Property Investment Research - Is Spain still economically sound?
Published on 2nd May 2008 by Don Ross
Spain's economy is 69.7 percent free, according to our 2008 assessment, which makes it the world's 31st freest economy. Its overall score is slightly lower than last year. Spain is ranked 17th out of 41 countries in the European region, and its overall score is higher than the regional average.
Spain is notably strong in business freedom, trade freedom, investment freedom, financial freedom, property rights, and freedom from corruption. The average tariff rate is low, but non-tariff barriers include distortionary European Union subsidies on agriculture and other goods. The government has tried to streamline red tape and improve licensing procedures. Foreign investment is subject to few government restrictions. The judiciary is independent of politics, as in most other EU countries, but case resolution is extremely slow.
Spain is relatively weak in fiscal freedom, government size, and labor freedom. Total government spending equals almost two-fifths of GDP. The labor market is highly restrictive, from the number of workweek hours to employment severance procedures.
Background:
Many years of brisk growth characterized by strong job creation, structural reforms, and sound fiscal policy are a major part of the legacy of former Spanish Prime Minister José María Aznar's government (1996 to 2004). The current premier, José Luis Rodríguez Zapatero,, won office in the wake of the pre-election al-Qaeda bombings in Madrid in 2004 on a promise that he would immediately withdraw Spanish troops from Operation Iraqi Freedom, but he did not reverse the Aznar reforms and continues to enjoy a buoyant economy on the back of Spain's economic liberalization. The key to continued growth lies in improving sluggish labor productivity and increasing Spain's ability to innovate, but Zapatero has not announced any major economic initiatives for the remainder of his term.
Business Freedom - 77.5%
The overall freedom to start, operate, and close a business is relatively well protected by Spain's regulatory environment. Starting a business takes an average of 47 days, compared to the world average of 43 days. Obtaining a business license takes less than the world average of 19 procedures and 234 days. Bankruptcy proceedings are fairly easy and straightforward.
Trade Freedom - 86%
Spain's trade policy is the same as those of other members of the European Union. The common EU weighted average tariff rate was 2 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, nontransparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Pharmaceutical and biotechnology regulations and service market access barriers exceed EU policy, and protection of intellectual property rights can be problematic. Consequently, an additional 10 percentage points is deducted from Spain's trade freedom score.
Fiscal Freedom - 54.5%
The top income tax rate is 43 percent, down from 45 percent, and the top corporate tax rate is 32.5 percent, down from 35 percent. Other taxes include a value-added tax (VAT), a property tax, and a transportation tax. In the most recent year, overall tax revenue as a percentage of GDP was 36.1 percent.
Freedom from Government - 56.2%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 38.2 percent of GDP. In comparison with other OECD countries, state involvement in the economy is low.
Monetary Freedom - 78.1%
Spain is a member of the euro zone. Inflation is moderate, averaging 3.5 percent between 2004 and 2006. Nearly stable prices explain most of the monetary freedom score. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also controls the prices of medicines and public transport and influences prices through regulation and state-owned enterprises and utilities. An additional 10 percentage points is deducted from Spain's monetary freedom score to account for these policies.
Investment Freedom - 70%
Foreign investment of up to 100 percent of equity is permitted, and capital movements are completely liberalized. National security-related activities require prior approval; other investments require after-the-fact notification of the Ministry of Finance. Foreign companies may bid on privatized assets, and privatization continues in telecommunications, tobacco, air transport, electricity, and petroleum. There are no restrictions or controls on resident or non-resident foreign exchange accounts, repatriation of profits, and proceeds from invisible transactions. Current transfers must be declared to deposit institutions. The Bank of Spain requires reporting on most credit and lending activities.
Financial Freedom - 80%
Spain is fully integrated into international financial markets, and its banks-to-inhabitants ratio is far above the EU average. There were 53 domestic credit entities in 2005. All commercial banks are privately owned, and Banco Santander Central Hispano and Banco Bilbao Vizcaya Argentaria account for almost a third of loans. Economic growth has greatly reduced non-performing loans. The government provides subsidized financing through modest credit institutions. There were 312 insurance companies at the end of 2005, and over a quarter of the sector was foreign-controlled. Capital markets are well developed and open to foreign investors.
Property Rights - 70%
The judiciary is independent in practice, but bureaucratic obstacles are significant. Contracts are secure, although enforcement is very slow. Patent, copyright, and trademark laws approximate or exceed EU levels of intellectual property protection. Enforcement actions (especially private-sector initiatives) using Spain's new IPR legal framework have greatly increased the criminal and civil actions against intellectual property pirates.
Freedom from Corruption - 68%
Corruption is perceived as minimal. Spain ranks 23rd out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Giving or accepting a bribe is a crime, and bribes are not tax-deductible for corporations or individuals. There is no obvious bias for or against foreign investors. Corruption is not an obstacle to investment.
Labor Freedom - 56.7%
Don Ross
General Manager of Ward & Co, has a vast range of experience in both financial services and property development. As an international speaker he has provided the inspiration that has led to wealth creation around the globe.
