1 INTRODUCTION
Spain’s financial position during the late 19th and early 20th centuries has been frequently described as one of the persistent deficits on current account. It is also widely accepted that this situation was a result of her integration into international commodity and factor markets that contributed, in turn, to slowing down Spanish economic growth and deepening the country’s backwardness. Such a depiction is not grounded in sound quantitative evidence, but provides a set of challenging hypotheses for research and testing. In this paper, a preliminary reconstruction of the balance of payments on current account allows the rejection of the pessimistic view that Spain’s international integration hindered the growth of the economy. On the contrary, the sustained deficit on current account over 1850-1890 highlights the fact that net inflows of foreign capital made possible to meet the demand for domestic investment and, thus, boosted Spanish economic performance, while current account reversals help to explain the economic slowdown at the turn of the century. The paper is organized as follows: Section 2 presents current assessments of Spain’s international position. Section 3 describes briefly the sources and procedures employed in the reconstruction of the balance of payments on current account. Section 4 examines its main trends and determinants from a «sudden stop» perspectiveFootnote 1. In Section 5, the implications for the growth of Spain’s financial position are discussed and Section 6 is the conclusion.
2 ASSESSMENTS OF SPAIN’S INTERNATIONAL POSITION
For most historians, Spain’s position in the international economy during the 19th and early 20th centuries is characterized by a chronic deficit on current accountFootnote 2. This diagnosis stems from the official trade figures (Estadística del comercio exterior), which show a sustained negative commodity trade balance, and from the scattered evidence about the gross inflow of foreign capital into SpainFootnote 3.
Spain’s trade balance experienced, according to Juan Sardá Dexeus (Reference Sardá Dexeus1948, p. 277), a sustained deficit for long periods, while Gabriel Tortella (1974a, p. 122) stressed that the trade balance was negative through the late 19th century. The persistent deficit represented, in Jaime Vicens Vives’s (Reference Vicens Vives1959, p. 631) view, a heavy burden that contributed to the economic failure of the Restoration (1876-1923).
The view that a chronic trade balance deficit hindered the economic growth still prevails in Spain’s historical literature. Supposedly, the current account deficit would have set a limit on the growth of demand to which supply had to adjust, leading to slower growthFootnote 4. The acceptance of an external constraint on growth caused by a structural balance of payments deficit has major economic policy implications, as it would require protective measures to limit imports and a floating exchange rate. Alfonso Herranz-Loncán and Daniel Tirado (Reference Herranz-Loncán and Tirado1996, p. 24) observed that the values of income elasticities for imports and exports suggest the existence of a constraint on Spain’s economic growth resulting from the trade balanceFootnote 5. José María Serrano Sanz (Reference Serrano Sanz1997) estimated the theoretical growth rate for the Spanish economy, which was compatible with the current account equilibriumFootnote 6. As long as the theoretical rate is above the actual one, there is no problem. This would have been the case of Spain over 1869-1891. However, if it is below, as it would have happened during 1892-1935, the external sector would have hindered the long-run growthFootnote 7. Recently, Oscar Bajo-Rubio (Reference Bajo-Rubio2009), in a long-run view of Spain’s external sector, reaches quite a different conclusion — an external restriction on growth, resulting from a potentially unsustainable trade deficit, would only appear in phases of exceptionally high growth.
Thirlwall’s (Reference Thirlwall1979) «external constraint on growth» is, however, predicated under the assumption that the terms of trade are stable and international capital flows are negligible. In the context of the early globalization (1850-1913), such an assumption is far fetched. Intense international commodity and factor flows took place while the terms of trade suffered dramatic changes (O’Rourke and Williamson Reference O’Rourke and Williamson1999; Obstfeld and Taylor Reference Obstfeld and Taylor2004; Blattman et al. Reference Blattman, Hwang and Williamson2007). In fact, the proponents of the «external constraint on growth» view accept that in the presence of a sustained current account deficit financed through capital inflows, their prediction of the long-term growth rate is inadequate and the restriction on growth would result from the pace and size of foreign investment (Thirlwall and Hussain Reference Thirlwall and Hussain1982, p. 501). Thus, before jumping to the conclusions about a potential external constraint on growth, it seems necessary to examine the current account of evolution over time.
To complicate the situation further, Spanish foreign trade statistics have been questioned by Jordi Maluquer de Motes (Reference Maluquer de Motes1999, pp. 110-111, 189) who argues that exports to Cuba and the Philippines were overexaggerated during the years 1895-1898, as they included supplies for the Spanish troops (military equipment but also foodstuffs, clothing, etc.) that did not involve a commercial transactionFootnote 8. Were this the case, military supplies should be removed from exports and considered as current Government transfersFootnote 9. Previously, however, one should prove that no commercial transaction had taken place and military supplies were sent to the colonies by the Government. If, alternatively, supplies for troops were provided by private firms, they would represent exports. Furthermore, it could be simply the case that, as a result of the increasing number of Spanish troops in the colonies, the demand for foodstuffs and clothing increased. Another important reason to explain the increase in exports to the colonies (and to the rest of the world) during the late 1890s is the (real effective) depreciation of the Peseta (Figure 9), which improved the competitiveness of Spanish exports. In fact, the estimated values of the price elasticity of exports suggest that, other things being equal, the depreciation would have triggered a significant rise in the volume of exportsFootnote 10. Moreover, an examination of the official trade statistics for 1897 indicates that there were no «State trade» separate records for exportsFootnote 11. Therefore, I have not corrected official export figures to allow for the hypothetical inclusion of the Government supplies to colonial troops.
Another objection to the revised figures for the 19th century Spanish foreign trade has been raised by Tortella (Reference Tortella1994)Footnote 12. A contradiction between the corrected trade balance figures — which reduce the commodity trade deficit in the 1850s and 1860s and provide a surplus after 1870 — and the inflow of foreign capital is highlighted by this authorFootnote 13. Tortella (Reference Tortella1994, p. 132) argues that, at the end of the 19th century, with a positive inflow of capital and emigrant remittances, it would be hard to explain the peseta’s depreciation if there was also a trade surplus. This assertion, which seems logical at first sight, is, however, the result of identifying the commodity trade balance with the current account balance, in other words, with the overall balance for goods, services (which includes net income from abroad) and current transfers (including emigrant remittances). Such identification would be only warranted if the balances of services and current transfers were close to equilibrium, or if they canceled each other. In the case of the balance of services, such an assumption is inconsistent with the size of both external public debt and foreign investment in the private sector, which involved large interest and dividend payments. What is more, the assimilation of gross foreign investment with the (negative of the) current account balance is not validated as the latter only records net foreign investment into Spain. Furthermore, migrant remittances, the main component of the balance of current transfers, only became significant at the very end of the period under consideration as Spanish mass emigration was a comparatively late phenomenon in European perspective (Sánchez-Alonso Reference Sánchez-Alonso2000).
Tortella’s argument throws up questions worthy of careful consideration. When did emigrant remittances become significant? Why did the depreciation not take place in 1883, as soon as the convertibility of the peseta was suspended? What were the causes behind the delayed, post-1891 depreciation of the peseta? Sardá Dexeus (Reference Sardá Dexeus1948, p. 219) offered an early diagnosis: «the economic causes of this depreciation may be linked to the possible existence of domestic inflation caused by the increase in the quantity of silver and bank notes, with repercussions on prices and the trade balance», while adding, «it is better to seek the immediate cause in the evolution of the balance of payments.» It is Sardá’s second interpretation, focused on the balance of payments, the one that has found support in recent literature (Gutiérrez et al. Reference Gutiérrez, Herranz and Tirado1998; Cubel et al. Reference Cubel, Palafox and Sudrià1998; Sudrià and Tirado 2001).
Alternative interpretations to Sardá’s have been offered. Pablo Martín Aceña (Reference Martín Aceña1993, pp. 140-141) underlined the association between macroeconomic stability and a stable exchange rate of the peseta. Tortella (1994) identified the financial problems of the Government as the main cause of the nominal depreciation of the Spanish currency between 1891 and 1905. More recently, Marcela Sabaté et al. (Reference Sabaté Sort, Gadea and Escario2006) concluded that the treasury-financing needs led to money creation and, hence, to sacrificing a fixed exchange rate.
Unfortunately, the debate is seriously constraint by the lack of quantitative evidence about Spain’s international position. The first step requires the reconstruction of the balance of payments on current account, a task to which the section 3 of the paper is devoted.
3 A PRELIMINARY RECONSTRUCTION OF THE BALANCE OF PAYMENTS ON CURRENT ACCOUNT
The balance of payments systematically summarizes the economic transactions of an economy with the rest of the world. These are the transactions involving goods, services and income, financial claims on and liabilities to the rest of the world and transfers (IMF 1993, p. 6). I have estimated every item of the balance of payments on current account (commodity and service trade and current transfers). The procedure and sources used in the reconstruction of the main components of balance of payments on current account are summarily discussed in this section, although enough detail is provided for the reader who wants to replicate the computations. Needless to say, these computations are highly tentative, and only further research will eliminate the errors that fraught my estimates.
3.1 Commodity Trade Balance
3.1.1 Exports and imports of goods
Free on board (f.o.b.) value of goods exported and imported needs to be computed. Estimates on the basis of Spanish official trade statistics and corrected for quantity underestimation, including an estimate of smuggling through Gibraltar and Portugal, and for price biases by Prados de la Escosura (Reference Prados de la Escosura1986) have been usedFootnote 14. Cost, insurance and freight (c.i.f.) imports were converted into f.o.b. imports to comply with the balance of payment conventions.
3.1.2 Gold and silver
Quantities of gold and silver recorded in Spanish trade statistics (coins, bars and paste) are considered as monetary gold and silver and, therefore, not included in the estimates of net exports of goods and servicesFootnote 15.
3.2 Service Trade Balance
Three main categories are considered under the following labels: (a) freight and insurance services, (b) tourism, emigrants’ funds, passenger services and other services and (c) net income from abroad.
3.2.1 Freight and insurance
Freight income received for exports carried in Spanish ships minus freight expenses paid for imports transported in foreign vessels constitute the first item to be computed under this label. Following Douglass North and Alan Heston (Reference North and Heston1960), the freight-value method, or freight factor, was preferred to the earnings per ton methodFootnote 16. Total freight revenues on exports and imports were first computed by applying freight factors to the f.o.b. value of exports and imports and, then, in order to ascertain the freight income on exports (a credit for Spain), the share of tonnage exported carried under Spanish flag was used, while the share of imported tonnage in foreign ships was employed to compute freight expenses on importsFootnote 17. In addition, freight income from carrying trade between foreign ports was assumed, following North and Matthew Simon, to represent a percentage of freight earnings and a 10 per cent of freight income on exports was acceptedFootnote 18. Port outlays by Spanish ships in foreign ports and by foreign ships in Spain’s harbors as payments for port dues, loading and unloading expenses and coal are assumed to represent a fixed share of shipping earnings and expensesFootnote 19. Foreign ships transported more tonnage than in Spanish vessels as they exhibited, according to Jesús Valdaliso (Reference Valdaliso1991, p. 71), a more efficient transport capacity ratio. I assumed that more fully loaded vessels made smaller outlays per ship and, hence, port outlays by Spanish ships abroad (a debit) were established at 30 per cent of the freight income on exports while port outlays by foreign ships in Spain (a credit) were fixed at 20 per cent of freight expenses on importsFootnote 20. Finally, marine insurance income and expenses were computed under the widely shared assumption that underwriting follows the flag and exports in Spanish ships were, hence, usually insured by Spanish companies while imports in foreign vessels were insured by foreign companiesFootnote 21. I arbitrarily assumed that the insurance rates were identical by Spanish and foreign companies and accepted those used by Prados de la Escosura (Reference Prados de la Escosura1986), to which I added an extra 2 per cent to include shipping commissions and brokerage.
3.2.2 Tourism, emigrants’ funds, passenger services and other services
Yearly income from tourist services was derived on the basis of expenses per visitor (net of Spanish tourist expenses abroad) calculated by Francisco Jáinaga for 1931, times the annual number of tourists and, then, reflated with a cost of living index to obtain the current price estimates (Jáinaga Reference Jáinaga1932)Footnote 22. Unfortunately, the total number of tourists is only known since 1929 and was backward projected to 1882 with the rate of variation of passengers arriving by sea, while no tourism was assumed to exist over 1850-1881Footnote 23.
Spain was a net emigration country over the late 19th and early 20th centuries (cf. Sánchez-Alonso Reference Sánchez-Alonso1995). Emigrants carried small sums with them to cover their arrival expenses. It can be reckoned that, by 1931, emigrant funds to America represented, on average, 200 gold pesetas, that is, 400 current pesetas, including the fare and small amounts to cover arrival expensesFootnote 24. If the fare represented around 340 current pesetas, 60 pesetas would correspond to the emigrant’s fundsFootnote 25. However, Jáinaga only added «a small amount for unavoidable expenses» to the cost of the passage, and this sum is most likely an underestimationFootnote 26. I, therefore, accepted a higher estimate of 100 pesetas for those emigrating to America, and one-tenth, ten pesetas, for those to Algeria (and to France) in the eve of the World War IFootnote 27. These average sums times the number of emigrants to America, Algeria and France cast an yearly series of emmigrants’ funds that was reflated with a wage indexFootnote 28.
In addition, revenues and expenses from passenger transport have to be taken into account. Fares paid by tourists carried by Spanish ships and by returning immigrants by Spanish vessels are included on the credit side, while fares paid by emmigrants to foreign shipping companies represented a debit. The number of migrants provided by Blanca Sánchez-Alonso (Reference Sánchez-Alonso1995) for 1882-1913 has been completed with an estimate of migration for the years 1850-1881 on the basis of the scattered foreign evidenceFootnote 29. The share of arrivals and departures in Spanish and foreign ships is provided by official migration statistics from 1911 onwards and shows a stable pattern, roughly one-third of the emmigrants returned home under Spanish flag and three-fourths left in foreign shipsFootnote 30. These shares were accepted for the 19th and early 20th centuries. The fares for trips to Argentina, Cuba and Algeria are derived from Alejandro Vázquez, Moisés Llordén and official emigration statisticsFootnote 31.
Finally, Government transactions (credits and debits) were, in turn, taken from official sources (Díaz García Reference Díaz García1976).
3.2.3 Net income from abroad
Ascertaining the amount of and the returns to each type of capital asset invested abroad and of foreign capital invested at home is fraught with so many difficulties that has often discouraged the direct estimate of net incomes of foreign capital in historical studiesFootnote 32.
The alternative indirect approach starts from a benchmark estimate of a country’s international indebtedness at the beginning of the considered period that is yearly updated with the net inflow of capital. Such a convenient approach produces, however, a very crude estimate, as the initial amount of a country’s international indebtedness is not accurately computed and, especially, the interest rate used does not capture the average returns of a wide and changing variety of capital assets. Any alteration in the interest rate applied and/or in the initial estimate of international indebtedness provokes large differences in absolute terms in the long run (North 1960, pp. 574-575).
Therefore, in spite of its shortcomings, I have preferred to use a direct approach. Because of the dearth of data, only very crude estimates of foreign capital incomes (dividends and interest payments to private foreign capital and external debt service), on the debit side, and of Spanish labor returns abroad (wages and salaries), on the credit side, have been carried out. These are the main components of net income from abroad, as neither foreign labor in Spain nor Spanish investments abroad were significant over the period considered.
On the debit side, three main items are distinguished: (1) the external debt service; (2) dividends and interests paid to railway shares and debentures owned by foreigners; and (3) returns to foreign factors in miningFootnote 33.
Service payments on the external debt have been computed by applying specific interest rates to each class of the Government bondsFootnote 34. Some caveats are needed about the volume of external public debt in foreign hands. After the sovereign debt rescheduling in 1882, which exchanged existing foreign debt for new bonds (at 43.75 per cent of its nominal value), and simultaneously with the abandonment of gold convertibility of Spanish currency in 1883, debt repatriation started as Spaniards found more secure to invest in bonds serviced in gold pesetas as a shelter against currency depreciationFootnote 35. Since 1891, when the peseta started depreciating, Spanish citizens purchased external debt bonds while foreign bondholders tried to get rid of them. The Government reacted by introducing the so called «affidavit» in 1898, which implied that only non-resident bondholders would continue receiving their interest payments in gold pesetas (or in French francs), while the rest would be paid in current pesetas (and offered to convert their external debt bonds into internal debt). As a result, the external public debt fell, in 1903, to 52.7 per cent of its volume in 1898, which implies that Spanish residents had purchased almost half of the Spain’s external public debt between 1891 and 1898. Hence, only half of the interests paid (52.7 per cent) on external debt should be computed as payments to foreign capital invested in external debt over 1891-1898. I have, then, assumed that the interest payments effectively paid to foreign bondholders over 1891-1902 should be computed on the volume of external debt in existence in 1903Footnote 36. Moreover, in so far, the external debt was serviced in gold pesetas, and the amount of interests paid (obtained by applying the interest rate to foreign debt in non residents’ hands) has to be increased by the depreciation rate of the current peseta with respect to the gold peseta over 1891-1914Footnote 37.
Railway companies were highly concentrated and the detailed research by Pedro Tedde de Lorca (Reference Tedde de Lorca1978, Reference Tedde de Lorca1980) provides enough evidence to estimate dividends on share capital and interests on debentures paid to non-residentsFootnote 38. Dividends paid to shareholders and interest payments on debentures issued by the three major railway companies are available from the mid-19th century onwards (Tedde de Lorca Reference Tedde de Lorca1978)Footnote 39. Both the percentage represented by the three main companies in total capital invested in railways and the proportion of railways’ capital in foreign hands have to be ascertained to compute the returns to foreign capital invested in Spanish railways. Tedde de Lorca provides total capital shares and bonds held by the three major companies and its proportion in total investment, and, on the basis of Albert Broder’s research (Broder 1976), also the participation of French capital in total capital invested in 1867, at the time of network construction, and over the 19th centuryFootnote 40. Broder’s (Reference Broder1976, p. 62) estimates of foreign investment in railways allowed, in turn, to rescale French railways’ capital to cover all foreign capitalFootnote 41.
Foreign capital in mining was mainly British. On the basis of the effective capital invested by British companies and cumulated total foreign investment in mining, it can be suggested that, over 1870-1913, more than half of all foreign capital in Spanish mining came from the United KingdomFootnote 42. Decadal averages of dividend and interest payments to British companies are provided by Charles Harvey and Peter Taylor (Reference Harvey and Taylor1987) that were rescaled to include all payments to foreign capital in Spanish mining for 1851-1913, assuming similar rates of return in non-British foreign investment, and using the estimated British participation in total foreign capitalFootnote 43. Estimates of foreign capital returns in mining derived through this procedure were, then, distributed annually with an index of non-retained value in Spanish mineral exportsFootnote 44.
Assessing returns to Spanish labor employed abroad is a complex task as labor incomes (wages and salaries), which belong to the balance of services, have to be distinguished from emmigrants’ remittances, which belong to the balance of unilateral transfers. Actually, the distinction can only be made since 1917, and I accepted that only 5 per cent of those emmigrating to America and 60 per cent of those migrating to Algeria returned within the year over 1850-1913Footnote 45. The next step was to assess the amount that, on average, was brought home by Spanish workers returning after 1 year, or less, away from home. I computed an average sum that was taken home by the temporary emmigrant or sent annually by the long-term emmigrant to their relatives and friends. Estimates of total sums sent home by emmigrants have been gathered in recent historical research for the early 20th centuryFootnote 46. José Ramón García López (Reference García López1992) presents the most comprehensive estimates for the years before the World War I — 250-300 million pesetas as an annual average over 1906-1910 that amounts around 340-400 pesetas per emmigrant (either returning home or sending remittances). I accepted 400 pesetas per emmigrant as a benchmark that was, then, projected backwards and forward with a nominal wage index constructed for the destination countries and adjusted for the exchange rate between the peseta and each destination country’s currency over 1850-1913Footnote 47. Finally, returns to Spanish labor abroad were obtained by multiplying the annual sum per head with the number of emigrants returning home within their first year abroad.
3.3 Current Transfers Balance
Emmigrants’ remittances constituted its main historical component in Spain before 1913. Not all emmigrants sent money home while being abroad. In historical estimates, it is usually accepted that most of those who established themselves abroad stopped sending money after 5 or 6 years either because they have already paid for their debts or because they planned to invest in the receiving country. I arbitrarily assumed that emmigrants only sent money home within their first 5 years and computed the emmigrants’ remittances by multiplying the estimated average sum per emmigrant with the cumulative figure of emmigrants arrived in the last 5 years, after deducting those migrants who returned home within 1 yearFootnote 48.
3.4 The Balance of Payments on Current Account and the Net Inflow of Capital
Adding up the balances of goods, services — including net payments to foreign factors — and unilateral transfers, the balance of payments on current account is obtained.
The net inflow of capital — that is, the capital account balance — has been derived, in turn, by adding the negative of the current account balance to the increase in foreign reserves, computed from yearly estimates of the stock of gold and silverFootnote 49. An alternative estimate of annual variation in reserves is provided by net exports of gold and silver in the official trade statistics. However, its lack of coverage of total specie flows, due to smuggling, did not advice its use (Tortella Reference Tortella1974, pp. 121-122)Footnote 50.
Finally, annual series of Spain’s international indebtedness can be obtained by adding up the net inflow of capital to the level of indebtedness at the beginning of each year. The level of international indebtedness at the beginning of 1850 is, at best, an informed guess and has been assumed to be equivalent to the nominal value of external public debt, 1505 million pesetas (Comín Reference Comín1996, p. 131), since private foreign investment has been considered negligible until mid-19th century (Sardá Dexeus Reference Sardá Dexeus1948, p. 262). Needless to say, the resulting estimates are very tentative and should be taken with a grain of salt.
4 TRENDS IN SPAIN’S INTERNATIONAL POSITION
Clearly defined periods can be distinguished in the commodity trade balance: one of the deficits — but for 3 years, 1854-1856 — from 1850 to the 1866 crisis, followed by one of the surpluses — but for 1 year, 1876, — up to the eve of the World War I (Figure 1). When we turn to the balance of services, a persistent deficit is observed. Transport, tourism and intergovernmental transactions show a negative sign (Figure 2), and, more important, its main item, net income from abroad, too (Figure 3). The service of the public debt dominated the net income from abroad until the beginning of the Restoration (1876). After the sovereign debt rescheduling (1882) and, especially, from 1890 onwards, this situation changed with net returns to foreign capital in railways and mining gaining weight. Emmigrant remittances became increasingly important from the late 1880s and increased dramatically since 1904 offsetting, at least in part, the net payments to foreign factors (Figure 4).
Figure 1 COMMODITY TRADE BALANCE (MILLION PESETAS)
Source: See text.
Figure 2 SERVICES TRADE BALANCE (EXCLUDING NET INCOME FROM ABROAD) (MILLION PESETAS)
Source: See text.
Figure 3 SERVICES TRADE BALANCE: NET INCOME FROM ABROAD (MILLION PESETAS)
Source: See text.
Figure 4 CURRENT TRANSFERS BALANCE (MILLION PESETAS)
Source: See text.
Adding up the commodity, services and current transfer balances results in the current account balance. Two distinctive phases with 1891 as a turning point can be distinguished. A sustained current account deficit was in place throughout 1850-1890 — except for 4 years. Then, from 1891 up to the World War I, a surplus prevailed with the years 1899-1904 as the only exception (Figure 5)Footnote 51. The highly tentative estimates of the net inflow of capital match the inverse pattern of the current account balance, although they exhibit a higher level over 1859-1873 and, especially, a lower one during the years 1883-1890 (Figure 6). Finally, crude estimates of the annual balance of Spain’s international indebtedness are presented in Figure 7. It appears that international indebtedness grew up to 1879, stabilized, then, until 1890, and exhibited a steady decline thereafter, but for a short reversal over 1899-1904Footnote 52.
Figure 5 CURRENT ACCOUNT BALANCE (MILLION PESETAS)
Source: See text.
Figure 6 NET CAPITAL INFLOW (MILLION PESETAS)
Source: See text.
Figure 7 SPAIN’S INTERNATIONAL INDEBTEDNESS (MILLION PESETAS)
The sharp contrast between the commodity and current account balances is clearly a most striking result. The commodity trade balance is positive in 50 out of the 64 years, with deficit concentrated in the years 1858-1866 — in which large imports associated to railway construction took place; meanwhile the current account was in deficit for most of the time except for 1891-1898 and 1905-1913. These two periods and 1858-1866 are the only ones in which the signs of the two balances match each other.
The divergent evolution of the various components of the balance of payments allow us to reconcile the positions of those who maintained that, from 1870 onwards, the commodity trade deficit resulting from the official figures was implausible (Prados de la Escosura Reference Prados de la Escosura1986) and those who stressed that Spain’s international position was one of the deficits (Sardá Dexeus Reference Sardá Dexeus1948; Tortella Reference Tortella1994). The explanation for the apparent contradiction between the two balances is to be found in the growing role played by net income from abroad that was not counterbalanced by current transfers, as emmigrant remittances only became significant from 1904 onwards. Thus, the current account deficit appears to be associated to the costs of investing in new infrastructures and exploiting natural resources.
How could the current account surplus over the years 1891-1898 and 1905-1913 be explained? The reasons behind the change from a current account deficit to a surplus can be explored in the light of the phenomenon known as «sudden stops.» Sebastian Edwards (Reference Edwards2004, p. 19) has defined a sudden stop episode as «an abrupt and major reduction in capital inflow to a country that up to that time had been receiving large volumes of foreign capital.» Sudden stops are, thus, sharp reversals in capital inflows that constrict domestic consumption smoothingFootnote 53. During the first wave of financial globalization that took place in the late 19th and early 20th centuries, two main effects are associated to sudden stops: drops in the exchange rate and deceleration of economic activityFootnote 54.
Exogenous forces conditioned sudden stops. Monetary tightening in core countries (e.g. increases in the central bank discount rates) represented a significant exogenous element in the reversal of capital inflows. Also international crisis irradiating from capital importer countries, such as Argentina during the Baring crisis in the early 1890s, constituted an exogenous force to be taken on board. However, the fact that not all capital importers suffered to the same extent a given sudden stop suggests that endogenous factors mattered.
Let us examine the Spanish experience in the light of sudden stops (SS, hereafter). In Figure 8, international capital flows, proxied by British-, French- and German-aggregated current account (excluding all gold flows), are confronted with the net capital inflow in Spain, both expressed in SterlingFootnote 55. Several slowdown episodes in international capital flows are observed starting in 1866, 1873, 1890 and 1896, of which those of 1873 and 1890 appear to have special intensity. In Spain, sudden stops can be observed in 1866-1869, 1876-1880, 1890-1896 and 1904-1907, with especial intensity in the last two episodes. Interestingly, the last sudden stop, at odds with the previous ones, occurred while international capital exports were accelerating during the decade before the World War I.
Figure 8 INTERNATIONAL NET CAPITAL FLOW AND SPAIN’S NET CAPITAL INFLOW (MILLION STERLING)
Sources: Obstfeld and Jones (1997), and see text for Spain’s net capital inflow.
Which of the predicted effects of the SS are found in the Spanish experience? To begin with, currency crashes occurred during 1891-1893 and 1896-1898, but not in earlier SS, or in 1904-1907 — when the opposite happened and the peseta returned to its previous position in 1891 — (Figure 9)Footnote 56. Why such an uneven response to different SS? The consequences of two exogenous events, the Baring crisis (1890) and the Cuban War of Independence (1896-1898) are, no doubt, part of the explanation. According to Luis Catao (Reference Catao2007, pp. 266-269), during the first wave of financial globalization, countries that experienced rapid monetary expansion and had a lax fiscal behavior were more prone to currency crashesFootnote 57. In fact, money supply (M2) appears to have grown above GDP in Spain during the cyclical upswings 1885-1889 and 1896-1898 (Figure 10). Meanwhile, the public debt/GDP ratio, sharply reduced as a result of the sovereign debt rescheduling in 1882, experienced a sustained increase over 1893-1896 and went further up in the aftermath of Cuban War of Independence, 1899-1903 (Figure 11)Footnote 58.
Figure 9 SPAIN’S CURRENT ACCOUNT BALANCE (% GDP) AND NOMINAL AND REAL EFFECTIVE EXCHANGE RATE (1913 = 100), 1870-1913
Source: See the text.
Figure 10 RATIO M2/GDP (1874-1913)
Sources: M2, Martín Aceña and Pons (Reference Martín Aceña and Pons2005); GDP, Prados de la Escosura (Reference Prados de la Escosura2003).
Figure 11 PUBLIC DEBT/GDP (1884-1913)
Sources: Public debt, Comín and Díaz Fuentes (Reference Comín and Díaz Fuentes2005); GDP, Prados de la Escosura (Reference Prados de la Escosura2003).
The simultaneity of sudden stops and exchange rate drops during the 1890s tends to play down the role of the suspension of the gold convertibility of the peseta (1883) suggesting that, during the 1880s, as long as an inflow of foreign capital continued, the Spanish currency remained stable, regardless of whether the exchange rate floated or not (Figure 9).
This result has implications for the debate between those who emphasize the advantages of a floating exchange rate for a developing economy due to the high opportunity cost of maintaining gold reserves as well as the shock absorber role of the exchange rate (Sardá Dexeus Reference Sardá Dexeus1948; Tortella Reference Tortella1974; Flandreau and Zumer 2004), and those who stress that belonging to the Gold Standard sent the right signal of compliance with orthodox financial practice to capital markets (Martín Aceña Reference Martín Aceña1993; Bordo and Rockoff Reference Bordo and Rockoff1996). To the extent that it could be factored out, macroeconomic stability rather than belonging to the Gold Standard seems to have been the relevant signal for international investors.
When macroeconomic discipline was abandoned at the time of the Baring crisis and, then, again, by the need to financing the Cuban War of Independence, the control mechanism that stopped the peseta from falling disappearedFootnote 59. Macroeconomic instability, especially inflation, which soared over 1895-1904 (Figure 12), had negative effects on the reputation of Spain’s economy making it less attractive to international capital, as suggested by the spread between the discount rate of the Bank of Spain and those of the central banks in the main capital-investing countries (Figure 13)Footnote 60.
Figure 12 RATE OF INFLATION (1883-1913)
Source: GDP deflator from Prados de la Escosura (Reference Prados de la Escosura2003).
Figure 13 INTEREST RATE SPREAD IN SPAIN (1884-1913): DIFFERENTIAL WITH ENGLAND, FRANCE, AND GERMANY
Sources: Central banks’ discount rates for Spain Martín Aceña and Pons (Reference Martín Aceña and Pons2005), Britain, France and Germany Homer and Sylla (Reference Homer and Sylla1991).
After the independence of Cuba, Puerto Rico and the Philippines, a current account deficit reappeared between 1899 and 1906 that could be associated to the repatriation of capital from the former colonies in the sound economic environment provided by Fernández-Villaverde’s stabilization plan (Comín Reference Comín1999).
Why, then, the sudden stop of 1904-1907, at the time of an international expansion of capital flows, and why the current account reversal was accompanied by an improvement in the exchange rate of the peseta? There are good reasons to explain why the exchange rate did not drop. The fact that, for most of the period up to the World War I, inflation remained moderate and the debt/GDP and M2/GDP ratios were continued falling, as opposed to what had happened in the 1890s, help explain why a currency crash was avoided. Furthermore, no exogenous events such as the Cuban War of Independence took place while emmigrant remittances played an important offsetting role in the current account balance (Figure 4). But, why was Spain left aside from the international wave of investment before the World War I? It is noteworthy that Italian and the Portuguese current account balances also experienced a surplus during this period (Bordo et al. Reference Bordo, Cavallo and Meissner2010; Catao Reference Catao2007). Meanwhile, Argentina, Brazil, Canada and Russia became the main capital importers. Why were South–Western European countries excluded? Was it because investment opportunities had dried up, or because the opportunity cost was too high? It would be worth investigating the extent to which the decline in a sustainable current account deficit results from a reduction in foreigners’ demand of an emerging country’s assets (Edwards Reference Edwards2004). In Spain, by the end of the 19th century, those sectors that had attracted most foreign capital were already developed; the railways network was completed and mining resources were fully exploited. Perhaps this fact helps explain why, in the absence of new investment opportunities, international capital inflow into Spain slowed downFootnote 61. This is, no doubt, an avenue for further research.
To sum up, the idea that the suspension of the convertibility of the peseta in 1883 and its delayed effect in terms of a currency crash in the 1890s was the result of endemic balance of payment problems is not supported by the evidence presented here. On the contrary, it is the alternative view that sudden stops, in a context of domestic financial imperfections, are to be blamed.
5 DID INTERNATIONAL INTEGRATION HOLD BACK GROWTH?
The traditional view among Spanish economic historians, reinforced by those who argue in terms of the «external constraint on growth» approach, associates a current account deficit to a deterioration of the economic situation or a threat to growth. Conversely, a current account reversal — that is, a surplus on current account — will imply, according to the sudden stop literature, a decline in investment and, thus, in economic growth that tends to intensify if the country is less opened (Edwards Reference Edwards2004; Bordo et al. Reference Bordo, Cavallo and Meissner2010).
No consensus has been reached on the importance of a large and resilient current account deficit for growth. The optimistic view emphasizes the intertemporal nature of the current account arguing that to the extent they reflect a rise in investment there is no reason for concern (Sachs Reference Sachs1981; Corden Reference Corden1994). The opposite, pessimistic view, epitomized in Thirlwall’s approach (Reference Thirlwall1979), has a more recent expression in Fischer (Reference Fischer1988) to whom the first sign of a crisis is the current account deficit. In this context of uncertainty, historical research can make a useful contribution.
How did the interruption of foreign capital inflow affect economic growth in Spain?
Let us begin with the current account identity:
where CAB is the current account balance; X and M are exports and imports of goods and services, respectively; NCT is the net current transfers; and NY is the net income from abroad, while CAB equals the difference between gross domestic saving (S) and investment (I)Footnote 62. Here, we can normalize regarding GDP (Y), to provide an idea of the relative size of each item,
Two distinctive phases can be observed in the relationship between investment and saving with 1890 as the turning point (Figure 14). Domestic investment was above saving between 1850 and 1890, which means that the foreign capital supplemented the domestic saving to meet investment demand. The gap between investment and saving was particularly noticeable from 1850 to 1866. This upsurge of investment that reached 10 per cent of GDP in the early 1860s was associated to the construction of the railways network in which foreign capital played a non-negligible role. From 1890 up to the eve of the World War I, investment depended almost exclusively on domestic saving as a current account surplus prevailed (exception made of the years 1899-1904). All in all, investment and saving followed the same trend with investment remaining below 8 per cent of GDP up to 1898, but for the years of the railway construction boom.
Figure 14 GROSS INVESTMENT AND SAVING (% GDP)
Sources: Investment, Prados de la Escosura (Reference Prados de la Escosura2003); saving, see the text.
The small size of investment and saving, in terms of GDP, hides the relative importance of foreign investment within the gross domestic capital formation in Spain. Starting from expression (2), we can decompose gross domestic investment into gross domestic saving (private, Sp/Y, and Government, Sg/Y, saving) and the (negative of the) current account balance (Figure 15).
Figure 15 DECOMPOSING GROSS INVESTMENT: PRIVATE AND GOVERNMENT SAVING AND THE (NEGATIVE OF THE) CURRENT ACCOUNT BALANCE (% GDP)
Sources: Government Saving, Comín and Díaz Fuentes (Reference Comín and Díaz Fuentes2005); for the rest, see the text.
Government saving was negative up to 1891, especially between 1861 and 1873, and was not counterbalanced by a rise in private saving but by a current account deficit financed through a net inflow of foreign capital. This way, the decrease in government saving did not imply a constraint to the investment ratio. An implication is that a decline of investment derived from a decrease in government saving — the crowding-out hypothesis sometimes discussed in the literature — is not confirmed by the evidence.
The relative importance of the net capital inflow contribution to capital formation is captured by its share of gross investment (Figure 16). Between 1850 and 1890, foreign capital financed the one-fifth of the domestic investment, reaching, on average, almost the two-fifths of it during the third quarter of the 19th century. Conversely, in the years 1891-1913, the net outflow of capital implied a contraction of domestic investment (13 per cent) that reached nearly the one-third over 1891-1898, but experienced a reversal episode over 1899-1904, in which the net inflow of foreign capital represented 15 per cent of the gross capital formation.
Figure 16 NET CAPITAL INFLOW AS A PROPORTION OF GROSS INVESTMENT (%)
Source: see the text.
These are far from negligible figures, but how large was the impact of net capital inflow on economic growth? I have used a growth-accounting framework to investigate how much would the capital stock have varied, if investment demand had been met exclusively through domestic saving, and, then, how much would have the GDP per head differedFootnote 63.
The absence of net inflow of foreign capital is simulated by replacing actual investment with saving in the estimates of capital stockFootnote 64. It could be argued that foreign capital was invested in non-residential structures, machinery and transport equipment to larger extent than in residential structures. This option has not been explored here, but it can be presumed that the results from this counterfactual exercise provide only a lower-bound estimate. Furthermore, we could speculate that the investment by nationals would have been lower without the stimulus of foreign investment, and the employment would have been lower without this increase in capital formation.
A comparison between actual and counterfactual capital stock is provided in Figure 17. Over the period 1850-1890, the counterfactual level of capital stock is lower and its pace of growth milder than the actual one (3.1 against 3.4 per cent), especially during years of intensive capital inflow such as those of the railway construction (2.9 vs. 4.9 per cent). As regards the years 1891-1913, the question is how larger the capital stock would have been, if all saving would have been invested domestically, that is, without a net outflow of capital. In such a scenario, the actual capital stock would be smaller and its growth is slower than the counterfactual one (2.5 vs. 2.8 per cent), and even more during the sudden stops of the 1890s (1.9 vs. 2.9 per cent).
Figure 17 ACTUAL AND COUNTERFACTUAL CAPITAL STOCK, 1850-1913 (1850 = 100)
Source: see the text.
Next, the impact on the growth of GDP per head has been assessed by comparing the actual and counterfactual scenarios. The simulation exercise provides once again the lower-bound estimates, as foreign capital inflow is assumed to have an impact on capital accumulation, but not on the efficiency in the use of production factors. Nonetheless, the new technology embodied in machinery and transport equipment financed by foreign investment would have improved efficiency and, thus, increased the total factor productivity. This would be especially the case during the railway construction and the mining boom of the third quarter of the 19th centuryFootnote 65.
Actual and counterfactual growth rates of GDP per head over distinctive phases of the economic performance are offered in Table 1Footnote 66. Two different phases are considered that correspond to the long swings in Spanish economic growth, 1850-1883 and 1884-1913 (Prados de la Escosura Reference Prados de la Escosura2007)Footnote 67. In the first one, per capita GDP would have grown at a slightly lower rate in the counterfactual scenario of the lack of a net inflow of foreign capital. The differential increases during the railway construction. In the post-1884 years, the counterfactual scenario of the absence of a net outflow of capital produces a faster pace of growth. This is more intense during sudden stops, particularly in those of the 1890s.
Table 1 ACTUAL AND COUNTERFACTUAL GROWTH (%)
Sources: Prados de la Escosura and Rosés (Reference Prados de la Escosura and Rosés2009, Reference Prados de la Escosura and Rosés2010), and see the text.
The results of this highly tentative and speculative exercise help to highlight the significance of Spain’s openness and integration in the international capital market. Economic growth intensified during the late 19th century, as foreign capital complemented domestic saving to meet a growing investment demand and, although difficult to quantify, improvements in the quality of capital and embodied technology in new capital goods, whose acquisition was funded by foreign capital, most probably made the economy more efficient. Conversely, the sudden stops at the turn of the century slowed down the growth, as the increase in capital accumulation decelerated, and presumably the efficiency of the economy. Thus, sudden stops by causing current account reversals and currency drops in a context of domestic macroeconomic imperfections had a clear negative effect on the long-run growth of Spain.
6 CONCLUDING REMARKS
In 1850-1890, the economic expansion coincided with a significant current account deficit, whereas in 1891-1913, the growth slowed down at the time of positive current account balances. This inverse correlation between current account surplus and economic growth throws serious doubts on the widespread view of an external restriction to Spain’s growth during the 19th century. It suggests, in fact, an alternative interpretation — the balance of payments reacted to changes in the equilibrium between saving and investment. Thus, the current account deficit resulted from an inflow of capital that allowed the rate of investment to rise and, in turn, to contribute to more rapid growth. Only when isolation from the international economy increased, since 1891, investment demand had to rely on domestic saving. In the context of globalization that characterized the classical gold standard era, there was no reason why an open economy should not enjoy sustained access to international capital markets and break the link between investment and domestic saving. From this perspective, the persistence of the current account deficit between 1850 and 1890 is better understood.
At the turn of the century, domestic macroeconomic imperfections strengthened the current account reversals that had been provoked by sudden stops, undermining the confidence of foreign investors in the Spanish economy and helping the flight of foreign capital. Furthermore, as Blanca Sánchez-Alonso (Reference Sánchez-Alonso2000) has shown, the migration push of the 1891 protectionist tariff was largely offset by the microeconomic consequences of the currency crash preventing individuals from migrating for one and a half decades.
The view that Spanish integration in international markets contributed to a slowing down of economic growth appears to be wrong. It can be suggested that without the current account deficit — that is, without an inflow of foreign capital — Spain would have grown at a slower speed during the second half the 19th century. As the inflow of capital dried up, investment had to rely exclusively on domestic savings’ slowing down capital accumulation and economic growth.
APPENDIX 1
(Table 2A)
Appendix 1 THE BALANCE OF PAYMENTS ON CURRENT ACCOUNT, NET CAPITAL INFLOW AND INTERNATIONAL INDEBTEDNESS, 1850-1913 (MILLION PESETAS)
* Excluding factor payments.
Source: See text.
APPENDIX 2
(Table 2B)
Appendix 2 INVESTMENT AND SAVING, 1850-1913 (MILLION PESETAS AND % GDP)
Sources: See the text and Appendix 1. GDP and Investment, Prados de la Escosura (Reference Prados de la Escosura2003); Public Saving, Comín and Díaz Fuentes (Reference Comín and Díaz Fuentes2005).
