“People reject capitalism because they think it is based on shady deals”

Luis Garicano argues that Spain’s institutions need a huge dose of transparency Only then will confidence return to the economy

Luis Garicano.

Luis Garicano believes that some of the problems that weigh on the Spanish economy, such as corruption and cronyism, have little to do with cultural considerations and are much more the result of the legal and social environment in which institutions are created. In his recently published book El dilema de España (Or, The dilemma of Spain, published by Atalaya), the London School of Economics professor sees an urgent need for profound changes in how the state works, in the educational system and in political parties in order to enhance the transparency and fairness of markets. "A competition commission or constitutional court is of no use if later you appoint the most servile of people to it," he says.

Question. You warn about crony capitalism and the importance of getting your way into the VIP box in Real Madrid's Bernabéu.

Answer. The capitalism that works serves the needs of other people. If you invent a telephone that many people want, things will work out well for you, and if you invent one that nobody wants they will go badly. Steve Jobs and Bill Gates didn't spend their time calling politicians to get licenses; they were in their offices in Seattle thinking about programs and products. In Spain, the danger is a drift toward a situation in which those who get ahead are not those that have the best ideas, but those who have the best connections. It's a concern that a lad of 20 sees that the way to go is not to get himself trained up and have good ideas but to know the municipal councilor and get good permits in order to make money. If the system is saying is that this is what is important, all the energy will go toward that and not toward generating ideas. Spain has the lowest level of acceptance of capitalism among neighboring countries because people believe it works based on shady deals.

Q. Isn't there a VIP box at Yankee Stadium or the Emirates?

A. Having connections and things of that order happen everywhere, but it is more dangerous when they dominate wide segments of the economy and the rules of play don't address this. That, for example, is the problem that Spain has in the electricity sector because everything works on the basis of phone calls and decrees. When the system doesn't work, you open the door to wheeling and dealing in the shadows. Things work if they are done in a transparent way, with independent regulators that can't be got at.

We are not in Venezuela, but we're heading for a scenario in which Venezuela is not impossible"

Q. You have been critical of the members chosen for the CNMC competition watchdog.

A. In a soccer game the referee needs to be independent and for people to believe in him; otherwise, people won't go to watch soccer. In a market economy you need legitimacy so that when electricity rates go up there is a body in which people believe, trust and understand. When those who take decisions don't believe in this, they want bodies that obey the politicians. They have to be recognized experts in the required area. In the case of the CNMC and others, such as the independent fiscal authority, what happens far too often is that instead of looking for legitimacy with people with the right credentials they look for people they can call at two in the morning for them to give you a report on what you want to hear by four o'clock.

Q. An ethos of having contacts in the top echelon makes capitalism somewhat less democratic.

A. And also something that people are not willing to accept. In the case of Burgos, for example [in reference to a recent series of public protests against a planned urban development that the mayor of the Spanish city was eventually forced to abandon]: if you think there has been a transparent decision, and in the end you lose, you accept it. But if you see that the game has been rigged, city residents rebel. In the financial sector governance has clearly improved, but I am concerned about the drift of things. We are not in Venezuela, but we're heading for a scenario in which Venezuela is not impossible. That's something to be afraid of.

Q. You criticize the level of competence of Spain's political leaders.

A. We live in a globalized economy and many decisions require personal contact on a daily basis with other leaders. You would do well to speak English and get overseas experience. The consequences of a system that is so inbred and closed to the rest of the world are significant in a globalized economy.

Q. Even if we were to choose leaders from among graduates of Harvard and Oxford, the social standing of those who can accede to power would be a narrow one.

Technocrats are overly confident in technical solutions; if Vietnam can't be won with five bombs, then use 5,000"

A. That's true. You don't want to convert politics into a domain of the elite, either. However, if the university systems work, it should be possible for anyone to get overseas training. You need a balance and at the moment we are at one extreme. The Kennedy government was at the other extreme; everyone was a technocrat, and something in between is needed.

Q. In your book you talk about the mistakes made by Kennedy's technocrats.

A. Technocrats are overly confident in technical solutions; if Vietnam can't be won with five bombs, then use 5,000 or five million. Technical solutions are not always solutions; you have to be able to understand what people want. And to be capable of explaining things.

Q. You ask a very tough question in your book when you deal with Spain's system of oposiciones, competitive examinations in which the government guarantees those who pass a job for life. Is anyone willing to change a country in which a 22-year-old decides to spend a great deal of his time locked up in his room memorizing subject matter to be able to regurgitate it better than anyone else before an examination panel?

A. You need dynamic people with creativity that look to change the world and you find people that want an absolutely secure job without seeing the world.

Q. Nobody has found a solution to the problem of the labor market in Spain, but you and your colleagues at the Fedea Foundation came up with an idea that was something of an achievement. Neither the government, the labor unions or employers liked it. This was the idea of a single contract that does away with all temporary contracts, except in the case of temporary replacement, and which establishes severance pay levels that increase the longer you are in the job. What happened?

A. The first thing the [labor] minister said was that it breached the Constitution. A dual labor market has the advantage for those on permanent contracts that when the pace of activity slows in Spain and the reaction is to get rid of people instead of reducing wages and hours worked, those on temporary contracts are the first to be fired. To the hard core of the labor unions, having a high degree of people on temporary contracts is not such a bad thing, while businessmen are afraid they will be left alone to deal with all of those on fixed contracts. The people who have taken the brunt are the young on temporary contracts.

Q. Do you believe there is a need for a different business culture?

A. Businessmen are on the lookout to make a profit everywhere. If they see the way to do this is to make a contact, or through a subsidy, they will do so. And if they see a more transparent system, with clearer rules in which it pays to do things right, they will do so. It's not a question of culture but of institutions. If we change the rules, businessmen will do things in a different way.

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