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Economic Analysis

Foreign investment in Spain

Foreign investment in Spain

By | Economic Analysis
 
Since the signing of the economic and military agreements with the United States, in 1953, that marked the beginning of the end of the isolation of Spain in the international scenario and, even more so, with the Spanish incorporation to the European Economic Community, in 1986, foreign investment in Spain grew to unprecedented levels. However, it is useful to shed light on some details that contribute to dispelling myths and pre-established ideas.
According to a study by the D & B consultant for 2017, only 2% of the companies located in Spanish territory are foreign. We are talking about some 18,205 active companies in the country that, paradoxically, account for 26% of the total (380 billion euros). Foreign companies, worth pointing out, employ 970,000 workers (19% of the economically active population). In terms of geographical location, 40% of commercial companies go to Madrid, 29% choose Catalonia and 8% are based in Andalusia.
The case of Catalonia deserves a separate line: according to fDi Markets (the largest online database of foreign investments), Barcelona was -in 2015- the second European city by volume of foreign investment (after London) and the sixth city in Europe by the number of projects. Catalonia is, historically and in recent years, the fourth region in Europe (first in continental Western Europe) in foreign investment volume.
And what are the business opportunities for foreign companies that decide to settle in Spain? Let’s see some statistics. The trade takes 25% of the total. The construction follows with 15%; business services, are next with 14% and the industry is fourth with 11%. It is no coincidence that these same sectors stand out among national companies (among which, however, construction exceeds trade). Is the weight of foreign companies decisive in the sectors in which they operate? Well, we can say that they cover 9% of the energy market; 7% in financial intermediation and 5% in telecommunications.

 

Separate paragraph for an analysis of commercial and financial risk of non-Spanish institutions. The levels of risk they present are lower than their national peers: 29% have a high or medium-high risk compared to 36% of Spanish companies, while 71% of foreign companies have low or medium-low risk levels, compared to 64% of Spanish companies.

The vast majority of foreign investors agree that Spain has many clear advantages when it comes to settling in: the flexibility and adaptability of economic operators, the quality of life offered by the country, its cultural proximity to Latin America (where several Spanish multinationals are located), the rise of tourism, the efficiency of its transport network and the development of renewable energy. As an incentive for the future, Spain aspires to become one of the world’s leading research players.

The other side of the coin is the obstacles of the Spanish administration: the complexity of starting a new company, and the lack of relevance of the Spanish market compared to other Western countries. We would need several more pages to analyze the complexity of the Spanish legislative system, due to the presence of 17 Autonomous Communities (comparable to the American states, the Italian regioni or the German Länder), which is also an obstacle to investment.

After a brief analysis of all the factors, we can conclude that Spain undoubtedly has unique and attractive characteristics that make it an unavoidable destination for foreign investment.


About the author:

Eduardo Fort holds a degree in Political Science from Complutense University of Madrid. He has participated in academic projects related to History of Ideas and Political Theory. He has collaborated with various media – newspapers and television- as an international analyst and specialist in Latin America.

Crisis 2008-Keynes

Global Financial Crisis in 2008 and the Return of Keynes

By | Economic Analysis

Introduction

The 2008 crisis finds some similarities with the Great Depression. In both cases, there were sharp and unexpected economic collapses, they both started in the United States, and both rapidly spread to the rest of the world. Today, the financial system is more complex and the economic ideas are not only sustained on a theoretical construction. In fact, nowadays there are financial interests from different institutions with different economic and political power. Keynes not only tried to expose the deficiency of the predominant ideas in his days, but he also substituted them for an alternative analysis –The General Theory-. Between World War II and his death in 1946, Keynes contributed to the creation of an institutional order in Bretton Wood that sought to avoid another crisis of similar consequences (Knoop, 2004, 39).
The Keynesian recipes worked from 1945 until 1973, when the oil crisis started a completely new scenario of coexistence of inflation and unemployment (ibid, 105). This circumstance had not been anticipated by Keynes because in 1973, for the first time, inflation was not based on demand but in cost (prices grew because energy and oil prices went up). Without economic recession and demand, prices kept rising, so demand inflation became cost inflation. For the first time, problems of unemployment and inflation coexisted and Keynes’ policies were replaced by Monetarist theories (ibid, 55).
 
The subprime crisis of 2008 was a new stage of the crisis that made unemployment coexists with a deflationary situation instead of with inflation, i.e. there was unemployment with lower prices and deflation. At the beginning of the crisis, deflation came with the expectation of low prices. That, along with the fact that many people lost their jobs and consequently their purchase power, delayed consumption. This situation would have jeopardized the economy as it would have made prices fall even below the production costs, with the resulting loss of the companies. However, Keynesian theory was resurrected and his policies provided a solution.
 

Keynes’s theoretical frame and perspective for the 2008 crisis

 
The 2008 crisis was a liquid assets crisis where the markets’ uncertainty played the main role in individuals’ decisions. In the General Theory, Keynes placed special emphasis on the agents’ expectations. This way, any economic forecast becomes uncertain, and crises are tied to changes in the expectation of the economic actors causing “prices reflect the market sentiment on the value of the assets rather than investors’ decisions based on discounted expected returns” (Bilginsoy, 2015, 294). According to Keynes, the investors’ expectation is not only determined by the expected efficiency of a certain asset, but by its animal spirit. Keynes believed that when uncertainty becomes higher, economic agents generally prefer liquidity overspending, and as a consequence of consumption, investment, and demand are reduced (Knoop, 2004, 43). The preference for liquidity in the subprime crisis was, therefore, a natural consequence of a dynamic economic system.
The most common explanation of a crisis for Keynes is not the rise in taxes rates, but a collapse in the efficiency of the capital. Furthermore, pessimism and instability that comes with the breakdown in the capital efficiency provoke that people prefer liquidity, which assumes a decrease in investment. (Bilginsoy, 2015, 267-268).
 
The tendency of Western economies in the years previous to the 2008 crisis was related to the concept of the liquidity trap, analyzed by Keynes. Liquidity among the investors generated new investments due to the high expectations of the economic boom, but the recession came, monetary policy also became very inefficient. The 2008 Crisis is also a crisis in the effective demand; this means that most people prefer liquidity. The question that arises here is how the subprime crisis originated in a financial world can have effects on the demand and the real activities of the economy. The Keynesian theory argues that the explanation is on money neutrality. The classical approach considers that changes produced in the money supply will only affect nominal variables (the price level, nominal wages, and nominal output), and not the real variables (real output, unemployment, labor, capital, and technology). This is known as money neutrality (Knoop; 2004, 36). Unlike Classical economists, Monetarists believe that this so-called money neutrality is only held in the long run. The reason for this has to do with inexact information and price misperceptions. However, for Keynes money is not neutral since it constitutes part of the banks’ liabilities. Banks have assets in the form of money because those assets will be validated by liquidity fluxes coming from companies, families, and even states. Therefore, according to Keynes money is not merely a means of exchange, but a tool to finance investments and to buy financial assets.
 

Keynes’ recipes for the 2008 Crisis

The financial crisis of 2008 had two main problems; unemployment and deflation. Keynes provided the answer to combat the two dilemmas simultaneously by stimulating the global demand. For such a purpose, the recipe of what should be done is simple: lower taxes, lower interest rates, raise public spending and reduce the exchange rate to make export selling more competitive (Knoop, 2004, 42).
 
However, today’s world has some limitations to the Keynesian model. Nowadays, the main problem is not inflation as it was in the 50’s and 60’s (ibid, 48). Furthermore, in those years, employment was always below 8% (ibid). In Western countries, especially within the frame of the European Union, the monetarism and dominant discourse has been to restrict budgets, cut public spending, and raise taxes. Despite this, the solution from a Keynesian perspective is quite different: lower taxes and increase spending. The problem is that by doing this, countries would generate deficits and public debt, and countries like the EU members cannot any longer use the monetary policy instruments that Keynes used since they do not control over interest rates and/or the exchange rate.
 
As we can see, the complex world in which we live nowadays makes harder to implement Keynesian policies again. Back in the 30’s, these countries could maintain a policy of lowering taxes and rising public spending, consequently increasing the deficit and public debt indefinitely (Galbraith, 1975, 156-157). Today, these countries have signed a stability pact through which the EU disciplines the public spending and the public debt of each member. As for the problem of the high unemployment, Keynes would recommend expansionary policies for countries with a high rate of unemployment, sustained in time. This, along with tax cuts and higher government spending should stimulate the economy. The problem is that the EU membership limits these possibilities as public deficit must not exceed 3% and public debt cannot go over 60% according to the Stability Pact.
 
In the 2008 crisis, the Federal Reserve System and the European Central Bank tried to lower interest rates with the goal of people keep investing, and counteract the subprime crisis. However, in a context of uncertainty, people rather use cash since it gives more ‘protection’ to their real economy. As an alternative to the crisis, Keynes would propose in general terms; capital control and regulation. This would enable liquidity towards desirable investments.
 

Conclusion

The 2008 crisis revealed the following paradigmatic points: a belief that economic risk can be quantified, that financial liberalization brings virtues, and that the advantages of markets depend on banks intervention. It is very difficult to have a new General Theory nowadays. For that to happen, the current system should go back to the animal spirits of human behavior.

References:

-Cihan Bilginsoy, A History of Financial Crisis: Dreams and Follies of Expectations (Economic as Social Theory) (2015).
-John Kenneth Galbraith, The Great Crash of 1929, (1975).
– The Stability and Growth Pact (SGP), Economic and Financial Affairs (2015) European Commission.
-Todd A. Knoop, Recessions and Depressions / Understanding Business Cycles (2004) New York.

Argentina, the eternal Phoenix

By | Economic Analysis

Eduardo Fort

Last 31th of May and after an intense parliamentary session, the Argentine Senate approved the legislation that limits the tariffs for communal services (gas, water, electricity), which suffered a runaway rise since the last devaluation of the Argentine peso. President Mauricio Macri, as he had anticipated (and, in fact, signed previously) vetoed the law, arguing that the cost of denying the fare reality[1]  would amount to around 110 billion pesos (approximately 3,800 million euros)[2].

This measure marks the umpteenth attempt of the Argentine president to normalize the socioeconomic situation of the South American country. Throughout its recent history, Argentina was characterized by taking unexpected and, in many cases, contradictory paths. Liberal, conservative, social democratic and populist, Argentine has also protected Nazis and war criminals fugitive since the end of the Second World War. However, it has also been one of the first countries to recognize the State of Israel[3], an ally of the United States during the Cold War[4], and an enemy of the United Kingdom during the Falklands War. It seems like the main characteristic of Argentina throughout the 20th century has been uncertainty. Despite 2018 is the 35th anniversary of the Argentine democracy (of full force and undisputed good health), it is worth clarifying that only in 1999 was the first transfer of command between a democratic president and a counterpart, under normal circumstances[5].
 
The rise to power of President Mauricio Macri, which took place on December 10, 2015, marked the first electoral victory of a candidate not emerged from the two historical political parties in Argentina: the Justicialist Party (founded by Juan Domingo Perón in 1946) and the Radical Civic Union (founded by Leandro N. Alem in 1891). Throughout two and a half years of government, President Macri promoted several measures with the stated objective of “making Argentina return to the world”[6], to turn the country of Lionel Messi and Pope Francisco into a reliable place, respectful of the Rules and attractiveness for investors. Quite an odyssey!
 
In spite of everything that I have said so far, there are reasons for optimism because the numbers are on our side. Argentina is the third most developed economy of Latin America after Brazil and Mexico. Argentina is also a member of important international organizations such as the G-20 and the G-77. It has a GDP (nominal) around 450 billion euros and a GDP per capita (nominal) of around 11 thousand euros. The main asset of the country was and still is, the immensity of its natural resources; as an anecdote, it is worth saying that, at the beginning of the 20th century, the country was already known as ‘the world’s breadbasket’. Argentina not only has an important agricultural wealth but also an enormous mining, gas and oil potential. Furthermore, the country also has vast reserves of fresh water, lithium, and phosphates. With a thriving service sector, there are already numerous Argentine companies with an international presence and some of them are even listed on the New York Stock Exchange[7].
 
With the approval of the International Monetary Fund (institution to which Argentina returned[8] after a long time)[9] and the support of front-line countries (such as the United States, Japan, France and the United Kingdom)[10], the second decade of the 21st century can be the take-off platform that Argentina not only needs but is also looking for.

Quick facts about Argentina

Argentina, quick facts (1)

Argentina, quick facts (2)


About the author:

Eduardo Fort holds a degree in Political Science from Complutense University of Madrid. He has participated in academic projects related to History of Ideas and Political Theory. He has collaborated with various media – newspapers and television- as an international analyst and specialist in Latin America.

Sources:

[1] In Argentina, due to policies designed by the government of Néstor Kirchner (2003-2007) and Cristina Fernández (2007-2015), large sectors of the population are benefited by a system of subsidies for energy consumption.
[2] Braslavsky, G (2018) Tarifas: Mauricio Macri vetó la ley en tiempo récord y se endureció con el peronismo. Clarín. Available online: https://www.clarin.com/politica/macri-veto-ley-tiempo-record-endurecio-discurso-peronismo_0_HkDzglA1m.html [Last access: 07.06.2018]
[3] Argentina recognized Israel on February 14th 1949, less than a year after the proclamation of the State of Israel.
[4] Argentina collaborated with the United States providing “military advisers” for the counterinsurgency in Central America, as well as joining the US boycott to the Moscow Olympic Games in 1980.
[5] In 1989, president Raúl Alfonsín had to leave office six months earlier. In 1995, his successor Carlos Menem was re-elected.
[6] Cué, C (2017) Macri: “Los argentinos dijeron basta de echar la culpa al mundo de lo que nos pasa”. El País. Available online: https://elpais.com/internacional/2017/02/23/actualidad/1487876091_370254.html [Last access: 07.06.2018]
[7] To mention a few: the Globant computer, the Mercado Libre that buys and sells platform, or the Macro and Supervielle banks. To these it should be added Corporación América (which controls 51 airports around the world) and the energy companies Central Puerto, Genneia and Pampa Energía.
[8] Todo Noticias (2018) Macri: “Decidí iniciar conversaciones con el FMI” (Video file). Available online: https://www.youtube.com/watch?v=YTiTFcACJKU [Last access: 07.06.2018]
[9] Viaña, D (2018) ¿Por qué Argentina ha tenido que pedir otra vez ayuda a su ‘odiado’ FMI? El Mundo. Available online: http://www.elmundo.es/economia/macroeconomia/2018/05/10/5af34989e2704eb1158b46a9.html [Last access: 07.06.2018]
[10] Rumi, M (2018) La Argentina recibió el apoyo de países clave en el directorio del Fondo. La Nación. Available online: https://www.lanacion.com.ar/2133945-la-argentina-recibio-el-apoyo-de-paises-claves-en-el-directorio-del-fondo [Last access: 07.06.2018]

Looking up north: a brief perspective on Finland and its unique position

By | Economic Analysis
Even though Finland is part of the Nordic countries, its context has not always been the same as its Nordic neighbors. Finlands geopolitical position has made the country more prone to be involved in wars and forced it to adapt its economy to its own particularities. This divergence from other Nordic states is particularly noticeable in the labor market and the economic relations of the country.
Finnish economy has always been more susceptible to crises. While the industrial sector was already strong in other countries of the region, Finland still based its economy mostly on agriculture. It wasn’t until the thirties that there was a rapid growth in industry, construction, and service sectors in Finland, which completely changed the situation. As a consequence, the country transformed its GPD, and while agriculture is almost irrelevant nowadays, the services, industry, and construction sectors are still prominent. One main underlying factor of this transformation is the famous Finnish education system. As early as in the thirties, 70% of the population was able to both read and write. At the time, there were technical institutes for students that wanted to obtain an intermediate level technical training, as well as business schools and technical universities. Already back in those days it was equally important to have a university degree or a vocational training, which strongly contributed to the decrease of elitism in the educational system. Nowadays all educations in Finland is free, enhancing the country’s economic and social position.
 
Over the years Finland has established a fiscal system of high taxes. However, this was not always the case. In the inter-war period the Finnish government applied so-called ‘qualified liberalism’; seeking to promote individual innovation and entrepreneurship, by decreasing or avoiding state intervention. This resulted in poorly regulated labor and capital market. Later on, the role of the state became more prominent by supporting the industrialization of the country and promoting export of the goods obtained by industrial production. After World War II, the Finnish government had to spend around 15% of its budget on war reparations, while there was an ongoing battle of ideologies in the country: West vs East. This dispute was sorted out when Finland signed the Bretton Woods agreement in 1948, becoming part of the western bloc.
 
It is also important to highlight that the female workforce, as well as the unions’ roles, constantly increased until Finland entered the so-called ‘Tupo’ era in 1968 (tulopoliittikka). At that time, the Government took an active and prominent part in the labor market, even mediating between companies and workers. We could even say that Finland has led the way for other countries in the region in terms of conciliation of working and private life, by providing favorable working conditions such as extensive parental leave policy for mothers and fathers (11 months and 7 weeks, respectively). Another aspect to be highlighted is that 70% of the deputies in the Finnish Parliament are women, which also represent 50% of the working force overall.
 
After a decade of constant devaluation of the former Finnish currency, the country joined the European Union in 1995 and adopted the Euro in 2002. Although this was initially interpreted as an attempt to strengthen ties with the Western world, it allowed the country to not only collect, but also spend high amounts of public expenditure on social protection. Yet, in recent years, Finland has embraced a more liberal system and started a process of privatization. However, the State still owns a large number of companies, including 6 of the 10 largest companies in the country.
 
The Finnish example proves that those who see things as a consequence of a certain ideology or predetermined system are denying themselves the creativeness and innovation of a system that seeks results over ideological debates. Finland is the example of working around obstacles to end up with a win-win situation. The question that arises is: is the Finnish model sustained by deep cultural values and the wealth and stability of its Nordic neighbors, or could it in fact be exported to other parts of the globe?