Growth and Wellbeing in the Long-run: Spain in the Italian Mirror by Leandro Prados de la Escosura (Universidad Carlos III, Madrid) Banca d’Italia, Roma,

Growth and Wellbeing in the Long-run: Spain in the Italian Mirror

by Leandro Prados de la Escosura(Universidad Carlos III, Madrid)

Banca d’Italia, Roma, 9 November 2011

Trends in Real Output per Head in Preindustrial Spain (11-year moving averages) (1850/59 = 100) [logs]

4.1

4.2

4.3

4.4

4.5

4.6

4.7

Growth of Output per Head (%)

1280/9-1340/9 0.12

1340/9-1370/9 -0.69

1370/9-1590/9 0.15

1590/9-1670/9 -0.18

1670/9-1810/9 0.11

1810/9-1850/9 0.44

1280/9-1850/9 0.04

Spain and Italy: Real Output per Head, 1280-1850 (1850/59 = 100) (11-year moving averages) (logs)

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

5

1280

1295

1310

1325

1340

1355

1370

1385

1400

1415

1430

1445

1460

1475

1490

1505

1520

1535

1550

1565

1580

1595

1610

1625

1640

1655

1670

1685

1700

1715

1730

1745

1760

1775

1790

1805

1820

1835

1850

Spain Italy

Spain’s: Italy’s Mirror Image

• Italy In phases of demographic stagnation or decline, -> population pressure on resources relaxes => improvement in per capita income

• Spainunder sluggish or negative population growth => falling output per head (and vice versa)

=> a frontier economy up to the 16th century

- 1600 onwards, crops expanded at the expense of pasture

Spain and Italy in European Perspective: Per Capita GDP Levels (U.K. 1850 = 100) (1990 G-K $)

20

30

40

50

60

70

80

90

100

110

1300 1348 1400 1500 1570 1600 1650 1700 1750 1800 1850

UK Netherlands Belgium Germany France Italy Spain Sweden

The Early 19th Century: A Turning Point in Spain

• Population increase

• Agricultural productivity growth

• Urbanization

• New institutional framework

• GDP per head growth… despite the loss of empire

• But … relative decline

Real Per Capita GDP, 1850-2007

100

1000

10000

Long-term Growth, 1850-2007: New Evidence

• Real GDP multiplied by 57

• Real GDP per head by 19

• Three main phases of growth:

• 1850-1950

• 1951-1974

• 1975-2007

• Continuity over 1850-1950 View of 19th C failure and 20th C success, rejected

Phases of Economic Growth 1850-2007 (%)GDP GDP per Head Population

1850-2007 2.6 1.9 0.7

1850-1950 1.4 0.8 0.61951-1974 6.5 5.5 1.01975-2007 3.2 2.5 0.7

1850-1883 1.8 1.4 0.41884-1920 1.3 0.7 0.61921-1929 3.8 2.8 1.01930-1952 0.8 0.0 0.91953-1958 4.7 3.9 0.81959-1974 6.9 5.8 1.11975-1986 2.5 1.8 0.71987-2007 3.6 2.9 0.7

GDP Growth Decomposition, 1850-2007 (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1850-1883 1884-1920 1921-1929 1930-1952 1953-1958 1959-1974 1975-1986 1987-2007

Per Capita GDP Population

Long Swings (1850-2007)

• Long swings differ from trend growth due to economic policy, international integration and technological changes

• 1850-83 Acceleration: Reconstruction, openness, capital inflows

• 1883-1920 Deceleration: Stability but isolation

• 1920-29 Acceleration: Govt intervention and capital inflow

• 1929-52 Depression, Civil War, Autarchy

• 1952-58, Growth with hardly any institutional change

• 1958-74, Accelerated growth and cautious opening up

• 1974-86, Deceleration: the costs of the transition to democracy

• 1986-2007, Growth recovered after accession to European Union

Spain’s Relative Per Capita GDP (%) (2005 EKS $)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1850

1854

1858

1862

1866

1870

1874

1878

1882

1886

1890

1894

1898

1902

1906

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

% UK % France % Germany % Italy % USA

Growing up, Falling Behind, Catching Up

• 1810-1850, economic activity grew faster than population, but slow per capita income (0.4 %) => Retardation

• 1850s-1914, per capita GDP growth parallel to a widening gap with the Core => Growth and backwardness paradox

•

• World Wars sluggish growth and backwardness

• 1920s dynamism and a mild Great Depression, more than offset by the Civil War

• Late 20th century: Growth and Catching-up …but not convergence

What’s behind GDP per Head?

• GDP per capita = GDP/hour x Hours/person

• Long-run labour productivity growth (1920s, 1953-1986)

• Hours per person: long-term decline

• From 1975 onwards: * labour quantity and productivity, evolved inversely

- 1975-86: employment destruction, more than offset by a productivity surge

- 1987-2007: productivity slowdown, offset by the increase in hours worked

* opposite trends in GDP per head and per hour worked

GDP per Person and per Hour, 1850-2007

100

1000

10000

PIB per capita PIB/hora

Per Capita GDP Growth Decomposition (%)Per Capita GDP per Hours worked

GDP hour worked per person

1850-2007 1.9 2.0 -0.2

Panel A.1850-1950 0.8 0.9 -0.11951-1974 5.5 5.5 0.01975-2007 2.5 2.9 -0.5

Panel B. 1850-1883 1.4 1.2 0.21884-1920 0.7 1.0 -0.31921-1929 2.8 2.0 0.81930-1952 0.0 0.0 0.01953-1958 3.9 4.3 -0.51959-1974 5.8 6.3 -0.51975-1986 1.8 6.1 -4.41987-2007 2.9 1.1 1.7

Per Capita GDP Growth Decomposition (%)

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

1850-1883 1884-1920 1921-1929 1930-1952 1953-1958 1959-1974 1975-1986 1987-2007

GDP per hour worked Hours worked per person

Italy: Per Capita GDP Growth Decomposition (%)

Labour Productivity and Structural Change (upper bound)

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1850-1883 1883-1920 1920-1929 1929-1952 1952-1958 1958-1974 1974-1986 1986-2000

Internal Productivity Structural Change

Italy: Labour Productivity and Structural Change (upper bound)

Main Comparative Results

Italy: BGZ (2011)•Modest growth prior to WWII … but spurts in 1880-1913 and 1938-51•Golden Age acceleration: productivity growth across the board & structural change

• Productivity slowdown since 1993: the role of services

Spain•Mild pre-1950 productivity growth & structural change(except 1920s)•Acceleration 1953-86: the Golden Age and ‘Transition’•Dramatic slowdown since 1986 (EU accession)

Hours Worked per Occupied-Year, 1850-2007

1700

1900

2100

2300

2500

2700

2900

1850

1854

1858

1862

1866

1870

1874

1878

1882

1886

1890

1894

1898

1902

1906

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

Horas/año por ocupado

Italy: Hours worked per occupied-year, 1861-2011

Determinants of Labour Productivity

• Physical capital per occupied (hour)

• Human capital per occupied (hour)

• Efficiency gains (PTF)

Capital Input: Growth Rate (%)

Composition of Capital Stock in Spain (%) (1995 Pesetas)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

1850

1855

1860

1865

1870

1875

1880

1885

1890

1895

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Dwellings Other Constructions Transportation Equipment Machinery and Equipment

Italy: Composition of Capital Stock (%)

Labour Quantity (hours worked): Growth Rate (%)

Capital Deepening: Growth Rate (%)

Human Capital: Alternative Measures

Education based(Mincer)

• Educational levels (years of schooling) weighted by education returns

• It does not consider other forms of human capital

Income based(Jorgerson)

• Skill levels of workforce weighted by relative wages

• Data demanding …

• assumption of perfect competition in relative remunerations

Labour Quality Measures: Income and Education

90

100

110

120

130

140

150

160

170

180

190

Jorgenson RR 7%

Labour Quality Growth: Income and Education Approaches(%)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1850-1883 1884-1920 1921-1929 1930-1952 1953-1958 1959-1974 1975-1986 1987-2000

Jorgenson Education

Sources of Labour Productivity Growth (%)

(I) (II) (III) (IV) (V) (VI) (VII)

Income-based Approach Education-based Approach

GDP per Land Capital Labor TFP Labor TFP

hour worked Input Quality Quality

1850-2000 2.1 0.0 0.8 0.2 1.1 0.3 1.0

Panel A.

1850-1950 0.9 0.0 0.5 0.1 0.3 0.1 0.3

1951-1974 5.5 0.0 1.2 0.6 3.7 0.4 3.9

1975-2000 3.4 0.0 1.4 0.4 1.7 0.7 1.3

Panel B.

1850-1883 1.2 -0.1 0.6 0.0 0.6 0.1 0.5

1884-1920 1.0 0.1 0.6 0.1 0.2 0.1 0.3

1921-1929 2.0 -0.1 0.6 0.5 1.1 0.1 1.4

1930-1952 0.0 0.0 0.2 0.0 -0.1 0.3 -0.5

1953-1958 4.3 -0.2 1.3 0.8 2.4 0.4 2.9

1959-1974 6.3 0.0 1.2 0.9 4.2 0.5 4.6

1975-1986 6.1 0.0 1.9 0.9 3.4 0.8 3.4

1987-2000 1.1 0.0 0.8 0.1 0.2 0.6 -0.3

Sources of Labour Productivity Growth Variable Factor Shares (Income)

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1850-1883 1884-1920 1921-1929 1930-1952 1953-1958 1959-1974 1975-1986 1987-2000

Land Capital Labor Quality TFP

Sources of Labour Productivity Growth Variable Factor Shares (Education)

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1850-1883 1884-1920 1921-1929 1930-1952 1953-1958 1959-1974 1975-1986 1987-2000

Land Capital Labor Quality TFP

Italy: Sources of Labour Productivity Growth (%)

The Sources of Labour Productivity Growth• TFP accounts for half the labour productivity increase 1850-2000

• Factor accumulation ruled prior to 1950 and since 1987

• TFP, hegemonic in the 1920s and 1953-1986

• Labour productivity and TFP growth, closely associated1920s, 1951-74, labour productivity acceleration mostly due to TFP

• Broad capital accumulation and efficiency gains, complementary for labour productivity growth

• TFP and capital main spurts coincide with:

- the impact of the railways (1850s-80),

- the electrification (the 1920s and 1950s)

- adoption of new vintage technology in the Golden Age

Why the recent Labour Productivity Slowdown?

• Have Italy & Spain exhausted their catching-up potential?

• TFP gains from structural change, exhausted

• Spain, industry, efficient and small (17.5% GDP in 2007), tiny agriculture (2.9% GDP in 2007), but large services

• Challenges

- low productivity in construction and services (IT)

- more education does not imply more human capital

Income Distribution and Poverty

• How has per capita GDP been distributed over time?

• Did growth reach the bottom of the distribution?

• Was there a growth-inequality trade-off?

• Did growth and inequality changes have an impact on absolute poverty?

How to measure inequality?

Gini = ∑ Gi pi πi + ∑ ((yp – yl)/ yl) πl pp+ L [A] [B] [L]

• ∑ Gi pi π i (Gini A), weighted sum of within-group inequality

• ∑ ((yp – yl)/ yl) πl pp (Gini B), between-group inequality

• (L) is the overlapping component (residual)

Gini and its Components, 1850-2000

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Gini A Gini B Gini

Inequality Trends

• Wide inverted W, peaks in 1918 and 1953

• Between-group inequality ruled the pre-1960 era

• Within-group inequality ruled the post-1960 era

=> social concern for different kinds of inequality before and after 1960

• When inequality plotted against real per capita income, a single Kuznets curve

The Kuznets Curve in Spain (Kernel Fit Epanechnikov, h=0.4042)

.28

.32

.36

.40

.44

.48

.52

6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0

Per Capita GDP (log)

Gin

i (H

odric

k-P

resc

ott)

Inequality before and after Franco

Why Inequality fell in the globalization backlash? •Forces pushing for re-distribution - unions’ increasing bargaining power - labour unrest- menace to property rights

=> the drop in capital and land returns relative to labour more than offset the rise in wage dispersion

•Interwar inequality decline, at odds with a war of attrition on income (wealth) distribution

Early Francoism: rising inequality•inequality fell within labour and capital but polarization increased

Late Francoism •Redistribution => inequality reduction

Comparative Findings• Political factors conditioned income inequality trends

• WWs increased inequality with no permanent effects

• No impact of progressive taxation until the 1980s

• The inequality rise in early Francoism, not explained by property income concentration, but by its share in GDP => divisive effects of Civil War

• Spain converged to OECD, except for the Autarchy

• Spain and Latin America: divergence since the 1950s

Gini in Spain and OECD Countries, 1870-2000

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

1870 1880 1890 1900 1913 1929 1938 1950 1960 1970 1980 1990

Spain UK Italy Norway Denmark USA Japan

Italy: Income Inequality, 1861-2011

Gini in Spain and Latin America, 1870-2000

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

1870 1880 1890 1900 1913 1929 1938 1950 1960 1970 1980 1990

Spain LatAm4 LatAm6 LatAm15 LatAm16

Was There Economic Polarization?

• Polarization: An increase in between-group inequality (a growing gap between proprietors and workers) parallels a decline in within-group inequality

• A measure of polarization:

Ratio of ‘between-group’ inequality to ‘within-group’ inequality (Zhang & Kanbur 2001)

Economic Polarization (Gini)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Polarization Gini

Did growth and income distribution changes have an impact on absolute poverty?

Poverty reduction depends on the

• Growth of average incomes

• Changes in income distribution

• How sensitive poverty is to growth and inequality

But also on the initial

• inequality level

• level of development

• poverty line

Poverty Headcount (%)(Poverty Line 1985 Geary-Khamis $ 2 a day per person)

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1850 1860 1870 1880 1890 1900 1913 1920 1925 1929 1935 1950 1955 1960 1965 1970 1975

$2 Poverty Headcount

Poverty Trends• A long run decline in absolute poverty,

with reversals in the early 20th Century and during Autarchy

• Poverty reduction at a different speed:

- slower before World War I => the impact of growth on poverty weakened with rising inequality & low initial development

- faster, and accelerating, in the 20th Century once the initial income constraint was released

=> by the end of Francoism, absolute poverty < 2%

• Growth plus inequality fall (Interwar; since 1950s) => reduction in absolute poverty