Low Productivity is the Heart of the Problem

06/06/2012 Barcelona

“The non-tradable sector, that is services, which accounts for a large part of Spanish jobs, has not increased its productivity in 20 years, neither in the private nor the public sector,” IESE Prof. Pankaj Ghemawat told a Continuous Education session in Barcelona last night. The session was titled “World 3.0 and Spain: Solutions to the Crisis,” in reference to Ghemawat’s much praised book World 3.0: Global Prosperity and How to Achieve It.

Before moving on to the question of Spain, Ghemawat discussed the basic tenets of his book, written as a riposte to Thomas Friedman’s The World is Flat, a popular work on globalization. Ghemawat contends that the world is not nearly as globalized as we have been led to think, showing that most countries trade with near neighbors, most university students study in the country of their birth and that the extent of immigration has been exaggerated.

“If you don’t recognize that the world is only 10-20 percent globalized you’ll miss out on the fact that there are lots of opportunities for integration,” he said.

Ghemawat pointed to persistently low productivity as being at the heart of Spain’s problems with wage rises, albeit from a low base, not being linked to increased productivity. Furthermore, “the least productive Spanish manufacturers are the ones that don’t export and don’t innovate.” He added that Spain’s level of trade integration is still limited and it is still a relatively domestic economy.

He said that, compared to the United Kingdom, Spain has surprisingly weak trade relationships with its former colonies although it invests heavily in them.  A further problem is that Spain is exporting to countries with low growth, mainly in Europe, which have a shrinking share of GDP.

Spain should have more trade with Latin America and North Africa. Meanwhile, Spanish companies are virtually absent in Asia. “There is a need for Spanish firms to reach beyond their comfort zone if they are to increase exports,” he said.

In conclusion, Ghemawat said “the Spanish government isn’t going to solve these problems. Business has to do it.”