Life is a Dream

The Developmental State in Spain, 1950-1990

Agustín E. Ferraro Juan José Rastrollo

University of Salamanca University of Salamanca
agustinferraro@usal.es rastrollo@usal.es

Introduction

The publication of “Bureaucracy and Growth” by Evans and Rauch (1999) marked a milestone

in the field of studies on economic development. In the paper, the authors present the design

and application of an empirical-statistical test for one of Max Weber’s major theoretical propo-

sitions in economics and sociology. The proposition, which Evans and Rauch describe as the

“Weberian state hypothesis,” maintains that modern capitalist systems can only reach their full

potential in those countries where the state is consistently organized as a “rational” bureau-

cratic institution. The German sociologist classically defined rational bureaucracies—they have

been called “Weberian” bureaucracies ever since—as organizations staffed by career civil serv-

ants, recruited and promoted by merit, protected from political interference, and operating ac-

cording to clearly established rules and regulations (Weber 1968, 1399).

In order to test empirically the connection between state institutions and economic growth,

Rauch and Evans compared data on bureaucratic structures and GDP variation for a sample of

35 countries during the period 1970-1990. They found that the Weberian state hypothesis was

amply confirmed by the empirical test. The authors corroborated a “strong and significant”

1
statistical correlation between their measurements of the degree of Weberian rationality in state

bureaucracies—based on multiple expert evaluations—, and the national variation in GDP per

capita for the 35 countries of the sample (Evans and Rauch 1999, 755). The empirical-statisti-

cal analysis confirmed clearly, in other words, that state institutions staffed by permanent ca-

reer civil servants, recruited by merit, and protected from political interference, do in fact cor-

relate to substantially higher levels of economic development, compared to other kind of state

organizations. Simply put, the data reveal that Weberian bureaucracies contribute in a decisive

way to economic growth.

In several respects, Spain represents an exceptional case among the 35 countries chosen by Ev-

ans and Rauch for their sample. The list of cases does not include fully developed nations at

the beginning of the period under scrutiny, 1970, but most of the countries selected were al-

ready advanced on the path to development or “semi-industrialized” at the time—except for

five low-income economies added to adjust geographical representation (Evans and Rauch

1999, 753). Interestingly, from all the Western countries in the sample, Spain scored the high-

est level of bureaucratic rationality in its state structures. Only Asian countries such as South

Korea or Singapore showed markedly higher measurements regarding the consolidation of

professional civil services protected from political interference. During the time-span under

study, Spain’s degree of bureaucratic rationality leaves well behind Latin American countries

such as Brazil, Chile, Mexico and Argentina, and also other semi-industrialized countries such

as Egypt, Turkey, or even Israel (Evans and Rauch 1999, 756). Now, such a high measure of

bureaucratic rationality is quite extraordinary, because Spain had only embarked on a serious

and sustained civil service reform since 1958, a few years before the beginning of the period

under analysis (Gutiérrez 1987, 46). Previous to that particular year, public employment in

2
Spain had been completely politicized by the Franco dictatorship, candidates for public service

were selected on the basis of their ideological loyalty to the regime, and they were generally in-

competent as a result (Nieto 1986, 338).

Certainly, both the period and the sample chosen by Evans and Rauch are relevant and useful

for their research purposes, but the period does not take into account a further significant cir-

cumstance about the Spanish developmental state. At the end of the fifties, Spain remained

one of the poorest countries in Western Europe, with a traditionally agrarian economy. During

the sixties, however, Spain experienced rates of GDP growth that surpassed those of other na-

tions such as the Federal Republic of Germany, the United States, France, or Italy, and that

were only slightly below the growth rates of Japan (Lieberman 1995, 97). Moreover, a substan-

tial component of the fast economic growth in Spain was industrial production; the rate of

growth of industrial output for the period 1960-1973 was the highest of any Western country,

and more than double the average for Western Europe (Lieberman 1995, 104).

During this period of very fast growth, Spain’s economy was strongly regulated and state-man-

aged, including high protective tariffs, industrial subsidies, regional poles for domestic indus-

trial production, and other policies promoting economic development, which will be further

considered in section one below (Catalan 2010, 215). In order to attract foreign investment and

promote exports, after 1959 the government introduced a cautious opening of the national

economy, which had been almost completely closed for the previous two decades. Being inter-

nationally isolated after 1945 in any case, the dictatorship had tried, with scant success, to run a

nationally self-sufficient, “autarchic” economy. Nevertheless, as Lieberman (1995, 63) has

pointed out, after the relative opening of 1959 the government “continued to practice a strong

3
dirigiste policy,” and the government’s “dirigisme grew stronger in the latter part of the 1960s”

(Lieberman 1995, 115). In fact, the government introduced comprehensive economic planning

beginning in 1964, and three technically very detailed four-year national plans were put into ef-

fect during the next twelve years until 1975, which were among the period of fastest economic

growth. (Zaratiegui 2015)

In view of its achievements as a developmental state, the case of Spain could well represent a

potential blueprint for the design and application of public policies that make possible for a

poor, agrarian country, to move towards the goal of becoming a developed, industrialized na-

tion. With all possible criticisms and deficiencies, which will be also examined in section one

below, that kind of transformation was promoted very successfully in Spain during the period

of state-led economic development. The national development strategy began with a sweeping

civil service reform that created a Weberian bureaucracy, and this was followed immediately by

an array of specific public policies, particularly focused on promoting industrialization and ex-

ports. The strategy was very successful, and it could certainly serve as a source for the discus-

sion of development strategies to be applied in other countries.

However, although such a reading of the process of development in Spain seems quite evident,

it has been surprisingly controversial among local economists, almost from the beginning. Al-

ready at the end of the seventies, González (1979) stated that the economic growth of the six-

ties was not the result of the development programs put in practice by the government. By in-

terfering with free markets, those development plans actually obstructed economic growth, ac-

cording to González (1979, 321), “although some of it can be attributed to them.” Even more

pessimistic in his critical assessment of Spanish development policies was at the time Ros

4
Hombravella (1979). The government’s policies only made sense, according to this author,

during the short period of relative “economic liberalism” between 1959 and 1963. Afterwards,

during the period of development planning, the state’s impact on the economy lost “con-

sistency and strength,” and any kind of reform “stagnated,” since structural reforms can only

consist of deregulation of markets (Ros Hombravella 1979, 31, 57). A few years later, Carreras

(1984) was also very skeptical of development policies in Spain, regarding particularly the ap-

plication of protective tariffs for industrial promotion. The relationship between industrial

growth and protective tariffs could not be considered in any case positive, according to Carre-

ras (1984, 193), it “should rather be the opposite.” Tortella (1994, 257) was also very skeptical

about the results of any kind of state intervention in the economy, in his opinion it was “very

doubtful” that the policies of industrial promotion had a significant role in the development of

the Spanish economy. For Tortella, policies such as protective tariffs, by suppressing market

competition, rather hindered or delayed growth (Tortella 1994, 256).

In sum, for the past three decades, very critical views on the developmental state have been

relatively standard in Spain; they were certainly strengthened with the triumph of neoclassical

economics in international academia by the early nineties, and the ensuing weakness of

Keynesian or developmentalist perspectives in scholarly debates and public policy. Moreover,

during the transition to democracy and afterwards, many Spanish scholars were logically eager

to take distance from the Franco dictatorship, and there was a corresponding trend to criticize

and repudiate vehemently any positive results of government programs connected to the mili-

tary regime (Braña, Buesa and Molero 1984, 200). Even to this day, a resolute denial of the ef-

fectiveness of any kind of state intervention in the economy, and the retrospective application

of this thesis to the period of fast economic growth in Spain, remains a common scholarly

5
points of view among Spanish economists. For Prados et al. (2010; 2011), for example, the rel-

ative opening of the Spanish economy in 1959 was the only set of policies that successfully

promoted growth during this whole era in Spain. And these measures were effective, precisely,

because they can be seen as a “historical precedent” (Prados et al. 2010, 2) or even as a “fore-

runner” (Prados et al. 2011, 46n) of the neoliberal prescriptions of the Washington Consensus.

Confronted with often acrimonious debates about the issue among Spanish scholars, interna-

tional economic historians have been understandably reluctant to take sides regarding develop-

mental policies and their results in the country. Standard works on Spanish economic history

remain curiously guarded on the topic of causes and determinants of the fast economic growth

during the sixties and seventies. Wright (1977, 60) displays typical impartiality by stating that if

“development plans cannot be deemed to have provided sufficient impulse to account for the

scale of industrial development after 1959, this does not mean that the government’s role in

the industrial sector has been negligible.” For his part, Harrison (1978, 156) confirms that

there is a forceful debate on the issue among Spanish scholars, and that therefore “it is a mat-

ter of opinion whether the so-called ‘Spanish miracle’ can be attributed to indicative planning.”

Lieberman (1995, 113) also observes that there are strongly conflicting viewpoints on this sub-

ject in Spain, and—salomonically—pronounces both wrong.

A further result of the strong controversy on the Spanish development state represents the fact

that the country is almost never considered, in international literature, as a possible model or

blueprint for successful—even for partially successful—developmental institutions. Prominent

comparative treatments of economic development during the twentieth century barely con-

sider the Spanish developmental state, or frequently they do not even mention the Spanish

6
case at all (Woo-Cumings 1999; Kohli 2004; Haggard and Kaufman 2008; Williams 2014). As a

result, even discussions of the developmental state in Latin American countries, otherwise so

similar to Spain as regards culture and institutions, ignore the Spanish state as a comparative

reference, and rather put forward as successful institutional models or blueprints East Asian

developmental states such as Japan or South Korea (Evans 1995; Haggard and Kaufman 2008;

Schneider 2015). It is true that the Asian economies were exceptionally effective in terms of

state-directed development during the twentieth century, but from a Latin American point of

view, there are certainly interesting points of comparison with Spain, nonetheless.

One of the key issues that offer a relevant comparative perspective between Latin American

countries and Spain is civil service reform, considered as a necessary condition for successful

economic development. As referred to earlier, Spain was able to carry through a sweeping civil

service reform beginning in the late 1950s, and the consolidation of a national Weberian bu-

reaucracy was a precondition for the fast economic growth of the 1960s and 1970s; this was

one of the cases of correlation between civil service reform and economic growth confirmed

by Evans and Rauch (1999). Massive patronage and political clientelism remain, however, per-

sistent problems in present-day Latin American states, making civil service reform very diffi-

cult. The extent of patronage in Latin America has been recently compared by Grindle to the

spoils-system in U.S. American experience. For Grindle, at “the outset of the twenty-first cen-

tury, nowhere in the world, except perhaps in mid-nineteenth century U.S. experience, was pat-

ronage more fully embedded in political reality than in Latin America [...] and nowhere had it

been more fully decried as a hindrance to development [...].” (Grindle 2012, 141-2) As outlined

above, the Spanish case is usually overlooked in discussions on Latin American state institu-

tions and development, but the fact of the matter is that a Spanish spoils-system, with massive

7
clientelism in public employment, was no less embedded in political reality than the U.S. spoil-

system during the nineteenth century (Parrado 2000, 253; Centeno and Ferraro 2003, 15)

The mid-nineteenth century U.S. experience was definitely not the only case of extended politi-

cal patronage that can be compared to present-day Latin American practices. Max Weber him-

self described, as a rather evident set of circumstances, the correspondence in patronage prac-

tices between Spain and Latin American countries during the nineteenth century. Writing in

1919, Weber treats as relatively similar phenomena the American spoils-system, and the sys-

tems of massive political patronage both in Spain, and in the Latin American “former colo-

nies” of Spain. Only in the first case could Weber observe a trend to civil service reform at that

moment—as we will discuss in section two below, the first successful civil service reform in

Spain had begun just at the time of Weber writing this particular essay (Weber 1994, 321).

The practices connected to the Spanish spoils-system revealed marked cultural and institutional

similarities to political clientelism in Latin America, even in terms of the vocabulary used in

Spanish language to refer to such practices—or to decry them—in ordinary political conversa-

tion (Centeno and Ferraro 2013, 20). As a result, the specific historical events and processes

that allowed Spain to curtail massive patronage during the twentieth century, and consolidate a

Weberian civil service for the national administration, offer an interesting frame of comparison

for discussions of patronage and developmental institutions in Latin America. In the second

section of the paper, we will discuss the political factors that made possible the creation of a

Weberian national bureaucracy in Spain between 1918 and 1936, and the reasons that com-

pelled the Franco dictatorship to reestablish a professional civil service, protected from politi-

cal interference, beginning in the late 1950s.

8
Vehemently denied by local scholars, ignored by the international literature, sometimes it can

appear as doubtful that something like a developmental state ever existed in Spain. Maybe eve-

rything that was done to promote economic growth was only seemingly effective, but it was

not just insufficient, it was also immaterial—practically a dream. Then again, serious doubts

about the reality of past public events and occurrences are nothing out of the ordinary in

Spain. As represented in the classic play by Calderón de la Barca, life is a dream in the coun-

try—no less perhaps than the developmental state—and, as the poet famously declared, “even

dreams themselves are dreams.”

In the first section below, we will discuss industrial development policies and their results in

Spain between 1950 and 1990, based on recent empirical studies. As mentioned above, how-

ever, development policies cannot be successful if a Weberian bureaucracy has not been con-

solidated in the first place. In the chapter’s second section we will examine the political strug-

gles and initiatives leading to the creation of a central career civil service in Spain during the

early twentieth century. Finally, in the conclusions, we will underline again the features of the

Spanish development experience that offer interesting points of comparison for a discussion of

the developmental state in Latin America.

9
1. Development and industrial promotion in Spain

In his groundbreaking work The National System of Political Economy, Friedrich List (1841) intro-

duced the idea that public institutions should promote economic growth, and that the initia-

tives towards this goal should be organized into a state-led national development strategy. Ac-

cording to List, national economies have levels or stages of development, and the transfor-

mation from an “agrarian stage” (Agrikulturzusstand) to a “manufacturing stage” (Manufak-

turstand) cannot ever take place under a system of free trade, if a given country has to compete

with already industrialized nations. As soon as one or more foreign economies have already

reached the industrial stage, there is no other path to economic development but for the state

institutions of the disadvantaged nation to establish a system of protective tariffs in order to

shield and promote local “infant industry” (junge Industrie) (List 1841, 64-65). List drew inspira-

tion for his thesis about the shielding of “infant industry” from the U.S. experience with pro-

tective industrial tariffs. He studied the American tariff system during his exile in the country

from 1825 to 1830, where he first conceived of the idea to systematize the promotion of na-

tional production into a general development strategy (Chang 2003, 61).

The ideas and the publicistic work of Friedrich List were instrumental in the adoption of pro-

tective tariffs by German state institutions, both before and after unification in 1871, as well as

other extensive development projects, such as the nationalization and accelerated expansion of

railways after 1879 (Henderson 1975, 207). The German national experience of state-led devel-

opment was very successful, and by the end of the century, the country had clearly overtook

Great Britain as an industrial power (Shin 1996, 70). The ideas of Friedrich List became also

10
influential in Japan after the Meiji restoration in 1868, and by the twentieth century, the doc-

trine of “Japanese developmentalism” was based to a considerable extent on the inspiration of

List and other economists of the so-called “German historical school” (Fallows 1994, 182;

Gao 1997, 40). The Japanese developmental strategies were extremely effective after World

War II, and during the 1960s Japan achieved annual growth rates as high as 12 percent, the

fastest expansion of any national economy at the time (Kohama 2007, 185). After the publica-

tion of Johnson’s (1982) book on the “Japanese miracle,” the concept of the developmental

state came to be associated with Japan, the country became thus more or less the model or

benchmark for any developmental state in the world.

Nevertheless, both in Germany and Japan, the policies of state-led development took for

granted the previous consolidation of strong professional civil services reaching to the posi-

tions of highest authority in government, that is to say, a Weberian bureaucracy. As Johnson

(1984, 322) described in his study, all public policy decisions at Japanese ministries were taken

by career civil servants; he further compared the role of politicians in Japan’s developmental

state after World War II to the symbolic role of constitutional monarchs, who “reign but do

not rule,” since the actual decisions were always taken by permanent civil servants. In his clas-

sical analysis of “rational” or modern bureaucracies, Weber (1978, 1409) had described an even

stronger dominance of the career civil service over public policy decisions in Germany, as a re-

sult of the fact that all ministers in German governments from the time of Bismarck were ca-

reer civil servants, with few exceptions. That a developmental state has to be run basically by

career civil servants—in order to be effective—was further corroborated by Evans and Rauch

(1999) with their empirical-statistical test of the “Weberian state-hypothesis” (discussed above

in the introduction). For Spain and Latin American countries, the consolidation of career civil

11
services, protected from political interference, has been the Achilles heel of every developmen-

tal project. Therefore, the previous consolidation of a career civil service has to be kept in

mind as a necessary condition for the successful growth strategies implemented in Spain during

the 1960s, which we are going to discuss in the following. We will come back to the issue of

the Spanish civil service reform in the next section.

With the end of the liberal era of free trade during the nineteenth century, Spain began to in-

troduce protective tariffs in 1891, which were raised across the board in 1906 (Harrison 1978,

34). Import duties were again substantially increased in 1922 under finance minister Francesc

Cambó (Lieberman 1982, 129). After 1922, furthermore, protective tariffs were more precisely

targeted towards industrial promotion, and they began to be considered in the context of other

national development strategies. Cambó, for example, was a strong supporter of extensive

public investment in railways as part of a national economic plan (Pabón 1999, 507).

Nevertheless, it was only after the years 1959-1963 that industrial promotion and economic

planning became integrated in Spain, including a wide range of policies that had been applied

successfully in other developing countries. These included government programs to build in-

frastructure and public services, industrialization plans with a regional focus, direct state in-

volvement by means of public industrial corporations, improvements in technical education,

strategies for the efficient use of local physical resources, public credit programs designed to

attract private capital, and other medium and long-term measures (De la Torre y García-

Zúñiga 2012, 45). After the transformation of the country from a poor agrarian economy to a

relatively advanced industrial nation during the 1960s and 1970s, the first systematic studies on

economic development in Spain took for granted that such government programs had been a

12
major factor in promoting growth, beginning with protective tariffs (Tamames 1972, 185;

Donges 1976, 27). As described above in the introduction, with the end of the Franco dictator-

ship, and the increasing dominance of neoclassical economics during the 1980s and 1990s,

many Spanish scholars came to dispute vehemently that any other economic model, except for

free markets and private enterprise, can result in economic growth and prosperity. Therefore,

according to this perspective, the developmental policies applied in Spain could only have been

either ineffectual or simply counterproductive.

Then again, other economists in Spain continued to support the thesis claiming that state inter-

vention had a positive impact on industrial development in Spain. In one of their early contri-

butions, Braña, Buesa and Molero (1984, 197) pointed out that from the nine industrial areas

with fastest growth during the period 1940-1963, eight of those areas were characterized by the

fact that public corporations had a high or very high participation in terms of overall output.

Aceña and Comín (1991, 317) showed that the best results in the industrialization process, dur-

ing the decade 1964-1974, were reached again in those sectors with a significant participation

of public corporations, such as steel, electricity, shipbuilding, and oil refining. In spite of this

empirical evidence, beginning in the early 1990s, most of the research and debates on state-led

development and industrialization began simply to disappear from economic journals and eco-

nomic departments in Western Universities. In the Spanish speaking-world, the rejection and

outright denial of developmental economics, both in public policy and academic research, be-

came very strong, as a result of the widespread influence of the neoclassical policy prescrip-

tions of the Washington Consensus.

13
And yet, particularly in the last few years, a separate area of research in Spain has been quite

critical of the neoclassical thesis in macroeconomics, which maintains the utter futility of de-

velopmental policies—both past and future. This area of research corresponds to applied eco-

nomics or microeconomics, the empirical study of specific economic areas, firms or regions.

As a more ideologically oriented discipline, macroeconomic theory in Spain remains to a con-

siderable extent on the side of the neoclassical consensus established in the 1990s. In microe-

conomics, a series of empirical studies showing the effectiveness of developmental policies, in

specific economic areas and production branches, have been consistently produced—Spanish

universities maintain separate departments of applied economics as a rule, so that this line of

research could be continued even during the hegemony of the neoclassical consensus affecting

macroeconomic departments. In the following, we will briefly summarize microeconomic re-

search on a key industrial area for national developmental strategies in Spain, the creation and

growth of the Spanish automobile industry during the period 1950-1980.

The development of the Spanish automobile industry represents a remarkable achievement in

the context of any discussion on public policy implementation. As García Ruiz (2001, 137) has

observed, Spain began “practically from nothing” in this area. In 1953, the production of auto-

mobiles in Spain was fewer than 600 units. The first period of state-led development of the

motor industry went until 1962, and the diverse strategies applied were very effective, total

production reaching more than 100,000 units in the latter year (Catalan 2010, 216). However, it

was during the following ten years that industrial policies became extraordinarily successful,

and automobile production in Spain rose steadily at a rate of 20% per year. By 1973, the coun-

try had climbed to the tenth position in the world ranking of automobile manufacturers, with

the production of 822,000 units between passenger and utility vehicles (García Ruiz 2001, 158).

14
Exports grew also very fast during the second period, 1963-1973, and by the latter year Spain

had reached the position of eleventh in the list of world car exporters (Catalan 2010, 221). The

automobile industry had become the most successful economic area in the whole history of

the Spanish economy, and the mainstay of the country’s transformation into relatively ad-

vanced industrial nation.

The production of cars in Spain by public, or public-private corporations, began in 1950 with

the creation of the firm SEAT (Sociedad Española de Automóbiles de Turismo). The firm was a part-

nership between the public holding INI (Instituto Nacional de Industria), with 51% of the capital,

the Italian car manufacturer FIAT with 7%, and a consortium of six Spanish private banks

holding the remainder 42% of the capital in equal parts. The initiative and the contacts for the

cooperation agreement with FIAT were originally established by one of the private banks,

Banco Urquijo (San Román 1995, 151).

The first SEAT plant was located in the duty-free zone of the port of Barcelona. The firm was

declared of “national interest,” and therefore, both import of auto-parts from FIAT Italy, and

import of industrial machinery from Italian or other sources, were exempt from tariffs (Tappi

2008, 57-58). SEAT was supported by a “national champion” strategy (Chiang 1990), including

strict restriction of car imports, very cautious licensing of possible rivals, and regulations man-

dating a high proportion of nationally produced components to be employed for car manufac-

turing in Spain (Catalan 2010, 211). Production at SEAT began in 1953, and by 1958, thanks to

the protected market, SEAT manufactured about 22,157 cars in two models, although the

15
whole production was sold locally, without exporting a single unit. Precisely, the key for the fu-

ture development of the industry was exporting, and this is where Spanish developmental pol-

icy of the second development phase, 1963-1973, showed its most significant achievements.

Added to the founding of the national champion SEAT, the government approved in 1951 the

creation of a private firm for the production of automobiles in Valladolid, under the name

FASA (Fabricación de Autómobiles Sociedad Anónima). The initiative for the creation of FASA

came from a group of individuals closely connected to the government, and to the public hold-

ing INI. This group decided to approach France RENAULT in 1950 with a proposal for the

manufacture in Spain of cars designed by the French firm (Sánchez 2004, 150). The original

investment for the creation of the Spanish FASA was underwritten by more than a hundred

small and medium businesses located in the area of Valladolid—the individuals who planned

the initiative had long-standing connections in this city. RENAULT contributed no share of

capital at first, as was part of the agreement, but next year the French firm acquired a share of

26% through its local Spanish subsidiary, as the result of a substantial capital increase—mostly

covered, again, by small and medium business owners in Valladolid (Fernández de Sevilla 2007,

124). The Spanish FASA began producing cars in 1953 with pieces imported from France, but

the firm was given a period of grace of four years, by the end of which it had to employ 100%

of parts manufactured in Spain for its production (Catalan 2010, 211).

During the 1950s, the passenger car market in Spain was almost completely dominated by

SEAT and FASA. As mentioned above, by 1962 total production in Spain was more than

100,000 units between passenger cars and utility vehicles (García Ruiz 2001, 158). The regula-

16
tions requiring the motor industry to use parts and components produced in Spain were effec-

tively applied during this period, and since the late 1950s SEAT had been employing more

than 90% of locally made parts for car production (Catalan 2006, 153). FASA reached more

than 95% of locally made parts in 1963 (Fernández de Sevilla 2007, 143). The enforcement of

regulations requiring parts and components made in Spain had a strong positive impact on di-

verse branches of the national industry.

The promotion strategies for the car industry were expanded during the 1960s with a new and

strong focus on exports, which until then had not been considered as a top priority. The first,

very general economic measure to promote exports was a drastic (43 percent) devaluation of

the peseta in 1959 (López-Claros 1988, 3). Currency devaluation made Spanish exports more

price competitive, but this measure could be effective only in the relatively short term, of

course. An array of new policies to promote exports were implemented during the next years

in key industrial branches, including the provision of subsidies to industrial firms, the exemp-

tion of indirect taxes on foreign sales, the deduction of import duties paid on all kinds of sup-

plies—raw materials, parts, capital equipment—destined for industrial production intended for

export, and other, specific measures of financial assistance to exporters (Carreras and Estapé-

Triay 2002, 138).

The policies of export promotion were again focused on the national champion SEAT. The

original agreement with the Italian car manufacturer FIAT simply forbade the Spanish firm

from exporting any of its production, a requirement which the Italians had imposed against the

reluctance of the Spanish business partners (Catalan 2006, 145). The industrial public holding

INI, which had a majoritarian share in SEAT’s capital, had been requesting the Italian firm to

17
authorize exports since 1956, to no avail. In 1961, the INI went as far as to propose to FIAT

an increase of the Italian participation reaching up to 50% of SEAT’s capital, which actually

implied to share not only ownership, but also management of the firm in equal parts. In ex-

change, the INI asked for the authorization to export cars, and other lesser concessions. FIAT

again refused (Catalan 2006, 155).

The failed negotiations with FIAT during 1961 were one of the last significant strategic deci-

sions carried out—or just attempted to be carried out—by the “old school” management staff

of the public holding INI. This old school management had been composed, first of all, of

military officers belonging to “technical” branches of the service, such as naval or army engi-

neers, and also artillery officers. Secondly, since its creation in 1941, the staff at INI had been

composed of civilians closely connected and “loyal” to the military, although only in subordi-

nated positions (Aceña and Comín 1991, 132-133). During the years 1963-1964, the public

holding INI was one of the key state institutions completely reorganized by the process of

consolidation of a professional “Weberian” bureaucracy, which was put in charge of public

policy decisions in Spain (Aceña and Comín 1991, 329). As shown by Evans and Rauch, the

reform of the civil service was remarkably successful in the country, and a few years later the

measurement of Weberian or bureaucratic rationality of Spanish state structures was the high-

est among Western nations in their sample (Evans and Rauch 1999, 756). In the years after the

reform of INI in 1963-64, as we will see, public policy decisions taken by its management be-

came much more technically sophisticated, and therefore much more successful. Among other

public policy areas, the key strategic goal of increasing industrial exports, which had completely

failed under the old management at INI, was to be realized fully, and beyond expectations, by

the new “Weberian” bureaucratic leadership.

18
The new management at SEAT took advantage of the opportunity offered by the introduction

in 1964 of a new car model by FIAT, the successful Fiat 850, to try to negotiate again the issue

of exporting cars produced in Spain, which FIAT had opposed strongly from the beginning. In

a bold maneuver, considering the strictness of tariff protection for Spanish industrial produc-

tion at the time, the public holding INI offered to have the government authorize FIAT to im-

port to Spain any number of units of the new model 850, manufactured in Italy, as long as

SEAT was not able to produce enough units in Spain to cover the local demand. FIAT was

powerfully committed to the model 850, anticipating a huge sales success, and they were eager

to start selling in Spain as soon as possible. Therefore, FIAT declared its willingness to make

some concessions regarding exports, much more if they could, in exchange, export to Spain

cars manufactured in Italy—such exports had been out of the question until then, since the

Spanish market was so highly protected. Therefore, FIAT accepted the Spanish offer, and in

exchange authorized SEAT to export cars to Latin American markets, more specifically to Bra-

zil and Colombia (Catalan 2006, 159). The sales to Brazil and Colombia were not very relevant

in themselves but, as we will see, this first authorization of exports by the Italian firm became a

crucial breakthrough for SEAT.

The authorization to export cars from Italy to Spain only benefited FIAT for a very short time.

Less than two years later, during 1966, the plant of SEAT in Barcelona was able to produce

30.000 units of the new model 850, and more than 100.000 units in total. There was no de-

mand left whatsoever to justify imports from Italy. The Italian partners could have considered

themselves tricked, and yet, the new professional bureaucracy in charge of industrial policy in

Spain had a completely new offer for FIAT by the end of 1966. Actually, it was more than a

19
new offer, the Spanish policy makers went on to propose a redefinition of the whole car busi-

ness for foreign firms operating in Spain.

The redefinition of the car business was going to take place under a new pattern of coordina-

tion between the diverse public agencies with policy roles in Spain. Under the “old school”

management of the public holding INI, conflicts with other areas of the Spanish government

were relatively common. In fact, an atmosphere of constant infighting with the Ministry of In-

dustry had existed since the creation of INI in 1941 (San Román 1995, 147). Now, the civil

service reform in Spain not only consolidated a professional civil service that took charge of

public policy decisions, that is to say, a Weberian bureaucracy. As Chibber (2002) has shown,

bureaucratic rationality is a necessary condition for the success of developmental strategies, but

it is not sufficient. A successful development state requires, in addition, disciplinary coordina-

tion to forestall interagency rivalry. Disciplinary coordination strengthens the cohesiveness of

state institutions, and without such cohesiveness even a Weberian bureaucracy will probably

fail in promoting economic development. As an example of successful disciplinary coordina-

tion, provided by a “nodal” state agency, Chibber (2002, 985) mentions the Ministry for Inter-

national Trade and Industry (MITI) in Japan, which was assigned coordinating powers over the

rest of the administrative apparatus.

In Spain, the further elaboration and application of industrial policy, after the reorganization of

the INI in 1963-1964, showed the end of inter-agency infighting that was characteristic of the

previous era. The new cohesiveness of state institutions was a contributing factor for the suc-

cessful reformulation of development strategies for the motor industry. The advancement of

the negotiations with FIAT are a case in point.

20
As a first step in the negotiations, during 1966 representatives from the Ministry for Industry

informally contacted managers at FIAT to discuss the new framework for the car business in

Spain. Once the informal discussions were advanced, the Minister opened a series of meetings

between representatives from all partners involved: FIAT, INI, SEAT, and the Spanish private

banks that owned shares in SEAT’s capital. The Spanish organizations were now acting in co-

ordination, with the Ministry operating in the new role as “nodal” state agency. The meetings

were not a mere ceremony, the previous informal contacts between FIAT and the Ministry

were not intended to decide in advance the issues on the table, as shown by the fact that, once

the rest of the Spanish partners joined, negotiations went on for another six months (Catalan

2006, 160).

By the new agreement signed in 1967, the share of FIAT in the Spanish car manufacturer

SEAT was increased to 36%, and the share of the public holding INI was accordingly reduced

to 36%. The rest of the capital was distributed among the six Spanish private banks that had

participated from the beginning. In this manner, management of the company was effectively

divided between FIAT and INI, with the Spanish private banks acting as final arbiters. The ar-

rangement represented a new “horizontal” way of managing public business, and conducting

industrial policy in Spain, which the old school military management could never have ac-

cepted—or even imagined. Under the new agreement, FIAT not only authorized SEAT to ex-

port cars, the Italian firm provided its vast international network of car dealerships as infra-

structure for the sale of cars manufactured in Spain (Catalan 2006, 160). Thanks to the agree-

ment with FIAT, and agreements with other international car manufacturers that we will de-

21
scribe below, the whole of Spanish car production was now transformed into an export ori-

ented business. As the “national champion,” SEAT was the acknowledged leader of this trans-

formation, at least at the beginning. Five years after the agreement with FIAT, in 1972, sales of

SEAT abroad represented 53% of total exports by the Spanish car industry (Catalan 2006,

169).

Added to the new cohesiveness and horizontal approach of industrial policy, a further factor

was decisive for FIAT’s willingness not only to accept, but moreover to support the export of

cars manufactured in Spain. The representatives of the Italian firm were eager to participate in

the new industrial policy envisioned by the Ministry for Industry. With the government’s active

sponsorship, the plan was for SEAT’s production of cars licensed by the Italian firm to in-

crease dramatically; the resulting massive exports could potentially strengthen FIAT in its over-

all commercial strategy aimed at the domination of the European car market.

The new industrial policy was successful for all partners, at least in the short to medium term.

A year after the agreement, SEAT was producing slightly over 180,000 vehicles, but only ex-

porting less than 1,000. Five years after the agreement, in 1972, the production was close to

340,000 vehicles, and more than 55,000 units were exported. As mentioned above, the figure

for exports by SEAT amounted to 53% of all Spanish car exports in 1972, the firm was clearly

leading the export market at that time. Less than ten years after the agreement, in 1976, SEAT

was already producing more than 340,000 cars, and exports were almost 77,000 units. Never-

theless, SEAT’s share of total Spanish automobile exports was down to 42% in 1976, and it

kept diminishing from there (Tappi 2010, 183). In fact, export sales were open to a new kind

of competition, which perhaps the Italian partners had not foreseen. In the agreement with

22
FIAT, the Spanish policy makers had never offered any guarantee that exports by SEAT were

going to receive the same kind of protection that firms producing in Spain received for the do-

mestic market. Now, other leading international car producers were soon willing and eager to

enter negotiations with the Spanish government, in order to produce cars in the country, and

export that production to European markets. The new competition was going to cause trouble

for SEAT and FIAT.

The strategy of industrial growth based on exports, first tried successfully with SEAT, became

a general policy in 1972. Given that both General Motors and Ford Motor Company had

shown their willingness to install car manufacturing plants in Spain, the Ministry for Industry

designed a new regulation framework for the entry into the Spanish market of international

firms, whose production was going to be oriented largely to exports. First of all, the new regu-

latory framework established the requirement to employ parts and components produced in

Spain at 50%—it remained at 90% for car manufacturers producing for the internal market.

Secondly, the regulations required a minimum investment in fixed assets—such as land, build-

ings and equipment—of over 150 million US dollars, or the equivalent of 10 billion pesetas in

1972, which amounts to around 880 million in inflation-adjusted dollars today. The regulatory

framework, in the third place, limited domestic sales by two measurements: exports had to

amount to two-thirds of the firm’s whole car production, and sales in the domestic market

could only reach up to 10 percent of the total sales, including exports, that were completed in

the previous year—the second stipulation made impossible to dodge the first by simply accu-

mulating stock from one year to the next (Fernández de Sevilla 2014, 302).

23
Ford began production in 1976, but negotiations with General Motors took slightly longer, and

the Detroit firm was finally authorized to install a car manufacturing plant near Saragossa in

1979, production beginning in 1983 (Catalan 2010, 221). Sorely disappointed by the fierce

competition under the new regulations for the car exports market, and considering the bad re-

sults of SEAT for the previous two years, FIAT decided to leave the country altogether in

1981. The SEAT shares of the Italian firm were transferred to the public holding INI, which

now became the majoritarian owner. However, almost immediately after FIAT’s departure, the

German car manufacturer Volkswagen offered to produce cars in Spain in partnership with

SEAT, and the agreement was signed the following year. The government implemented a fi-

nancial recovery plan for SEAT, and by 1986 the firm was again leading the automotive indus-

try in Spain in terms of overall production. As a result, Volkswagen decided to consolidate its

involvement in the Spanish car market, and the German firm acquired a participation of 51%

of the capital of SEAT.

Probably regretting the decision to abandon its investments in Spain, FIAT returned to the

Spanish car market in 1990, acquiring 60% of ENASA, a firm that manufactured utility vehi-

cles, previously owned by the public holding INI. Furthermore, and also in the area of utility

vehicles, two Japanese firms entered the Spanish market relatively early, Nissan in 1979, and

Suzuki in 1982. Following the redefinition of Spanish industrial policy in the early 1970s, the

commercial strategy in all those cases was to install care manufacturing plants mostly oriented

towards exports (García Ruiz 2001, 150).

The development strategy and the regulatory framework created in the early 1970s for the

Spanish motor industry were consistently applied in the following years, and the cohesiveness

24
of state organizations remained strong. As mentioned above, the long-term results were re-

markable. By 1996, Spain had reached the sixth position in the world ranking of automobile

manufacturers, leaving well behind Italy and the United Kingdom (Catalan 2000, 115). From a

total production close to 2.5 million units in that year, around 80% of the vehicles produced

were exported (García Ruiz 2001, 158).

Nevertheless, by the end of this period, the Spanish development strategies for the car industry

revealed at least two main weaknesses, with negative consequences for this area of the national

economy. Some studies have analyzed the developmental failures of the Spanish case by com-

parison with other countries that attempted to develop a national car industry, be it very suc-

cessful cases such as South Korea, or initially successful but then failed cases such as Argen-

tina. However, studies focusing exclusively on the Spanish case tend to reach similar conclu-

sions as regards the policy weaknesses mentioned. The first weakness was caused by the deci-

sion to abandon the strategy of protection and support for the national champion in the motor

industry, a public policy decision sealed in 1986 with the sale of a majoritarian share in SEAT’s

capital to Volkswagen. In contrast, as Catalan (2010, 226) observes, a key for South Korea’s

current dominant position in the international car market has been the longstanding public

policy support for the national champion, Hyundai. It is interesting to observe that South Ko-

rea went from not even appearing among the twenty top car manufacturers in 1973, to the po-

sition of fourth in the same ranking by 1996, with a total production close to 3 million vehi-

cles.

The second weakness affecting Spanish development strategies for the automobile industry is

partly related to the first. Both in the cases of Spain and South Korea, the national champions,

25
SEAT and Hyundai respectively, made the strongest contribution to technological innovation

in their industrial area. Since 1970, SEAT operated its own research and development (R&D)

center, and by 1974, it was the single Spanish firm with the highest expenditure on technologi-

cal innovation from all the national industry. Hyundai created its own R&D center in 1974,

and this area of the company expanded continuously afterwards (Catalan 2010, 215).

The unwillingness of Spanish firms to invest on R&D has been well documented (see Braña

and Molero, this volume). The deficiencies of public policy in the support of technological in-

novation have been compounded as a result, and this has remained as one of the weakest links

in the Spanish national economy.

26
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