Spain 3.0

The global crisis that has hit the OECD countries has left Spain badly injured. Moreover, the injuries are both superficial and internal.

After decades of successful operation, Spain's model of internationalization has run out of steam. A combination of manufacturing, cheap tourism and construction enabled unprecedented development of the nation. However, those pistons of the economy have now stopped firing. Part of the explanation is that other nations have started their motors — and offer cheaper beaches and cheaper labor.

Spain has enjoyed economic growth over the last three decades that has been comparable in speed with the more successful emerging markets such as South Korea and Singapore.

In 1976, Spain was still a developing nation according to the official measurements published by the World Bank. Yet, to the amazement of our neighbors, Spain managed to build a thriving and developed economy over the following years.

Our success was due to luck and hard work — firstly, trading with Europe and later across the Atlantic. Spain is today one of the richest economies in the world and a respected member of the OECD.

Over the past 15 years, Spain has also managed to develop global companies that lead their sectors. From a small town near Corunna in the extreme northwest of the peninsula, a global giant in the textile industry has emerged — Inditex. This company has triumphed with innovations in a sector that experts and economists had forecasted would die in Spain.

World-leading industrial and financial groups have flowered in Barcelona, Bilbao, Madrid, Santander and Seville. Spanish firms have achieved worldwide success in the telecommunications sector and through new technologies, as well as in renewable energy, engineering, construction and banking.

Before despairing at how badly Spain has performed, let's take a moment to look at where we Spaniards have done very well indeed — as it might provide us with clues for a prosperous future.

Success has been achieved by an exceptional generation of politicians and daringly efficient managers, entrepreneurs and bold strategists (many of whom rightly invested in Europe and the other side of the Atlantic Ocean).

Proof of this pool of Spanish talent is that foreign multinationals have headhunted a diaspora of Spanish executives who now sit on the boards of companies such as Nestlé, Xstrata, Holcim and SGS in Switzerland; Volkswagen in Germany; Securitas and Assa Abloy in Sweden; Peugeot, Schneider Electric, Alstom, Danone, Société Générale, Alcatel Lucent, Sanofi Aventis, Havas and Carrefour in France; and Intel, MasterCard, Kraft, Blackstone, Blackrock, Apax Partners, Permira, JP Morgan, Pfizer, Microsoft and Kodak in the United States and United Kingdom.

And to this list we might add emerging groups, such as the multinational Cemex, which has several senior Spanish directors. Many more companies could be added.

These achievements are important. But the challenges that await us are also important — and some of these challenges have been waiting for a while. We are now forced to reconsider our position in the commercial world.

To stabilize an economy that is faced by a shortage of capital, Spain must balance the current account deficit by boosting exports (the alternative is to further reduce domestic spending to reduce imports, and this action would further deepen the cycle of recession and unemployment). This export boost will not be easily achieved, as Spain does not enjoy, as in former times, exchange rate flexibility.

It may be worth visiting Harvard University to see how Spain could recreate itself with an “economy 3.0” that boasts more multinationals, more innovative and leading companies — and more entrepreneurs who are prepared to risk, fail and try again.

At Harvard, Professor Ricardo Hausmann has spent the last several years developing an empirical model of productive transformation. However, this is not simply a theory for the textbooks and lecture halls.

His model is currently being applied on a major scale in developing nations such as Colombia and South Africa. However, the model has not yet been applied to sophisticated economies where tradable sectors and services play dominant roles. Spain could be an ideal application.

Professor Hausmann trained initially as a physicist, and his theory applies network models borrowed from physics to the realities of micro and macro economics. His model says that companies and their products can be seen as “monkeys” — and the ecosystems in which they operate as the “trees and forests.”

Companies are connected as physical networks — and by drawing these connections, a forest can be mapped. Such maps can help monkeys see where are the nearest high-value products and the densest parts of the forest.

While some parts of the forest are denser and richer than others, monkeys can move among the trees. The decision to migrate from one part of a forest to another is a strategic decision. Hausmann says that two points become clear when studying Spanish “monkeys and forests.”

First, the economy has become significantly diversified since 1980, and as a result, there are many monkeys (products) in the densest parts of the forest. Nevertheless, there are also many relatively isolated monkeys in the more marginal parts of the forest. These monkeys, or products, are dispersed and enjoy few comparative advantages.

The good news is that many of these monkeys are near to the denser parts of the forest. In other words: With strategic organization, it is possible to jump from a sparsely wooded area (few opportunities) to a denser area (more opportunities).

Hausmann’s key idea is that nations diversify rather than specialize. The most successful nations are those that manage to produce a wide range of sophisticated products. Relatively sophisticated goods are less likely to be widely manufactured abroad because they require a range of capabilities, skills, materials and specific processes.

More sophisticated products require more manufacturing capabilities and skills. Nations that manage to develop more capabilities thereby succeed in producing products that are more difficult to copy — and are therefore less widely made.

The point is that Spain cannot continue exporting the same products to the same or new destinations (this is the prevailing model in economies 1.0 and 2.0: Namely, export the same products more massively and to more places).

Instead, the monkeys must jump trees and so produce new products, services and processes. We must increase our capabilities (the role of the state is fundamental in this respect) and identify those products, processes and services that are nearest.

From this selection, the most sophisticated and least ubiquitous products must then be identified (the role of directors and entrepreneurs being fundamental in this task).

We know that Spain can manage this task because it has already been done and continues to be done. Look at how companies such as Abengoa and Acciona are making the leap to renewable energy, and how OHL or Ferrovial are diversifying into fertilizers and airport management.

These firms are emulating the leaps made by firms such as Inditex, Indra or Telefónica — or by banks such as Santander and BBVA. However, we still have plenty of monkeys trapped in low-density forests and others who leapt the wrong way (towards sectors overly dependent on construction, for example).

A commitment to an economy 3.0 may also require the mobilization of applications and techniques that are representative of 3.0. Some of these approaches are inspired by social networking, crowd-sourcing and nuddling.

Let's mobilize talent throughout Spain and push our way through the bottlenecks in the production of new products, services and processes (capabilities) by using the horizontal networks offered by new technologies.

In any event, regardless of whether we are in the public or private sector, if we hope to follow those intelligent monkeys and head towards denser forests, then we are going to have to roll up our sleeves and get to work.

The recent past shows us that such transformations can be achieved. If we have the courage and confidence in our own potential, then we can repeat — and even improve upon — similar jumps that have been made in the past. The future is in our hands.

Editor's Note: This piece has been adapted from Javier Santiso's ESADEgeo Position Paper 1, published in September 2010 by the ESADE Center for Global Economy and Geopolitics.