Tuesday, April 2, 2013

Visiting Scholar Offers Insight on Yet Another Financial Crisis


By Tulio Bracho, First-year MBA, Finance

IGOE Fellows
There is a country with a population of 47 million people and an unemployment rate of 26%. The families of this country are in despair, struggling to make ends meet. This country’s society is burdened with the responsibility to support its struggling population, but has limited ability to borrow funds. The problem that this country faces is not a lack of education, natural resources, or democracy. Can you guess which country this is?

In today’s world economy, there are plenty of countries suffering from similar ailments as the ones described above. But, what if I told you that this country is home to multinational corporations, some of the best business schools in the world, the world cup national soccer champion team, and – according to them – the best wine you could ever taste? Can you guess now? 

Yes, I am talking about Spain. 

That friendly and beautiful country is fighting a battle to find a path of sustainable and healthy economic growth. Spain would like to accomplish in the economic and social realms what its athletes have accomplished in a wide range of disciplines. Professor Gustavo Lannelongue, Visiting Scholar from the Universidad de Salamanca and hosted at Kelley by the Institute for Global Organizational Effectiveness (IGOE), presented an analysis of the Spanish economy last Thursday to the IGOE MBA and PhD Global Fellows.

During his presentation, Professor Lannelongue explained that even though the Spanish financial crisis may have been caused by the same reason as the American crisis, a bubble in the construction sector, its consequences and its treatment have been different. The basic difference is rooted in the monetary system in which the Spanish economy operates. Being part of the Euro implies that Spain has limited influence in determining its monetary policy, so it has to focus on other types of solutions (e.g. fiscal policy). 

There are three areas in which the Spanish government has implemented measures to improve the economy. First, reform of the labor market, which translated into less employee power of negotiation, reduced unemployment benefits, and increased retirement age (65 -> 67). Second, spending cuts in development aid, state owned companies (railway, television), and subsidies for parties and social partners (- 20 %). Third, tax raises, such as an increase in the value added tax to 21% (from 16%), income tax rates (between 0.75% to 7% proportionally), and capital taxes (between 2% to 6%).

Fortunately, after those measures and the effects of the monetary policy the European Central Bank had implemented, the Spanish economy started showing some signs of stabilization. Recently the levels of debt have stabilized, the index of real estate prices has become attractive to foreign investors, the cost of labor has declined making it easier for businesses to hire people, and exports have increased. Of course, there are many challenges still to face and structural reforms that Spain must implement to improve its competitiveness, but it is good to know that reasonably good work is being done.  

Hopefully, political forces will continue lowering their populist voices and letting the experts do what must be done. At the end of the day, problems are solved by people who care less about pointing fingers and care more about rational thinking, sharp analysis and hard work. The great Spanish writer Miguel de Cervantes expressed well in Don Quixote, “It is not the responsibility of knights errant to discover whether the afflicted, the enchained and the oppressed whom they encounter on the road are reduced to these circumstances and suffer this distress for their vices, or for their virtues: the knight's sole responsibility is to succor them as people in need, having eyes only for their sufferings, not for their misdeeds.”   

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