A Pass in Finance and Labor, but Failing in Education and R&D

Funcas and IESE present the fifth Spanish Reform Monitor

14/04/2016 Madrid

iStock | Petar Chernaev

Improvement in finance, a pass in pension and labor market reforms, but failing in R+D, justice and public administration / Photo: iStock | Petar Chernaev

“The worst of the crisis is over. But Spain has no room for complacency just yet. And even less so when we analyze the labor market, competitiveness, regulation, public administration and the welfare state.”

So say the authors of the fifth edition of the Spanish Reform Monitor, a report by the Spanish Reforms initiative of IESE's Public-Private Sector Research Center (PPSRC) and the “Fundación de las Cajas de Ahorros” (Funcas).

The report is designed to contextualize recommendations made by international institutions on reforms – and monitor their status and progress.

Despite significant progress in finance, Spain just about scraped a pass for pensions and labor market reforms. And the country scored a resounding fail in R+D, education, justice and public administration.

The principal areas analyzed in the index were rated from 0-10.

IESE Professor Xavier Vives, director of the Spanish Reform Monitor, proposed 10 structural reforms in 2010. This is how those reforms have evolved over the last six years:

  1. Restructuring the financial system

    In the wake of the housing bubble which saw banks accrue debt as they bought up real estate assets, the Spanish financial system needed to be cleaned up. Capital injections and restructuring of the financial sector have improved its health.
    Meanwhile, public bodies like the “Fondo de Reestructuración Ordenada Bancaria” (FROB) and Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (Sareb) have demanded greater transparency in the banks’ balance sheets. The end goal is to clean up toxic assets.
  2. Consolidation of fiscal accounts and the public deficit

    Neither the European Commission nor the Bank of Spain see marked improvement in the Spanish deficit. Indeed, there are calls for a more exhaustive control of the deficit.
    Thus far, independent fiscal authorities and Constitution reforms have been established to put a ceiling on the deficit. However, the financing of autonomous communities has not been revised; nor have the different levels of government. There has been some progress – just not enough. Spending is at the same level and revenues have not improved.
  3. Transformation of the labor market

    While some labor reforms have been implemented, the quality of employment is still low. This is because the reforms do not address the problem is issue of duality in work contracts, which leave some employees more protected than others.
  4. Reforming the “battered” rental market

    The rental market is key in resolving the situation left by the housing bubble. Some progress has been made here in terms of legal security for owners. But there is still a long way to go before the market becomes fully competitive.
  5. Reforming the pension system

    The Social Security deficit has decreased as Spain has gradually come out of the crisis, and unemployment has reduced. Nevertheless, the population over 65 receiving a pension continues to grow – and with this, the cost of the public health system.
    According to IESE professor Núria Mas there are still “enormous differences” across Spain in terms of access and health care coverage. “We need to make more of an effort to ensure that the resources available are used adequately and generate more value for health,” she says.
  6. Reforming the judicial system

    The Spanish judicial system remains unreformed. The authors call for increased efficiency through digital transformation to reduce bureaucracy and speed up court proceedings.
  7. Improvements in the education system

    Spain is at the bottom of Europe in education. Improving in this area is the only way to increase productivity and wages. But every change in government has brought a new educational reform. Amongst the key areas to reform is vocational training, and although some ground has been gained here there is still a long way to go.
  8. Measures to raise productivity

    Increasing competition and deregulating certain sectors – these are the goals behind the creation of the “Comisión Nacional de los Mercados y Competencia” (CNMC), which has had issues with management and independence – making it essential to have competent regulators. There is also a lack of competency in the area of professional services.

    R+D. Spain is lagging behind in R&D with respect to the Euro zone. As well as a lack of investment, there is no efficient system of knowledge sharing or transfer – fundamental element for competitiveness and development. According to Antonio Cabrales, professor of the University College London and collaborator in the Spanish Reform Monitor, “certain political parties have proposed interesting ideas to invest in knowledge sharing, but because of a lack of resources, the only possible changes are organizational.”
  9. Coherent, long-term energy policy

    Spain urgently needs to reconfigure its energy “mix” and make the industry more competitive. The cost deficit has improved to some extent, but to the disadvantage of consumers who have had to absorb the rise in prices. Another change has to do with renewable energy, which is no longer subsidized and seeing changes in business models.
  10. Reforming the scientific-technical system and the university

    Finally, to be competitive and attain excellence, Spain needs to push reforms in governmental mechanisms and the way universities are financed – this extends to management systems and bureaucracy in scientific organizations.

In short, the authors of the report believe that the crisis has not been “fully leveraged to make the necessary reforms.”

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