Getting to the Netherlands? Southern Europe’s long road to growth

Why do they call it frugality when they mean responsibility? Possibly, that is the question that, half astonished, half complacent, many Dutch still ask themselves. The troublesome European Council took place and, in it, giant steps were taken. But before eventually breaking through, desires for solidarity confronted Rutte, the Dutch premier, as the main proponent of Calvinist virtue par excellence: why do we have to help you once again when you should fend for yourself? This (rhetorical) question actually explains why the crux of the matter in the meeting was persuading reluctant members that the South would be able to generate enough resources by itself in the future. Rutte’s brake willing, the ball of structural reforms is now in Southerners’ courts. But: why that deep distrust towards the South in the first place? Should Spaniards and Italians do something about it? And how?

Let’s get ourselves just for a moment in the shoes of a Dutch citizen fully informed about the evolution of the European economy (sci-fi, yeap, as a fully informed Spaniard or Lithuanian would be). In view of this (as the Figure below shows), it is very likely that that certain Jan or Joost displayed mixed feelings. All right: since the 1950s, Spaniards have witnessed rising living standards as never before, multiplying them by a factor of more than ten. But, on the other hand, those same Spaniards have been unable to close the gap with Jan, Joost and their fellow countrymen. What’s more: that gap has more than doubled over the last seventy years. Not even joining Europe’s club, with its massive injection of funds, has helpted to reduce it. What a Spaniard born in 1950 regards very legitimately as an economic success, continues to generate some concern in 2020 for Jan, Joost and his firm beliefs in Calvinist responsibility.

Source: Feenstra, Inklaar and Timmer, 2015

The reason for what appears as an insurmountable gap has much of a culinary metaphor. As if it were a recipe, economic growth comes either from adding more ingredients or from mixing them in original ways. The best recipes, however, tend to be the result of the latter;: innovation, not greater volumes. Despite this plain intuition, since Spain accessed the EU in 1986, its growth has relied upon more, not better, ingredients.

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It is precisely this what our enlightened Dutchie would appreciate in the following Figure, which displays how Spain and the Netherlands compare with respect to the immediate levers of economic growth (when the ratio is less than 1, Spain is below the Netherlands). Although Spanish workers have become more productive in recent decades (especially between 1960 and 1980), therefore reducing the gap with the Dutch, much of this increase is simply a consequence of using more equipment to perform their tasks (that is, they are more capital-intensive). If, on the other hand, we look at those levers behind better growth (such as total productivity or TFP, but also workers’ skills or other measures of capital «quality»), conclusions are much less satisfactory.

Actually, since Dutch started to pay some Spanish bills in 1986, Spain’s ability to mix ingredients in more original ways, rather than just adding more, has been limited. For some growth’s levers (such as TFP itself), the distance to countries like the Netherlands has even increased significantly. Do you start to understand Rutte better (even if only a little bit)?

Sources: Feenstra, Inklaar and Timmer, 2015; Bergeaud, Cette and Lecat, 2016. 

But maybe more disturbing is to realize how this divergence has been a permanent feature during the last seven hundred years. Jan’s mixed feelings in 2020 towards Spanish ability to grow is the same as that of all his ancestors all the back to the 14th century. It was then, as the Figure below shows, when the first turning point in the trajectories of present-day Spain and the Netherlands took place. Despite a not so different starting point (borderland’s agricultural societies immersed in colonization processes), a brutal epidemic, the Black Death, put the Netherlands on the path to development while negatively impacting on the Iberian economy. Another critical moment were the 16th and 17th centuries, another period of wars and plagues. What for the Netherlands was not only its social founding myth (the success of a mercantile and Protestant bourgeoisie against Spanish Catholic authoritarianism) but also an economic one (an urban economy increasingly integrated in international trade), was for Spain a time of increasing fiscal pressure, ruralisation, and income loss. By the time the steam engine and the textile industry arrived (late) in some Spanish regions during the 19th century, the gap had already grown so large that even pretty satisfactory economic growth was unable of catching up. 

Sources: Prados de la Escosura (here y here), Van Zanden (here y here)

In other words: Rutte’s distrust of Spain’s ability to fend for itself has deep roots. It is scepticism about Spain but, in general, also about Mediterranean Europe. It rests, in large part, upon the observation that, over the centuries, that wet corner of the European continent experienced an economic dynamism that the South cannot be replicate or, at least, on time and in a stable way. Beneath those more tangible levers I referred earlier, the explanation for these very different economic trajectories lies in a complex interplay of geography, culture, and norms making individuals to adopt decisions more or less favorable to the creation of wealth. While in the Netherlands and England a particular geographical endowment gave rise to more egalitarian societies both inside and outside the household, this was not the case in Spain. A more uniform distribution of power allowed for the expansion of family and social structures rewarding those individuals who acquired knowledge, made inventions, and applied them to fulfil others’ desires.

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Is it possible to do something in front of this distrust? It could appear that locating the deep roots of growth back in the distant past could only echo discouragement. Not really. Actually, these historical insights help us to better identify our room for maneuver. Even when context and cause are often the same for the historian, they show us that the crossroads different societies face over time are seldom original.

Both recent experience and the very long-term evolution of the economy (in Spain but also elsewhere) suggests the very same point: knowledge and ideas are the key driver of prosperity. As Paul Romer has written, we have eventually come to realize that it is ideas, and not objects, what poor countries lack. Ideas that, in a time of permanent technical change, are not so much in books but in people’s brains: it is what is called tacit knowledge, more typical of apprentices than of bookworms. In such a context, intellectual cross-fertilization (many teams of different people copying, producing, and exchanging ideas in and between them) is decisive. Look at Silicon Valley or Shenzhen, but also at Quattrocento’s Florence or 17th-century Amsterdam. But maybe even more crucial is designing the right incentives for those knowledge accelerators to blossom and grow. The last eight hundred years of technical innovation in Europe suggest that tacit knowledge flourishes wherever a delicate balance of private rewards and public subsidies is found. The great challenge (the only real one!) of our economies, and of the Spanish economy in particular, is precisely identifying what that balance is in the current context.

Early in the 17th century a merchant, Isaac de Espinosa, arrived in Amsterdam from Portugal in the footsteps of a whole diaspora of Jewish merchants, artisans, and scholars. Welcomed by the nascent Republic, his grandson, a certain Benito (Baruch in Hebrew), would eventually get a job in the Silicon Valley of the time – polishing the lenses with which Christiaan Huygens discovered the rings of Saturn. Around 1850 an English engineer, Joseph White, arrived in Barcelona, ​​where he produced the machinery of the first Spanish steamship, before setting up his own workshop in Seville. These experiences, individual as they are, condense many insights about the role of ideas and tacit knowledge in the economic fortunes of northern and southern Europe. 

But also about his future. Now that solidarity has finally made its way into Brussels and reforms are set in motion, we should be aware that our ability to grow will not be a great leap forward nor the result of massive injections of funds. It will be rather the result, in the words of V. S. Naipaul, of “a million mutinies”, decisions of thousands of individuals over long periods of time. The role of institutions will consist precisely in getting the incentives right, so that these individuals regard training and the production and exchange of ideas as its best option. Ultimately, this should be the main goal of any strategy aimed at making our economy more competitive and prosperous. By then Rutte will be able to sleep more peacefully when thinking about Southerners and, above all, Spanish and Italian citizens too.

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