Spain´s regions: who´s best prepared for a crisis?

Escrito el 24 marzo 2008 por Gayle Allard en Economía española

As the economic slowdown spreads across the globe, Spanish economists are asking which of their 17 regions (Comunidades Autónomas, or CCAA) are best prepared to withstand a possible crisis. A quick glance at forward-looking data indicates that the Basque region and Madrid are in the top spots and the traditionally poor regions of Andalucía, and Castilla-La Mancha are the worst prepared.

The forward indicator used for this ranking includes factors that are critical to a region´s future growth, notably productivity growth and spending on research and development by the private sector. In the former, Madrid is the clear leader with spending equivalent to 31.7% of regional GDP, followed by Catalonia and the Basque region. Some regions, in contrast, show almost no private R&D spending, such as the Balearic Islands, Extremadura, Cantabria and La Rioja. In productivity, Madrid drops to an intermediate position and the Basque region and Extremadura take the lead, with productivity growth of 2.7% in 2007. Madrid´s poorer showing could be due to the huge influx of previously uncounted immigrants, which raises the denominator in the productivity calculations (GDP/employed population); or due to the large weight of some low-productivity services in the region. High productivity growth and innovation will both help dampen inflationary pressures and boost competitiveness in the high-ranking regions, leaving them better prepared to face an eventual crisis.

Other factors considered in the ranking were inflation and the rise in unit labor costs, both key to regional competitiveness. Here, the most inflationary regions in 2007 were Navarre and Aragon, followed closely by Catalonia, the Valencian region and Castilla-La Mancha. The same regions, along with Murcia and the Basque region, ranked highest in unit labor cost increases (Aragon, however, dropped to a much lower position). Higher inflationary pressures will leave these regions in a poorer position to cope with slower growth and rising raw-materials prices in coming months. One of the best performers on both of these fronts was the Canary Islands. The ranking also considered the number of days that retailers were allowed to open on Sundays as a proxy for local attitudes toward free competition. Here, only Madrid, Murcia and the Canary Islands allowed shops to open more than the 8 days permitted in most of Spain (22 days in Madrid, 10 in Murcia and 9 in the Canary Islands). This more open attitude toward market forces could be a factor in future economic success.

Finally, regional debt and deficits as a per cent of local GDP were taken into account, since both will be aggravated in an economic slowdown, leaving local governments with fewer tools to tackle the crisis and higher structural interest payments and hence fiscal pressure in the future. Here, the Valencian region and Catalonia showed the largest regional debts, while in the Basque region and Cantabria debt was particularly low. On the deficit front, the Balearic Islands, Catalonia and Madrid showed surpluses in 2007, indicating an effort to reduce debt and balance government accounts., and Extremadura and Asturias were in by far the worst situation with deficit spending equivalent to close to 20% of regional GDP.

The last factor considered was the GDP growth forecast for each region in 2008, where Valencia, Extremadura and the Basque region came out as the clear leaders and Aragon, Catalonia, Cantabria, Murcia and the Balearic Islands lagged behind. Overall, the regions with the best prospects looking forward were the Basque region, La Rioja and Madrid, followed by Aragon, Catalonia and Cantabria. The regions whose outlook was least favorable were two of Spain´s poorest, Andalucía and Castilla-La Mancha, although prospects were not good either for the Canary Islands, Galicia, Extremadura, Asturias and the Valencian region. To change their position in the ranking and enhance their potential for future growth, the laggards would be advised to tackle regional finance issues and take measures to encourage innovation and business activity.


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