Tuesday, 29 November 2016

Long Run Growth in Spain: Evidence from Historical National Accounts

Leandro Prados de la Escosura
 (Universidad Carlos III,
CEPR, Groningen, and CAGE)
Can we rely on historical estimates of GDP to assess output and material welfare in the long run? 

In the early days of modern economic quantification, Kuznets (1952: 16-17), noticed the “tendency to shrink from long-term estimates” on the grounds of “the increasing inadequacy of the data as one goes back in time and to the increasing discontinuity in social and economic conditions”. Cautious historians recommend to restrict the use of GDP to societies that had efficient recording mechanisms, relatively centralised economic activities, and a small subsistence sector (Hudson, 2016; Deng and O’Brien, 2016). But should not the adequacy of data be “judged in terms of the uses of the results” (Kuznets, 1952: 17)? 

A new dataset

It is with these caveats that a new set of historical national accounts, with GDP estimates from the demand and supply side, is presented for Spain as the basis to investigate its modern economic growth (Prados de la Escosura, 2016b). 
Historical output and expenditure series are reconstructed for the century prior to the introduction of modern national accounts. The new series are built from highly disaggregated data grounded on the painstaking research carried out during the last decades. 
Then, available national accounts are spliced through interpolation, as an alternative to conventional retropolation, to derive new continuous series for 1958-2015 (Prados de la Escosura, 2014, 2016a). Later, the series for the ‘pre-statistical era’ are linked to the spliced national accounts providing yearly series for GDP and its components over 1850-2015. Finally, on the basis of new population and labour force estimates, GDP per head and labour productivity are derived (the dataset can be accessed at http://espacioinvestiga.org/bbdd-chne/?lang=en)

What do the data show? 

Aggregate economic activity multiplied fifty times between 1850 and 2015, at an average cumulative growth rate of 2.4 per cent per year. Four main phases may be established: 1850-1950 (with a shift to a lower level during the Civil War, 1936-1939), 1951-1974, 1975-2007, and 2008-2015, in which the growth trend varied significantly. 

Figure 1. Real GDP and GDP per head (2010=100) (logs)


But to what extent did a larger amount of goods and services affect individuals’ living conditions? Since population trebled, real GDP per head experienced nearly a 16-fold increase, growing at an annual rate of 1.7 percent. Such an improvement took place at an uneven pace. Per capita GDP grew at 0.7 per cent over 1850-1950, doubling its initial level. During the next quarter of a century, the Golden Age, its pace accelerated more than 7-fold, so by 1974 per capita income was 3.6 times higher than in 1950. Although economic progress slowed down from 1975 onwards, and the rate of per capita GDP growth shrank to one-half that of the Golden Age, the level of per capita GDP more than doubled between 1974 and 2007. The Great Recession (2008-13) shrank per capita income by 11 per cent, but, by 2015, its level was still 83 per cent higher than at the time of Spain’s EU accession (1985).
What steered such a remarkable rise in product per capita? GDP per capita depends on the amount of work per person and how productive this effort is. GDP per capita and labour productivity (measured as GDP per hour worked) evolved alongside over 1850-2015, even though, as the amount of hours worked per person shrank labour productivity grew at a faster pace –it increased 23-fold against 16-fold for GDP per capita. 


Figure 2. Per Capita GDP and its Components, 1850-2015 (2010=100) (logs)

Behind the decline in hours worked per person the main element is the reduction in hours worked per fully occupied worker, which fell from 2,800 hours per year in mid-nineteenth century to less than 1,900 in the early twentieth-first century. Thus, long-term gains in output per capita are entirely attributable to productivity gains, with phases of accelerating GDP per capita, such as the 1920s or the Golden Age (1950-1974), matching those of faster labour productivity growth. 
A closer look at the last four decades reveals, however, significant discrepancies, with phases of acceleration in labour productivity correspond to those of GDP per person slowdown, and vice versa. Thus, periods of sluggish (1975-84) or negative (2008-13) per capita GDP growth paralleled episodes of vigorous or recovering productivity growth, although in the first case, the ‘transition to democracy’ decade, labour productivity offset the sharp contraction in hours worked –largely resulting from unemployment- and prevented a decline in GDP per head. Conversely, the years between Spain’s accession to the European Union (1985) and the eve of the Great Recession (2007), exhibited substantial per capita GDP gains while labour productivity slowed down. Thus, during the three decades after Spain’s accession to the EU, in which grew at 3 per cent per year, doubling its GDP per head, the increase in hours worked per person contributed more than half of it. It can, then, be concluded that since the mid-1970s the Spanish economy has been unable to combine employment creation and productivity growth, with the implication that sectors that expanded and created jobs (mostly construction and services) were those less successful in attracting investment and technological innovation.

Falling behind, catching up, … and falling back again?

Spanish long-term growth has been similar to that of western nations, though Spain’s level of GDP per head appears systematically lower. 


Figure 3. Spain’s Comparative Real Per Capita GDP (2011 EKS $) (logs)


The pace of growth before 1950 was comparatively slow in Spain. Sluggish performance over 1883-1913 and failing to take advantage of its World War I neutrality to catch up, partly account for it. Furthermore, the progress achieved in the 1920s was outweighed by Spain’s short-lived recovery from the Depression, brought to a halt by Civil War (1936-39), and by a longer and weaker post-war reconstruction than in the warring western European countries after 1945. Thus, Spain fell behind between 1850 and 1950. 
The situation reverted from 1950 to 2007. The Golden Age, especially since 1960, stands out as years of outstanding performance and catching up to the advanced nations. Steady, although slower growth after the transition to democracy years (1975-84), allowed Spain to keep catching up until 2007. The Great Recession reversed the trend, although it is too soon to determine whether it has opened a new phase of falling behind. 
On the whole, Spain’s relative position to western countries has evolved along a wide-U shape, deteriorating to 1950 (except for the 1870s and 1920s) and recovering thereafter (but for the episodes of the transition to democracy and the Great Recession). Thus, at the beginning of the twentieth-first century Spanish real GDP per head represented a proportion of US and Germany’s income similar to that of mid-nineteenth century, and to that of the 1870s with regard to France and Italy, although had significantly improved with respect to the UK. 

This blog post was written by Leandro Prados de la Escosura, professor in Economic history at (Universidad Carlos III)

The working paper can be downloaded here: http://www.ehes.org/EHES_103.pdf

References

Deng, K. and P. O’Brien (2016), “China’s GDP Per Capita from the Han Dynasty to Communist Times”, World Economics 17, 2: 79-123.
Hudson, P. (2016), GDP per capita: from measurement tool to ideological construct, LSE Business Review (10 May 2016).
Kuznets, S. (1952), Income and Wealth of the United States. Trade and Structure, Income and Wealth Series II, Cambridge: Bowes and Bowes.
Prados de la Escosura (2016a), “Mismeasuring Long Run Growth. The Bias from Spliced National Accounts: The Case of Spain”, Cliometrica 10, 3: 251-275
Prados de la Escosura, L. (2016b), Spain’s Historical National Accounts: Expenditure and Output, 1850-2015, EHES Working Paper 103 http://www.ehes.org/EHES_103.pdf The dataset can be accessed at http://espacioinvestiga.org/bbdd-chne/?lang=en
Prados de la Escosura, L. (2014), Mismeasuring long-run growth: The bias from spliced national accounts,  (4 September) http://positivecheck.blogspot.se/



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