Economics master project by Shaily Bahuguna, Diego Loras Gimeno, Davina Heer, Manuel E. Lago, and Chiara Toietta ’19
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.
This paper aims to find a pattern in the evolution of altruistic and cooperative behaviour whilst distinguishing across different types of schools in Spain. In specific, we design a controlled laboratory experiment by running the standard dictator game and a public goods game in a public and private (“concertada”) high school. Using a sample of 180 students, we compare 12 and 16 year old children to distinguish the evolutionary pattern and test if there is a significant change by the type of schooling system. Alongside, we control for variants such as parental wealth status, religious views and ethical opinions. Interestingly, evidence from our data highlights that altruism levels rise throughout public school education whilst it falls in private schools. On the contrary, cooperation levels are relatively stable in public schools but rise in private schools. The results from this paper can be exploited to understand how education may influence selfish and individualistic behaviour in our society.
Our results show that at the initial stage, i.e. for the first year students, the level of altruism is higher in public schools and this prevails throughout the students’ education in a public school. On the other hand, we observe an opposite trend for students attending private school, as over the four years of education, the average level of altruism declines. In regards to cooperation, we find some surprising results. Although students attending a public school initially show higher levels of cooperation than private schools, over the course of their education, this gap is not only reduced but it is also surpassed by the private school. Our results are in line with previous research which state that females are more likely to donate and cooperate than males but contradict the popular view in literature that income has a positive correlation with both dependent variables.
With over 700,000 users, data from the app aquienvoto.org suggests how VAAs could represent a whole new way of surveying the general public before an election and collecting data on the political position of the population.
With over 700,000 users, data from the app aquienvoto.org suggests how VAAs could represent a whole new way of surveying the general public before an election and collecting data on the political position of the population.
The creator of the app is BGSE alum Hugo Ferradáns ’15, graduate from the Economics of Public Policy Program.Follow him on Twitter @Hferradans.
The rise of the internet era opened a door for innovative ways to help voters be informed about their political choices prior to casting their ballot. During the past 2015 Spanish General Election, new tools such as aquienvoto.org (whodoivote.org in English), an app that matches users’ policy preferences with parties’ proposed policies, became an easy and straightforward alternative for users to explore their political position and compare it to that of the biggest parties. Its success, with over 800,000 users and more than 30 million responses, suggests how technology and the social sciences can work successfully together to create a more informed and accountable electorate, especially in a multiparty political system such as the Spanish one.
But encouraging are more informed electorate is not the only benefit of Voting Advice Applications. In fact, the large amount of data that is generated from online applications such as aquienvoto.org can be a source of analysis and study regarding why people make their choices1, as well as a way to estimate what users care most about in a real-time basis before an election. This article, thus, will try to shed light on the usefulness of Voting Advice Applications to gather data on the political positioning of users. I will show some of the results that were acquired from aquienvoto.org, both on the policy preferences of users and on their most politically-aligned parties.
But first things first- What is exactly aquienvoto.org?
Aquienvoto.org is what is called in the field of political economy research a “Voting Advice Application” (VAA). VAAs are essentially an online test that matches users to parties depending on individual responses to policy-related statements. The user can either disagree or agree with the statements, as well as indicate whether that specific policy is important to him or her. After replying to several questions, the VAA gives the user a summary of what parties the user disagrees and agrees most with, mainly in the form of a ranking or a political map.
Even though there some VAAs more sophisticated than others2, all VAAs acquire essentially the same data:
the position of the user regarding a specific question (in a scale of completely agree to completely disagree with the statement in question),
whether that user gives importance to that question and
after answering all questions, the ranking of most preferred parties for each user.
Aquienvoto.org was able to gather information on 756,908 people, after dropping all users that did not complete at least level 1 (that is, replied to 31 questions).
What did users get as an advice from aquienvoto.org?
If we look at what party was the most first-ranked among users, we see that the centre-right Ciudadanos was the most preferred party throughout the whole period for roughly 33% of users. However, interestingly enough, the overall amount of people that voted for parties that are more leaned towards the left (Podemos,PSOE, United Left and Nós, representing 62.8% of votes) is much higher than those in line with liberal and conservative policies (Ciudadanos, PP, PNV and DiL, being 37.2% of users’ first choices), indicating that users from aquienvoto.org are consistently left-wing.
It is particularly noticeable the different layout that the results present when compared to the results from General Elections. For example, the conservative Partido Popular, which was ranked first in the elections with roughly 25% of votes, appeared last almost throughout the whole period for aquienvoto.org. It is clear that this might certainly come from the fact that VAA users are consistently younger and more left-wing than the average citizen, but it also poses a question that would be interesting to explore: do people vote in line with their policy preferences or are there other factors that are influencing voters’ decisions in the field of electoral politics?
How do people position themselves about certain issues and what they think are most important?
Unsurprisingly, the topics related to corruption were the ones users gave most importance to, with almost 10.67% of respondents (that is, 80,410 individuals) giving importance to the question “Politicians accused of corruption should resign and be illegitimated to run for office”, of which almost 93% of people responded that they agree or completely agree with the statement.
The second and third place of most-given-importance questions are related to the presence of religion in the political sphere (second place) and the presence of religion in the education curriculum (third place), for which both find a strong rejection towards religion. Furthermore, social policy is an area of much importance to individuals as well, surely very much related to Spain’s current economic woes. Indeed, Spanish law related to mass evictions over the past years3 takes fourth place in most-given importance question (8.06% of total questions replied), followed by a statement on the education budget (7,46%), for which most people agree that increasing the budget is a top priority within government policy. These results are roughly constant throughout time, although the amount of users that gave importance to questions declined (graph 2).
In terms of the most controversial topics out of all questions, where there are large amounts of people agreeing and disagreeing with the statement, we find the prohibition of bullfighting, the abolition of escuelas concertadas4 and the law regarding underage abortion5, having all of them a rather high rate of importance-responses as well.
Regarding what users are not interested on, that is, the questions that were least given importance to, it is seen that the four topics that are least important to users (starting from the least important) are the deficit and the ceiling of government expenditure, the legalization of prostitution, the regulation the financial sector, and the financing of the Autonomous Communities (the different regions of Spain).
What is the political position of the average user?
In order to give users the most interactive experience when analyzing their results, we created a map of their political position using eight different axis, as the Swiss VAA smartvote6 did. Using an algorithm, each response that a user gives contributes to create its “political map”, which can be later compared to the political map of the parties. Thus, using the responses from each user, we computed the political map for the average user, creating the image below.
As it can be seen, the average user is very much in favor of strong democratic institutions that condemn corruption at all levels, as it presents a rather high value for the axis related to democratic regeneration. Furthermore, it also presents a high value for welfare state and liberal society, and quite a low value for those questions supporting a liberal economy and a restrictive fiscal policy, which goes in line with the results mentioned above that users are more prone to identify themselves with left-wing policies.
Also, it can be seen that the average user rejects all statements related to regional nationalism, and favors those regarding state centralization. This changes, however, when comparing the average users from different regions, as people from Autonomous Communities such as Catalonia and the Basque Country strongly reject state centralization and favor regional nationalist policies.
What is left to be done from VAAs like aquienvoto.org?
Although VAAs can give academics a rich database, there are a number of methodological challenges that need to be overcome7, mainly regarding the representativeness of the sample. Indeed, if we want to make inferences on the positioning of the whole Spanish population, it is crucial that we acquire good quality data on the characteristics of users; something that has been proved difficult for online surveys. From aquienvoto.org, we are working to improve the process of data collection, providing users with the option to sign into an account where they can store their information and reply to surveys at any time. Nevertheless, we believe that more attention from Universities and governments should be given to these tools so that institutions and VAA organizations collectively work to make VAAs a better tool both for users and for the academia. Hopefully, that is what will happen in the next years to come.
Why are so many Catalans advocating independence? What would be the economic consequences of a potential separation from Spain? To find answers, BGSE students from the Master’s Program International Trade, Finance, and Development organized a talk on the economic effects of Catalan independence with Prof. Jaume Ventura. Prof. Ventura is a senior researcher at the Centre de Recerca en Economia Internacional (CREI), research professor at Barcelona GSE and member of the Wilson Initiative, a pro-Catalan-independence association of academics in the fields of economics and political science.
What is the optimal size of a state?
From a theoretical viewpoint, the ‘right’ size of a state is determined by a trade-off between two opposing forces. On the one hand, economies of scale and the border effect (i.e. political borders hamper trade) create a force towards larger countries. Such benefits are especially pronounced in areas such as economic markets and defense. On the other hand, heterogeneity of people’s preferences with respect to culture, the legal system or welfare, embodies a force for smaller countries. According to Prof. Ventura, these two forces have shaped the size and structure of the state in two waves throughout the history of globalization.
In the first wave, spanning from the Congress of Vienna to the beginning of the First World War, the number of countries more than halved, implying that states, on average, became larger. Political and economic integration proceeded hand in hand, and larger markets were created by sacrificing heterogeneity of preferences. After the Second World War, the second wave of globalization began. International trade reached higher levels and the number of countries multiplied to over 190. At the same time, international collaboration in the form of international organizations, such as the World Trade Organization, emerged. While this new era was characterized by political fragmentation regarding the nation state, larger markets were created through international cooperation and sacrificing economies of scope.
The creation of supra-national organizations enabled countries to exploit economies of scale irrespective of their size. As supra-national entities took over functions such as defense, which had previously mandated a larger state, even small states were able to thrive. At the same time, competencies such as culture, law and order and the welfare state remained on national agendas, as cultural globalization proceeds more slowly than economic globalization. All in all, it seems that the homogeneity of constituents’ preferences has become a more decisive determinant of a country’s size in the second wave of globalization.
The Catalan perspective
With this theoretical background in mind, Prof. Ventura turned to the specific case of Catalonia. First, he argued that small states in Europe, such as Norway and Switzerland, are competitive and wealthy. A potential Catalonian state with 7.5 million inhabitants would be larger than Denmark, Norway and Ireland, and only slightly smaller than Switzerland. Studies also find that the effect of size on economic growth depends on the degree of openness (Alesina, Spolaore and Wacziarg 2005). If a country is very open, size seems to have negative effects on growth. Catalonia, with a high degree of openness of 130%, could thus potentially grow faster if independent from Spain.
Next, Prof. Ventura focused on the long-run economic benefits of independence. If Catalonia became independent, this would imply giving up economies of scale arising from the union with Spain. However, these costs remain limited, in his opinion. The fixed costs of running a Catalan state have been generously estimated to be €2.793m which represents 1.4% of Catalan GDP, or €383 per Catalan citizen. Additionally, markets and defense have already been outsourced to the EU and NATO, suggesting that Catalonia would not lose out if it gave up the union with Spain (provided that it remained a member of EU and NATO). A major benefit for the Catalan economy would be the stop of fiscal transfers to the rest of Spain. Currently, taxes paid to the central government exceed public spending in Catalonia by €16.409m (8.4% of GDP). Moreover, current public capital in the region is the lowest throughout Spain. Public investment in Catalonia accounted for merely 8-9% of Spanish public spending, even though Catalonia contributes roughly 20% to the Spanish GDP.
In the short-run, there is a chance that costs might arise from retaliation by the Spanish state, and maybe others. However, Prof. Ventura estimates such costs, e.g. commercial boycotts, to be small and short-lived. He argues that retaliation would not be a sub-game perfect outcome, as most of the EU’s foreign investments and trade with Spain flows through Catalonia.
While the potential economic gains are substantial, Prof. Ventura emphasized that the heterogeneity of preferences between Catalonia and the rest of Spain remains the key reason behind Catalonia’s longing for independence. He pointed to his experience in the U.S., where the states enjoy a high degree of autonomy regarding education, justice, infrastructure, welfare and culture. In contrast, Spain’s central government dominates most aspects of public policy and previous attempts to increase Catalonia’s autonomy within Spain have failed.
While the future of Catalonia remains uncertain, Prof. Ventura advocated the right to self-determination and believes that “Catalan independence offers a unique window of opportunity to reform a bankrupt state and adapt it to modern times, both in Catalonia and Spain”.
By Hugo Ferradans, current student in the Barcelona GSE Master in Economics of Public Policy. Follow him on Twitter @Hferradans.
“In my over 50 years of academic life, the 1% has never had as much influence in shaping the knowledge of economics as it does now.”
UPF Professor Vicenç Navarro, author of Podemos’ electoral program, talks about the way economics is taught today and some of the policies put forward by Podemos.
Vicenç Navarro is currently a professor and the director of the Public Policy program both in Pompeu Fabra and John Hopkins University. Being one of the most internationally cited researchers in the field of social sciences, Vicenç Navarro is an economist, political theorist and sociologist who has been widely recognized for challenging neoliberal approaches to the study of economics. Together with professor Juan Torres, he is the author of the controversial electoral program put forward by Podemos, where they advocate for a strong public sector and welfare state, as well as a move away from an economy based on speculative industries like construction. Love-him or hate-him, Navarro’s strong opinions have been able to shake the current economic academia and Spain’s political scenario – and we are here to ask him about it.
Part 1: Reflections on the way Economics is taught today
Hugo Ferradáns (HF) – There is little doubt that neoclassical economics has contributed to a very large extent to the study of economics and social sciences. Nevertheless, it seems that this neoclassical school of thought has monopolized the economic syllabus in top universities around the United States and Europe, leaving alternative economic perspectives ignored.
You suggest in a number of articles that many of the economic policies that are being implemented currently in Europe come from specific power relations within the Eurozone (European Central Bank and the IMF against anti-austerity movements in Greece, Spain, etc.). In relation to the study of economics, how does the lack of teaching about institutions and politics in the economic curriculum, as well as the lack of debate against the foundations of neoclassical theories, are limiting our understanding of today’s economic and political scene?
Vicenç Navarro (VN) – One of the major problems we encounter in the production of economic knowledge is its excessive disciplinary approach. Actually, the academic institutions are usually divided by departments based on disciplines, one of them being economics. The reality that surrounds us, however, cannot be understood following the disciplinary approach. The understanding of our realities, including the economic ones, calls for a multidisciplinary analysis, with the understandings of the historical, political and social forces that shape and determine that reality. In order to understand the current Great Recession, for example, we have to understand how power—class power, race power, gender power, national power—is produced and reproduced through political institutions, as well as social and cultural ones. In other words, we have to comprehend how power relations shape the governance of our societies, including their economies.
Modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy.
The current economics, for the most part, do not do that. They specialize in branches of the tree without understanding, or even less, questioning, the nature of the forest. Moreover, they have given great emphasis to the methods, depoliticizing the realities of the economic phenomenon. Today, modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy. Currently, most of the major economic problems we face are basically political.
You cannot understand, for example, the current crisis in Europe without understanding the decline of labor income, and, thus, of domestic demand; this is the result of the changing power relations—primarily class power relations—that have occurred in the last thirty years. You can also not explain the crisis without understanding the enormous influence of financial capital on the European Central Bank. To try to explain reality by referring to the working of the financial markets as a point of departure is profoundly wrong and naïve. Financial markets have very little to do with markets. It was enough for Mario Draghi, the President of the European Central Bank, to speak a sentence, to reduce the interest rates dramatically.
The absence of the study of the political and social context, determined historically, makes current economics an apologetic message for current power relations, mystifying, hiding, and/or confusing the understanding of the economic phenomena. It is not surprising, therefore, that the critical traditions within economies are completely ignored or marginalized. It is predictable that current economists did not perceive the arrival of the current recession, which is a Great Depression for millions of Europeans. Only analysts from critical traditions were able to predict it. And we did it.
HF – Many people would ask why are historical and political contexts so ignored in the economics syllabus if they are so important to understand economics. Does this rejection come from a clash of interests between economic and political powers and Universities, or was it a slow transition towards a neoclassical orthodoxy led by the academia?
VN – The current emphasis on methods and its analysis of the economic reality without looking at the political context that determines it is a consequence of changes in the power relations in our societies. The apologetic function of current economies of the current power relations explains its lack of relevance. What we have been seeing since the 80s has been the enormous growth of income derived from capital, and the decline of income from labor. This has resulted in the drastic growth of inequalities.
The influence of financial and economic institutions in the production of knowledge is enormous.
But those who derive their income from capital have enormous influence on value-generating systems, including the media and universities. This is extremely clear in the US but is happening also in the European universities. Today, the influence of financial and economic institutions in the production of knowledge is enormous. They fund research, support economic journals, and shape, to a large degree, the academic culture in the area of economics. It is very similar to what happens in medicine where the pharmaceutical industry has a major influence in shaping clinical knowledge and practice.
In my over 50 years of academic life, never has the 1% (those who derive their income from capital) had as much influence in shaping the knowledge of economics. The situation in Spain is even worse than in the US, due to the lack of public funds for economic research. The major research institutions are funded by major banks or major corporations. This explains the dominance of the neoliberal ideology in most academic forums, journals, and major media.
HF – Does this influence go beyond universities? How does this affect democracy in Europe and the United States?
VN – The influence of what now is called the 1% on society affects all institutions that reproduce information and knowledge, from the major media in a country to the university, and now including the entire educational system, starting with the schools. The expansion of the teaching of economics to the school systems in an intent to expand a vision of reality that is in accordance with conventional wisdom in a country, the wisdom shaped by the 1%, and its allied classes (which includes approximately another 10% of the population).
Part 2: Public policy in Spain
HF – Moving now to policy in Spain, we would like to talk about the role of media in democracy. The importance of and the ways to achieve a plural media independent from public institutions and economic powers has been subject of intense debate over the past years due to its relevance to democratic quality. As an example, Prat and Strömberg (2011) suggest that to achieve this plural and independent media we need to encourage financially independent outlets. McChesney and Schiller (2003), however, focus on the importance of public media as a way to insulate outlets from being controlled by corporations.
In the economic program that Podemos presented, of which you are one of the authors, you suggest that there should be a “separation by law between the property of financial groups and communication outlets, thus ensuring the independence of all media companies from the government and large corporations” (page 10). Furthermore, you mention that there should be a “legislation that provides a minimum quota of independent public media outlets”, by which “no company could take more than the 15% of the total media market” (page 10).
Many people would question these policies, arguing that independence and quality in media markets are not necessarily achieved by constraining private companies and expanding public media outlets. Many examples of private media outlets that are independent of private corporations can be given, such as The Guardian, The New York Times and even La Sexta in Spain. How would an increase in the presence of public media outlets improve the independence of media from economic and political powers in Spain? Isn’t the problem of media independence about a casta that operates both at the private and public level?
VN – Today, financial capital—primarily banks and insurance companies—have the dominant voice in the major media. In Spain this is obvious. All major media are in deep debt and are in the hands of the banks. It is because of this that Professor Juan Torres and I indicated in our economic proposals for the new party Podemos that that linkage should be discontinued, because it enormously limits the necessary ideological diversity that should exist in any democracy. Today, there is no such diversity in Spain.
But that situation is not unique in Spain. I have lived for many years in the United States, teaching at the Johns Hopkins University for over fifty years, and ideological diversity is also very limited in that country. Rarely, if ever, will you see intellectuals such as Noam Chomsky in the major media. Incidentally, I have to correct you regarding The New York Times in the US and La Sexta in Spain. The largest groups of members on the Editorial Board of the NYT are related to insurance companies and banking. This explains the hostility of that daily to the specific single-payer proposal for reforming health care in the US. This proposal, put forward by the left of the Democratic Party and the labor union would be a model of the health care system that already exists in Canada, and would eliminate private health insurance within the publicly funded system.
And La Sexta is owned by economic and financial interests that also fund some of the extreme right-wing media, like La Razon. They allow some space for the left, but always in a very limited way. They expose those critical voices because they realize that the audience increases when critical voices are allowed. But the major owner supervises the production and do not leave much space for progressive forces.
HF – The economic program of Podemos also argues that it would encourage the presence of small and medium size companies to foster employment creation.
The Economist published an article called “Supersize me” (February 21, 2015) arguing that a lack of larger firms in Spain means fewer jobs and a less resilient economy. In particular, it mentions that “bigger firms tend to be more resilient in hard times than smaller ones. In Britain, for example, large companies – those with more than 250 workers – provide almost half of all private-sector jobs, compared with just a quarter in Spain. The Círculo de Empresarios calculates that if Spain had the same mix of firms as Britain, it would have lost half a million fewer jobs since the global financial crisis.”
From this perspective, what is attractive about medium and small size firms in an economy with such high unemployment rate, and what makes big corporations not a good option to overcome the challenges that Spain is facing today? How would this influence unemployment for young people?
VN – The major economic problems existing in Spain are not the size of the enterprises. Most of the largest Spanish enterprises used to be public enterprises that were privatized and run by friends of the governing parties. Many of them are less efficient than they were when they were public. Some of the major private banks that have run into major problems have been banks that used to be public. And even public banks were forced to act as private banks. And that is one of the major problems. Private banking in Spain is far too large. Spain is the country in the European Union with the smallest public banking sector. It is also one of the countries where it is most difficult to get credit. This, and the lack of demand due to the large reduction of wages (the lowest wages in the EU) and cuts in public expenditures (the lowest public expenditure in the EU) are the causes of the recession and limited recovery.
If Spain had the same percentage of adults working in the welfare State as Sweden, it would have about four million more people working then it has now.
The greatest need in Spain to restructure the economy, changing its dependency on sectors very prone to speculation, like construction. Also, contrary to what the 1% in Spain claims, the public sector is very underdeveloped. If Spain had the same percentage of adults working in the welfare State as Sweden, it would have about four million more people working then it has now.
HF – In your opinion, then, what would you say is Spain’s biggest challenge from an economic and political point of view, and what could the country do to overcome it?
VN – I would say that the biggest problem Spain is facing right now is the very limited democracy that it exists in the country. The transition from dictatorship to democracy in Spain took place in conditions very favorable to the conservative forces that controlled the State and the media. As a consequence, the Spanish state has a very limited democracy and underfunded welfare state. There is a need for a transition from the dramatically insufficient democracy to a real democracy, with active participation of the citizenship in the governance of the country.
Spain’s political class and institutions have behaved in an extractive manner. This situation is largely due to a structural system of rent extraction, both at a institutional and cultural level, that drives the creation of wealth to the benefit of a few.
By Hugo Ferradans, current student in the Barcelona GSE Master in Economics of Public Policy. Follow him on Twitter @Hferradans.
In 2012, MIT professors Daron Acemoglu and James Robinson published one of the most compelling and resourceful books I have read in the field of development economics: Why Nations Fail. Their work suggests that the existence of extractive institutions and an extractive political class constraints to a large extent the ability of a country to experience prosperity and economic success.
Acemoglu and Robinson define extractive institutions as those institutions that create a system that moves resources from the many to a small powerful elite. In this sense, institutions that are extractive do not secure property rights to the population, nor provide an unbiased justice system that caters for the interests of the powerless. Many examples are given: North Korea vs. South Korea, Mexico vs. the United States, etc., drawing the conclusion that, if a society operates under the rule of a state that fails to create institutions that are democratic, a state will be bound to fail and not achieve a decent level of prosperity.
Although Acemoglu and Robinson’s work focuses on the relevance of extractive institutions in developing countries, this article will show how the argument could be easily expanded to developed countries like Spain.
Indeed, after many years of economic boom where money was flowing ferociously into the economy, Spain appears to have reached an economic and political cul-de-sac. Where did all the money go? How can it be that Spain is now leading the charts of extreme child poverty in the European Union, and at the same time is the country with the highest number of high-speed trains and empty houses in Europe?
At this point is where Why Nations Fail becomes appealing to me. I put forward the idea that Spain’s political class and institutions have behaved in an extractive manner and that this situation is largely due to a structural system of rent extraction, both at a institutional and cultural level, that drives the creation of wealth to the benefit of a few.
It is important to clarify, though, that this article appreciates that the extent to which Spain’s institutions are extractive is not the same as the ones described in Why Nations Fail. Spanish institutions do secure property rights and provide certain mechanisms to achieve a satisfactory level of development and economic growth. However, the construction and housing bubbles, as well as today’s economic policies put forward by the conservative party Partido Popular, suggest how many institutions are fuelling a system that perpetuates a ruling elite without trickling wealth down to the rest of the population.
I would like to introduce, not only at a political-economy-theory level, but also looking at a number of historical qualitative and quantitative data, how Acemoglu and Robinson’s discourse is crucial to understand today’s political and economic situation in Spain, and how a move towards a greater democratic and prosperous country will only be achieved by a regeneration of Spain’s political class.
Some history: from the 17th century until today
The creation of a very dense and static political and economic elite in Spain can be traced back to the 16th and 17th centuries. The combination between an absolutist government and a system of privileges that encouraged the middle class to abandon productive work and constitute tax-free property entails, created an elite (the so-called hidalguía) that was characterized by a rejection to culture and class mobility. Indeed, this elite was very supportive of the emergence of rent-seeking structures, as seen in the massive increase of mayorazgos during the decline of the Spanish empire, which ensured that the hidalguía could not see their capital reduced but only increased. In this way, even though Spain was being hit hardly by an economic turmoil at the beginning of the 17th century, the elite managed to keep their wealth at the expense of the whole population.
Such mechanisms of extraction from the population endured continuously over history, protecting the power of the government, the aristocracy and the bourgeoisie 1. It was not until the Second Republic (1930-1936) that Spain’s political elite was questioned. The Second Republic was a period in Spanish history where the government started to impose a number of very progressive and democratic policies, and where the cultural elites started to have a say in politics. Nevertheless, this ‘insurrection’ ended up being highly suppressed by a coup d’état from the military, obviously led by the previous political elite. This caused a Civil War that ultimately drove Spain into 40 years of a dictatorial regime under the rule of Francisco Franco, who brought back the previous system of corruption and rent-extraction to the country.
After Franco’s death, the transition to democracy was the result of a compromise between the old dictatorship heirs and a new class of younger politicians that had been organized in underground movements. Under these circumstances, the new democracy inherited many of the ways of doing politics that were customary of the Francoist regime. It is certainly not surprising, thus, that such an extended and static elitist system continued until today. In fact, the development of rent-seeking institutions that provided systems of extraction is something so ingrained in the Spanish society that it endured after the transition to democracy.
The construction and housing bubbles
This article puts forward the idea that one of the major exponents of such a system were the construction and housing bubbles. A huge expenditure in public infrastructure, both at the local and state levels, as well as a facilitation of housing construction by the local and regional governments has been a distinctive feature of Spanish politics over the last decades. Although many politicians have tried to argue that such a level of investment in public infrastructure was a way to provide the population with a system of “common welfare”, this political discourse seemed to confuse allocating public resources for construction of essential public transport systems, like fast-train lines and airports, with the supplying of unnecessary infrastructures in order to get private gain, such as, for example, Castellon’s airport, which has been opened since 2011 but has not managed to attract any flights yet.
Where institutions create culture: Spain’s ‘culture of ownership’
The Spanish housing market has been a case-study for many economists for showing some unusual features. One of the most prominent ones is the level of homeownerships when compared to the average European countries– 87% of Spanish population is living in owned rather than rented houses, in contrast with the 60% average of Europe. Many politicians have encouraged this market structure by stating that Spain has an innate ‘culture of ownership’ as opposed to other European countries, and thus Spaniards should follow this ‘Spanish way of life’. Nevertheless, this was not the case not that long ago. In fact, in 1950, 51% of the population lived under a rented property, and even in some cities such as Madrid and Barcelona this figure could increase up to 85%, indicating that this ‘Spanish way of life’ was more imposed by public institutions than ingrained in the DNA of the Spanish population, something that is consistent with Why Nations Fail’s argument that culture does not precede politics, but rather politics creates culture.
This change was fuelled by the minister of housing in 1957, José Luís Arrese, who, after stating the famous quote “Spain needs to be a country of owners, not of proletarians”, presented a political project to confront the increasing number of shacks in the metropolitan areas of cities. In this project, Arrese committed to undergo a series of reforms, such as a massive investment to build new houses and fiscal reforms to provide the majority of the population with their “right for adequate housing”. Although the number of social houses built during this period of time were almost nonexistent, many of the reforms that characterized the last decades of the Francoist regime marked a point of inflexion in the emergence of a ‘country of owners’ in Spain. In fact, housing started to be seen by the political elites as a mechanism of social control by which the revolutionary desires of the working classes could be brought down. Making the working classes subordinates not only to the state, but also to the national banks that provided them with credit, gave the regime a new sense in the ways they could control the population and undergo their political project. Expanding ownership and the housing sector would not only bring economic growth, but also political stability. This was clearly stated by Arrese, who mentioned in a speech in 1957:
“Man, when not given a proper shelter, tries to take over to the streets and, controlled by his bad mood, becomes subversive, bitter and violent.”
Nevertheless, the poor social housing provision and the systematic speculation that gave the elites notorious economic revenue produced an environment of total political disaffection and lack of credibility. In fact, many of the national companies that created this boom in housing during the 60s were extremely linked to the richest families in the country, some members of which were even part of the political and administrative elites as well.
Furthermore, this desire to build a culture of homeownership further continued after the implementation of democracy, indicating again how housing was a mechanism of the elites to satisfy their interests. In 1985 and 1988, new reforms undertaken by the socialist government gave homeownership fiscal preference over renting. Buying a house could decrease by 15 to 17 percent the amount of income tax paid to the government. Also, Spain is the country with the lowest expenditure in social housing in Europe, spending 48.5 Euros per capita in contrast with the 117.06 of the European average. In this way, social housing did not expand in the years of the housing bubble because it ended up not being profitable for building companies. Thus, although the demand for social housing was increasing massively due to the systematic rise of housing prices in the real-estate market, the supply of social housing remained static, making it difficult for low-income families to buy a decent house.
The systematic fiscal compensations and the creation of a general belief by politicians that a house was ‘the best investment because prices never went down’ produced a general propensity for buying instead of renting. However, although the policies regarding tax discount for house ownership were massively applauded by the public, the real effects of these policies were neutral for consumers. The deduction of the tax for homeownership was actually compensated by the overpriced houses in the market, ultimately making the sellers, being big building companies and private banks, the only ones who benefited from this system of rent extraction. Furthermore, the political class was so linked to this culture of ownership and speculation that they would intensely benefit from the increase in prices and the rise in construction. In fact, many of the MPs in the national parliament owned more than three houses in 2011.
A political framework: the laws of urban planning
Besides the fuelling of a culture of ownership, Spain’s political class also created a framework in which speculation could operate freely, mainly taking the form of laws of urban planning that favoured mass construction.
In 1956, the Spanish government put forward the first law of urban development, which gave local councils the competencies to define whether an area was urban (suitable for building) or rural (unsuitable for building), as well as to determine the density of the construction to be taken place, making local governments able to redefine the land value of a specific area within a municipality.
However, this law was rather restrictive in some of the requirements for determining whether a piece of land is fit for urban development. To regulate and fuel the massive construction of houses during the housing bubble, successive governments put forward new laws that eased these requirements, such as the Law 7/1997 of 14th of April 1997 applied by José María Aznar, which allowed urban development in virtually any land throughout the country. In this way, local governments were able to easily increase the land value of particular unused areas by giving them an urban title. This fed the emergence of corruption during the housing boom years, since local governments could easily benefit the economic elites by increasing land values through giving land areas an urban title.
Furthermore, this new law gave local authorities the ability to issue building permits according to their local urban plan. In possession of a building permit, landowners were entitled to start with the building or urbanization project, having, however, the legal duty to give 10 percent to 15 percent of the total construction costs of the new urban development to the local authority. Both the state and landowners, thus, had very strong incentives to expand urban land, since local authorities could benefit financially from expanding areas of urbanisation and landowners could retain much of the value of their already valuable lands. Many municipalities were intensely financed by these forms of revenue, as seen in Valencia.
In addition, the decisions about the land title given to certain areas within a municipality tended to be signed by local authorities and private companies privately through the so-called convenios urbanísticos, which actually lacked any kind of transparency and regulation by the state. Politicians and private companies could negotiate many of the conditions for urban development in a city without a formal legal framework that regulated a possible case of interests in the negotiation of the convenio urbanístico.
It is important to differentiate how Spain’s legal framework is different from other similar developed countries in Europe. Indeed, many countries give councils the ability to decide the nature of lands in cities. Cities in France and Germany, for example, are also able to do so. In Spain, however, there is a system that gives private companies and local authorities incentives to expand urban land and build. Since local governments will get a big amount of revenue from giving building permits to private companies, they will deliberately do so to finance their debt. Also, since the negotiations between public and private actors were not regulated, local authorities and companies set urban policies to generate capital gains for the elites at the expense not only of creating a bubble in the economy, but also at the expense of environmental deterioration too.
The inefficient judicial system: a matter of resources?
Lastly, this article will briefly focus on Spain’s judicial system. On the basis of Acemoglu and Robinson’s (2013) theoretical framework, a state that is not providing a system that “prevents theft and fraud” would be “failing to secure property rights and justice” among the population, and thus becomes extractive. In this sense, if Spain is not promoting a system that is independent from other actors such as the political elites and that controls the evolution of extractive activities from any agent in the economy, especially from the ones in power, it will be contributing indirectly to the existence of this rent-seeking society.
The current judicial system in Spain is very inefficient. The average time that takes a trial to proceed with a resolution is one of the highest in Europe, sometimes taking 10 year to know the outcome. The media and many politicians have argued that this problem is due to the lack of resources given to the judicial institutions. However, Spain’s expenditure on justice is 50% higher than in France, and only 10% lower than Germany. Also, the number of judges per 100,000 inhabitants is similar to the one in France.
The problem, thus, must go beyond a simple analysis of the resources given to its institutions. One of the main problems, and it is indeed connected to the construction bubble, is the overlap of the political class and the judicial system. The two main parties, PSOE and PP, control the judges through the General Judicial Board (CGPJ), the major institution of Spain that promotes the independence of the judicial system from the parliament and the senate. In fact, although in 1980 a law that established that 12 of the members of the CGPJ were chosen by other judges was put forward, this law was derogated in 1985, giving the Parliament the power to choose all of the 20 members of the CGPJ. From this moment on, the CGPJ became a body used by the political class to rule for their own interests, where both political parties are constantly replacing the members of the chamber every time they come into power. It is not surprising, thus, that a study put forward by the World Economic Forum places Spain in the 60th position out of 133 in terms of the independence of the judicial system in front of the parliament, the senate and many private companies, being behind countries such as Namibia, Botswana and Gambia.
Regarding the cases of corruption that rose during the boom years, many of the trials about political scandals are still not resolved because of both the inefficiency of the judicial system and the poor dependence from the political parties that the system of justice has. One of the clearest examples is the Gürtel case, where the power of the political parties over the justice system was uncovered by the suspension of the judge Baltasar Garzón, the one that started its investigation. Indeed, when many front-line politicians from the government of Valencia and the Autonomous Community of Madrid started to be accused of bribery, money laundering and tax evasion in relation to the construction activities, a number of right-wing parties, of which some were involved with the politicians accused, put forward a lawsuit against him for causes unrelated to the Gürtel case.
After a long process of investigation, the CGPJ decided to move Baltasar Garzón aside the case and suspend him as a judge for 10 years. Currently the investigation is still ongoing. Most of the front-line politicians that were related in the case, such as Francisco Camps, were not found guilty.
The fact that the Spanish judicial system is failing to impose the rule of law to prevent theft and fraud is not a matter of opinion. Many studies have analysed the trust that the public has towards the judicial system, finding that it presents one of the lowest in Europe, being at the same level as Greece and Bulgaria. The effects that this can have on the evolution of further rent-seeking activities similar to the housing bubble are massive, since politicians know that being involve in corrupted activities will not be punished by law.
Challenging the establishment
This article has focused on the manifold ways in which Spain’s institutions have created a system of rent-extraction, with specific attention to the construction and housing bubbles. Although this issue calls for a more extensive and resourced analysis, I believe that Acemoglu and Robinson’s theoretical framework provides a good starting point.
This article has concluded that Spanish institutions are extractive for the following reasons. First, it was argued that Spain has been historically a country with a strong political elite that rules for the interest of the elites. Institutions constantly created a culture that perpetuated a system of rent extraction, as seen in the creation of the mayorazgos, as well as the ‘culture of ownership’ so acclaimed during the housing boom years. Second, institutions and major politicians not only promoted a certain culture that benefited them, but also a national administrative and political structure that fuelled the construction sector, and thus ultimately moving public resources into their hands. Finally, politicians also fuelled the creation of a non-independent judicial system that ensures that corruptive activities are generally not charged by law.
It is crucial that Spanish citizens challenge the establishment. Some moves from new political parties, such as Podemos, appear to be opening a door for this. Nevertheless, it is still not clear how the political scene will change in the following months. There is much to come, and hopefully Spain will realize about this vital challenges.
Víctor Burguete ’11 (International Trade, Finance and Development) is an Economic Researcher and Public Policy Analyst at IESE’s Public-Private Sector Research Center (IESE-PPSRC) in Barcelona. In this post, he shares the process of preparing a policy brief on Spanish policy reforms and provides an overview of the brief’s findings.
Preparing a Policy Brief like this took me over a month. It is necessary to consider than working in a research institution implies getting involved in many projects and there is usually less time than what I would like to devote to one specific project. In my opinion, it is very important to work open-minded and to continuously consider the possible connections among different projects. In the case of this Policy Brief, most of the data (international economic policy recommendations) were collected during the past few months. In late September I proposed this topic and the IESE-PPSRC research center decided to inaugurate these series of papers. After reviewing the literature (Table 1), I analyzed the data and I started creating some graphs and building the story I wanted to tell. Of course, the final text was reviewed several times until it was finally published.
“Spain’s response to EC and OECD economic policy recommendations” analyses the overall reformist progress of the Spanish Government in an international perspective. According to the international assessment, Spain ranks as one of the top reformers in the Euro Area and the EU as a whole. A second insight one gets from our Policy Brief is that Spain’s delivery, in relative terms to other countries, accelerated between 2011 and 2013.
Of course, this is the general trend and the Policy Brief offers details on the progress in the 18 policy sub-areas we cover at the SpanishReforms project, including how the reform priorities prescribed to Spain by these institutions have changed over time. Substantial progress is recognized in addressing the financial system reform, mainly in the area of recapitalization and restructuring but also by adopting other financial measures. However, both the OECD and the EC point to active labour market policies and professional services as the main structural reforms lagging behind.
More information in www.spanishreforms.com, a new an academic, non‐governmental website that aims at being a useful reference for those interested in independent, rigorous and up‐to‐date information about the Spanish economy and its economic policy reforms.
Ryan D. Griffiths, Pablo Guillen, and Ferran Martinez i Coma of the University of Sydney released a working paper (PDF) in September with a model of Catalan independence. The abstract:
We propose a game theoretical model to assess the capacity of Catalonia to become a recognized, independent country with at least a de facto European Union (EU) membership. Support for Catalan independence is increasing for reasons pertaining to identity and economics. Spain can avoid a vote for independence by effectively ‘buying-out’ a proportion of the Catalan electorate with a funding agreement favorable to Catalonia. If, given the current economic circumstances, the buying-out strategy is too expensive, a pro-independence vote is likely to pass. Our model predicts an agreement in which Spain and the European Union accommodate Catalan independence in exchange for Catalonia taking a share of the Spanish debt. If Spain and the EU do not accommodate, Spain becomes insolvent, which in turn destabilizes the EU. The current economic woes of Spain and the EU both contribute to the desire for Catalan independence and make it possible.
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