Tuesday, November 29, 2011

Corruption to the fore

In the last few weeks, disturbing allegations of corruption have emanated from all sectors in Spain. Today, a major paper reported that directors of Caixa Penedes (which was absorbed by another bank and subsequently bailed out by the state) gave themselves pensions worth €20 million. Meanwhile, a member of the royal family is accused of siphoning public funds from a nonprofit in Palma de Mallorca, the chief-executive at construction conglomerate Sacyr was sent packing after betting against his own company, and a judge is investigating allegations of corruption among members of parliament.

Cronyism, bribery, and embezzlement has always been looked on with a sort of amusement in Spain. The classic example if the Marbella city council. One city councilwoman was ousted after using 800,000 euros of public funds to purchase champagne. This after two former mayors had accused each other of embezzlement on live TV - and both turned out to be completely correct. One went on to marry a famous singer; another later owned a football team.

Today, Spain is ranked 30th in the corruption perception index. This seems quite dire considering that the likes of the UAE and Qatar - which recently bribed its way to a World Cup - are ahead, but perhaps should be taken lightly since the United States is also ranked only 22nd.

Wednesday, November 23, 2011

Hope rests in reforming the pulic sector

President-elect Mariano Rajoy’s announcement on Sunday night that his first action in office would be to meet with Spain’s 17 provincial leaders could spell big news for the debt-ridden nation. Having always grumbled about the cost of decentralization, Rajoy now has the political mandate to wrest duplicative powers away from provinces, making government smaller and more efficient.


Rajoy is hoping Spain can overcome its post-dictatorship fear of central government that has led to a maze of interdependent municipal, regional, and federal bureaus. Today, for instance, one has to visit an office at each level to get a national ID card (submitting paperwork and paying fees at each). The World Bank placed the nation in the 133rd spot for ease of starting a business due to the litany of legal permits required. Spanish people use the term “vuelva usted mañana” to describe the bureaucracy’s slow pace.


The outgoing socialist government cut as much around the fat as it could with hiring freezes and wage cuts but it did not advocate streamlining the levels of government. Indeed, there has never been a publically acknowledged government study on whether it makes economic sense to have different standards of primary education and unique methods of healthcare delivery in each province.


Spain’s public sector predicament is also found in Italy, Greece, and Portugal. A recent analysis by German and Austrian central bank economists found that those countries’ public sectors are 20-60% larger than Germany’s as a share of the work force, without an increased tax base. It also found that they had the lowest public sector performance indicators among EU members. Combined, the two factors are a major drag on overall economic productivity.


Rajoy will begin by altering labor laws to relax hiring and firing standards, removing risk from business owners’ balance sheets. It’s a positive start but let’s hope he and his counterparts in other new governments take advantage of a unique opportunity to change how their countries’ public sector is structured.

Saturday, November 12, 2011

From the Basement to the Boardroom

The IBEX-35 is an old boys club, there’s no way around it. The companies have been around for an average of 67 years and the only recently founded companies are in relatively new industries: alternative energy (Gas Natural, SA) and business services (Indra, SA).

The US also has its industrial-age barons and behemoths, but what about Amazon, Google, E-Trade, Ebay, and Facebook, all founded after 1994? There is nothing in Spain that can remotely match that growth trajectory.

It’s probably unfair to cite all those tech examples. The Silicon Valley feeding frenzy that started with Netscape in the 1990’s has never been duplicated, anywhere in the world. Spain doesn’t have the network of programmers, seed funding, and research institutions that would help tech companies grow – much less all of those concentrated in one place like Silicon Valley.

But there are examples in other sectors. Nike, Bed Bath & Beyond, and Victoria’s Secret were all founded in the 1970’s. Capital One, the credit card company, was founded in 1988! There are 6 financial institutions in the Ibex-35 and none were founded after 1965.

There are several reasons that so few young companies are among Spain’s giants. The first is the dynamics of the local market. Due to vast regional differences, companies need multiple strategies just to conquer Spain. Mutua Madrileña, the auto insurer, is an example. In the early 2000’s they had 40% market share in Madrid and just 3% in the rest of Spain. To enter Catalunya, they had to downplay associations with Madrid by calling themselves just MM or “La Mutua.”

Then, once you conquer Spain you still haven’t really gotten anywhere in world terms. You need to expand to Europe or Latin America – again, necessitating new product and marketing strategies, in addition to long-distance logistics. In the US, by comparison, if you have a nationwide presence you reach 25% of the rich world. And if you’re selling on both coasts you already have the logistics wherewithal to expand internationally.

Finally, there is a cultural factor. John Q. Spaniard opens up a shoe store or a bookshop to earn a modest living, not to sell online or ship to Abu Dhabi. American small businesses are more likely to have multiple locations and multi-channel presence.

Again, I’m not suggesting Spanish companies are badly run. But it certainly would be interesting to model economic growth against the presence of young companies that have reached a critical mass. Let’s see if I can find an academic with some on his/her hands...

Sunday, November 6, 2011

Playing Politics in a Debt Crisis

With Spanish general elections on the docket for November 20, it is interesting to see how candidates from opposite ends of the political spectrum are reacting to the various policy options to reduce Spain’s government debt. First, a run through of the key players:

Jose Luis Rodriguez Zapatero
Outgoing President, Socialist Party
The outgoing President's 8-year reign has a critical influence on these elections. Lauded for a social policy that brought convergence with the rest of Europe, Zapatero will feel he was blamed unfairly for the economic crisis in Spain. However, he has proved utterly incapable of making Spain’s government more efficient, instead granting even more autonomy to regional governments.

Alfredo Perez Rubalcaba
Presidential Candidate, Socialist Party
A former pilot and chemist, Rubalcaba has been the socialist party’s utility man, first as Minister of Education under Felipe Gonzalez in the early 1990’s and then as Minister of the Interior for Zapatero. Has always served with distinction but never really become a champion of the people. He's had a hard time distancing himself from Zapatero's perceived failures.

Mariano Rajoy
Presidential Candidate, Conservative Party
Twice embarrassed by Zapatero in previous elections, Rajoy has largely kept his mouth shut and reminded voters that Rubalcaba and Zapatero are responsible for Spain’s problems. It’s been a good enough strategy to build a double-digit poll lead. He has attributed his silence on economic issues to an uncertain economic environment where promises are difficult to keep, but some suspect he is keen to avoid espousing unpopular measures.

And now, the issues...

Issue 1: Taxes
Here Rubalcaba and Rajoy break cleanly along ideological lines. Rubalcaba wants to institute a special income tax for wealthy individuals and raise sales tax for certain items. Rajoy opposes both, favoring trickle-down economics such as homebuyer tax credits and business tax breaks.

Issue 2: Privatization
Zapatero secured congressional approval to privatize Spain’s lottery and sell concessions to manage the country’s two biggest airports. These were courageous decisions meant to put overcoming the looming government debt over his political beliefs. Because both measures were unpopular, Rajoy stridently opposed them and the sales were eventually scrapped amid flimsy market conditions. It’s very probable Rajoy will do an about-face once elected.

Issue 3: Size of Government
Spain has one of Europe’s most complex bureaucracies. In a country of just 48 million people, many of the 17 provinces have full autonomy in spheres ranging from education to police forces to healthcare. There is a desperate need to trim the fat and reduce the paper pushing. But the issue is strictly political. Every time anyone speaks of reducing the size of government, the linguistic minority regions cry wolf because the memory of Francoist oppression is still relatively fresh. It’s unfortunate Zapatero did not tackle this because only a liberal leader could pull it off.

Issue 4: Healthcare
Rajoy’s conservative party quietly embraces privatization of healthcare, outsourcing management of public hospitals to the private sector in two large provinces. However, the national government does not have the right to legislate about healthcare for each province without a change to the constitution.