Czech Republic overtakes Spain in GDP per capita

Nearly 20 years after Spaniards adopted the euro, there has been no convergence with Germany while Eastern European economies are edging closer

Skoda employees at a factory in Pilsen, Czech Republic.
Skoda employees at a factory in Pilsen, Czech Republic.VLADIMIR WEISS (BLOOMBERG)
Antonio Maqueda

In the 1990s, the Czech Republic was emerging from communism and it was producing just two-thirds of the wealth that Spain was. But in three decades, it has managed to beat the Spanish economy in terms of GDP per capita at PPP (or gross domestic product per person at purchasing power parity, which makes it possible to compare countries). Estonia, Lithuania and Slovenia are close to surpassing Spain on this metric as well.

The figures evidence a regression by Spain, which had been reducing its distance with the more advanced European economies until the financial crisis of 2008. Since the property crash, however, the Spanish economy has been drifting further away from northern European countries, stuck at wealth levels similar to those of Italy and France.

It is true that Spain’s per capita GDP has grown 50% in the last 30 years. But this metric has increased a lot more in some other countries, particularly in Eastern Europe. In the meantime, the gap separating Spain from Germany has increased since the 2008 financial crisis, and is now at 1997 levels. In other words, nearly 20 years after adopting the euro, there has been no convergence with the Germans, who are still around 25% wealthier than Spaniards.

In late 2007, the Spanish prime minister at the time, José Luis Rodríguez Zapatero of the Socialist Party (PSOE), announced that Spain had overtaken Italy in wealth for the first time, using data from the European Union’s statistics agency Eurostat. With the EU average established at 100, the data showed Spain at 105% of per capita GDP, while Italy was at 103%. It was the peak of the real estate bubble, and the Spanish executive was selling the point that the country had finally converged with the EU after a 21-year membership.

But the crisis hit soon later, and Eurostat’s figures for 2006 and 2007 were reviewed to show that Spain was never in fact ahead of Italy. The closest it came was 103% of the EU’s per capita GDP in 2007, four points below Italy. It was a similar story in 2017. In 2019, Spain ranked at 91% of the EU average, compared with Italy’s 96%, evidencing how both countries have lost ground within the union.

Meanwhile, several economies in Eastern Europe were getting close to Spain and even surpassing it. The most recent Eurostat figures show that the Czech Republic overtook Spain between 2018 and 2019. The Organization for Economic Cooperation and Development (OECD) lists 2019 as the year that the Czech economy outperformed Spain’s, while according to the International Monetary Fund (IMF), that moment took place in 2020.

The secret to Czech success

According to the OECD’s estimates, in 2019 Spaniards had a per capita GDP of $38,128 (€31,644), slightly below the figure of $38,152 for Czechs. How did a country that produced a third-less wealth per person 30 years ago come to be wealthier today? The answer lies largely in the fact that the Czech economy has converted itself into an industrial subcontractor for Germany. Industry and exports account for a much larger share of GDP.

But there are other factors at play. The unemployment rate in the Czech Republic is just 3%, compared with 16% in Spain. And there are far fewer temporary jobs. As a result, there is a lot less inequality despite a tax system that does not distribute wealth as evenly.

“Between 1980 and 2019 the unemployment rate in Spain has been close to 17%. If we could manage to reduce that by 10 points by adopting reforms to change the way the labor market as well as the goods and services market work, Spanish GDP would grow an additional 13%, which is more than the kind of growth expected to be achieved with the European funds,” said Rafael Doménech, an economist at BBVA.

Training and R&D

Training is also decisive. In Spain, 30% of young adults have no more than high school diplomas. In the Czech Republic, that figure is 7%. And even though the number of university graduates is similar, many more Czechs have vocational training studies.

The Czech government also spends an additional half-a-point of GDP on research and development (R&D) compared to Spain, and its public finances are healthier. Before the coronavirus pandemic, it had a slight surplus and debt levels were 30% of GDP as opposed to 95% in Spain.

Since 1997, the Czech Republic has been steadily bridging its economic gap with Germany, going from -40% to -23%. Spain remains stuck at -23%. Logic holds that a country that is lagging behind will experience faster growth as it adopts the technology and good practices of leading economies. And Spain did reduce this distance – until the property bust of 2008. From this moment on, the distance with the wealthiest economies has widened.

In his book Crecimiento y Empleo (or, Growth and Jobs), the economist Juan Francisco Jimeno explains that this gap in per capita GDP is due to two factors almost in equal parts: higher unemployment and lower productivity.

“We have grown by increasing the number of people in employment and by investing in activities that are not very productive such as construction, without improving efficiency or productivity,” adds the economic historian Leandro Prados de la Escosura.

Economists generally agree that training levels are inadequate, and that Spanish legislation divides workers sharply between those on long-term contracts and those on temporary ones, which does not encourage investment in human capital or favor career advancement or improvements in business efficiency.

Productivity, which is very important in the long term because it defines a country’s wealth, is another pending subject. Yet it does not show up as a priority on politicians’ agendas. Proof of it is the fact that despite a European recommendation from 2016, Spain has not created a Productivity Council, unlike other countries such as France, Germany, the Netherlands and Denmark.

English version by Susana Urra.

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