
One of the biggest challenges facing the developed economies and the Spanish economy
in particular is population ageing, as illustrated by the projections for the dependency ratio.
The extraordinary scale of this challenge is a result of the numerous implications of these
changes for economic growth, the labour market and fiscal policy, among other areas.
Of all these challenges, allow me to stress two. First, the challenges that population ageing
poses for the economy's potential growth, through its impact on the labour market and
worker productivity.
In this respect, it is worth emphasising that the labour force participation rate varies
significantly according to age, tending to decline as the age of retirement approaches.
Against a background of population ageing and intense technological change it is once
again essential to insist on the need to boost investment in innovation, but also in education
and in continuous training at work.
A rethink of working conditions would also be desirable to encourage transitions between
occupations over working lives, as these have been shown to help increase productivity and
extend labour force participation.
The opportunities that the demographic challenge offers to the development of some
sectors in the medium term should, however, not be overlooked. Notable among such
sectors are health, leisure, tourism, real estate and finance.
Spain is in a privileged starting position to compete in the provision of services to elder
sections of the population (the "silver economy"), given our special geographic and cultural
conditions and the pattern of sector specialisation we have developed in recent years. To
harness these new opportunities will require a nimble response both in the public and private
sector, and continuous improvements in quality and efficiency in the provision of the goods
and services demanded by a more elderly society.
Second, the effects of population ageing will be particularly notable in the case of public
finances. The European Commission projects that spending on health and long-term care
will be almost 2 pp of GDP higher in Spain in 2050 than in 2016. The upward pressure on
pension spending will be even greater. Here, following the suspension of the application of
the compensatory mechanisms included in the 2013 reform, additional measures will be
needed to guarantee the future sustainability of the pension system.
The debate in this area should start with the setting of the level of benefits that the public
pension system provides, ensuring that sufficient funds are raised to finance such benefits,
while establishing basic intergenerational equity parameters.
Some countries (such as Germany, Sweden and Italy) have opted to introduce mechanisms
to adjust the level of benefits or retirement age to life expectancy in order to stabilise the
system. Also, it would be advisable to increase its transparency and to strengthen the link
between the contributions made and benefits received, always ensuring an appropriate level
of sufficiency. Introducing incentives to favour greater alignment between the effective and
the statutory age of retirement would also be desirable.
***
All the challenges I have mentioned existed before the outbreak of the pandemic, although
the latter has increased the need to tackle them head-on. But new challenges are emerging
as a result of this crisis.
The crisis has highlighted some of the vulnerabilities associated with globalisation and
the risks arising from protectionism. Spain must take a leading role in defending a model of
global trade, based on multilateral rules and free competition. We should not forget that the
Spanish economy has become significantly more open, a development that has been
essential for our growth, but which also makes our economy more sensitive to any possible
international trade retrenchment.
The crisis may also accelerate the digitalisation of the economy. On the one hand, it has
demonstrated the potential of working from home, the use of which was limited in Spain
prior to the crisis. Its development will require the bolstering of its positive aspects and
efforts to alleviate its disadvantages. In particular, there is evidence that, where the
appropriate conditions do not exist, productivit