Regional development in Spain 1989-2010 : capital widening and productivity stagnation

This paper analyses the different factors that explain the pattern of economic growth in Spain along the last two decades, where has stood out the rapid growth of per capita income, capital accumulation and creation of employment. However, the most important structural phenomenon of the strong growth of the Spanish economy, especially in the decade from 1998-2007, was the limited growth in terms of output per worker and total factor productivity (TFP), which in combination with wage increases has led to a loss of competitiveness. An extended Solow growth model was estimated with panel data for the Spanish regions to measure the contribution of different factors of production (with special interest in the stock of private and human capital, as well as the gap of transport infrastructure capital) to the productivity of labour and the temporal evolution of TFP over the period 1989-2010. The results of our analysis provide strong evidence of stagnation in productivity throughout most of the period under study. The large investments and the strong growth in capital stocks were practically absorbed by an intense process of job creation. As a consequence, the capital/labour ratio and labour productivity levels remained almost constant whereas total factor productivity (TFP) decreased over the period of analysis. Therefore unlike other European countries, Spain did not experience a phenomenon of capital deepening with an increase in productivity. The intense GDP pc growth in Spain was of a rather "extensive" type, mainly based on a capital widening process.