Spain Destruction Was An Inside Job

Theory of Spain's political class

By CÉSAR MOLINAS

In this article I propose a theory of Spain's political class to make a case for the urgent, imperious need to change our voting system and adopt a majority system. A good theory of Spain's political class should at least explain the following issues:

1. How is it possible that five years after the crisis began, no political party has a coherent diagnosis of what is going on in Spain?

2. How is it possible that no political party has a credible long-term plan or strategy to pull Spain out of the crisis? How is it possible that Spain's political class seems genetically incapable of planning?

3. How is it possible that Spain's political class is incapable of setting an example? How is it possible that nobody - except the king and for personal motives at that - has ever apologized for anything?

4. How is it possible the most obvious strategy for a better future - improving education, encouraging innovation, development and entrepreneurship, and supporting research - is not just being ignored, but downright massacred with spending cuts by the majority parties?

In the following lines I posit that over the last few decades, Spain's political class has developed its own particular interest above the general interest of the nation, which it sustains through a system of rent-seeking. In this sense it is an extractive elite, to use the term popularized by Acemoglu and Robinson. Spanish politicians are the main culprits of the real estate bubble, of the savings banks collapse, of the renewable energy bubble and of the unnecessary infrastructure bubble. These processes have put Spain in the position of requiring European bailouts, a move which our political class has resisted to the bitter end because it forces them to implement reforms that erode their own particular sphere of interest. A legal reform that enforced a majority voting system would make elected officials accountable to their voters instead of to their party leaders; it would mark a very positive turn for Spanish democracy and it would make the structural reforms easier.

THE HISTORY

The politicians who participated in the transition process from Franco's regime to democracy came from very diverse backgrounds: some had worked for Franco, others had been in exile and yet others were part of the illegal opposition within national borders. They had neither a collective spirit nor a particular group interest. These individuals made two major decisions that shaped the political class that followed them. The first was to adopt a proportional representation voting system with closed, blocked lists. The goal was to consolidate the party system by strengthening the internal power of their leaders, which sounded reasonable in a fledgling democracy. The second decision was to strongly decentralize the state with many devolved powers for regional governments. The evident dangers of excessive decentralization were to be conjured by the cohesive role of the great national parties and their strong leaderships. It seemed like a sensible plan.

But four imponderables resulted in the young Spanish democracy acquiring a professional political class that quickly grew dysfunctional and monstrous. The first was the proportional system with its closed lists. For a long time now, members of party youth groups get themselves on the voting lists on the sole merit of loyalty to their leaders. This system has turned parties into closed rooms full of people where nobody dares open the windows despite the stifling atmosphere. The air does not flow, ideas do not flow, and almost nobody in the room has personal direct knowledge of civil society or the real economy. Politics has become a way of life that alternates official positions with arbitrarily awarded jobs at corporations, foundations and public agencies, as well as sinecures at private regulated companies that depend on the government to prosper.

Secondly, the decentralization of the state, which began in the early 1980s, went much further than was imaginable when the Constitution was approved. As Enric Juliana notes in his recent book Modesta España (or, Modest Spain), the controlled top-down decentralization was quicky overtaken by a bottom-up movement led by local elites to the cry of "We want no less!" As a result, there emerged 17 regional governments, 17 regional parliaments and literally thousands of new regional companies and agencies whose ultimate goal in many cases was simply to extend paychecks and bonuses. In the absence of established procedures for selecting staff, politicians simply appointed friends and relatives, which led to a politicized patronage system. The new political class had created a rent-seeking system - that is to say, a system that does not create new wealth but appropriates existing wealth - whose sewers were a channel for party financing.

Thirdly, political parties' internal power was decentralized even faster than the public administration. The notion that the Spain of the Regions could be managed by the two majority parties (the conservative Popular Party and the Socialists) fell apart when the regional "barons" accumulated power and, like the Earl of Warwick, became kingmakers within their own parties. This accelerated the decentralization and loss of control over the regional savings banks. Regional governments quickly passed laws to take over the cajas de ahorros, then filled the boards with politicians, unionists, friends and cronies. Under their leadership, the savings banks financed or created yet more businesses, agencies and affiliated foundations with no clear goal other than to provide yet more jobs for people with the right connections.

Additionally, Spain's political class has colonized areas that are not the preserve of politics, such as the Constitutional Court, the General Council of the Judiciary (the legal watchdog), the Bank of Spain and the CNMV (the market watchdog). Their politicized nature has strangled their independence and deeply delegitimized them, severely deteriorating our political system. But there's more. While it invaded new terrain, the Spanish political class abandoned its natural environment: parliament. Congress is not just the place where laws are made; it is also the institution that must demand accountability. This essential role completely disappeared in Spain many years ago. The downfall of Bankia, played out grotesquely in last July's parliamentary appearances, is just the latest in a long series of cases that Congress has decided to treat as though they were natural disasters, like an earthquake, which has victims but no culprits.

THE BUBBLES

These processes created a political system in which institutions are excessively politicized and where nobody feels responsible for their actions because nobody is held accountable. Nobody within the system questions the rent-seeking that conforms the particular interest of Spain's political class. This is the background for the real estate bubble and the failure of most savings banks, as well as other "natural disasters" and "acts of God" that our politicians are so good at creating. And they do so not so much out of ignorance or incompetence but because all these acts generate rent.

The Spanish real estate bubble was, in relative terms, the largest of the three that are at the origin of today's global crisis, the US bubble and the Irish bubble being the other two. There is no doubt that, like the others, it fed on low interest rates and macroeconomic imbalances on a global scale. But unlike the US, in Spain decisions regarding what gets built where are taken at the political level. In Spain, the political class inflated the real estate bubble through direct action, not omission or oversight. City planning is born out of complex, opaque negotiations which, besides creating new buildings, also give rise to party financing and many personal fortunes, both among the owners of rezoned land and those doing the rezoning. As if this power were not enough, by transferring control of the savings banks to regional governments the politicians also had power of decision over who received money to build. This represented a quantum leap in the Spanish political class' capacity for rent-seeking. Five years on, the situation could not be more bleak. The Spanish economy will not grow for many years to come. The savings banks have disappeared, mostly due to bankruptcy.

The other two bubbles I will mention are a result of the peculiar symbiosis between our political class and Spanish capitalists who live off government favors. At a recent meeting, a well-known foreign investor called it "an incestuous relationship" while a Spanish investor talked about "a collusion against consumers and taxpayers." Be that as it may, let us first discuss the renewable energy bubble. Spain represents two percent of world GDP yet it is paying 15 percent of the global total of renewable energy subsidies. This absurd situation, which was sold to the public as a move that would put Spain on the forefront of the fight against climate change, creates lots of fraud and corruption, and naturally captured rent, too. In order to finance these subsidies, Spanish households and businesses pay the highest electricity rates in all of Europe, which seriously undermines the competitiveness of our economy. Despite these exaggerated prices, the Spanish power system debt is several million euros a year, with an accumulated debt of over 24 billion euros that nobody knows how to pay.

The last bubble I will discuss concerns the countless unnecessary infrastructure projects built in the last two decades at an astronomical cost, benefiting the builders and hurting the taxpayers. One of the most scandalous cases is the spoke highways into and out of Madrid. Meant to improve traffic flows into the capital, the radiales were built with no thought given to important principles of prudence and good management. First, rash forecasts were made regarding the potential traffic on these roads (currently it is 30 percent of expectations and not because of the crisis; there was no traffic in boom times, either.) The government allowed the builders and the concessionaires to be essentially the same people. This is madness, because when builders disguised themselves as license holders through companies with very little capital and huge debt, builders basically got money from the concessionaires to build the highways, and when there was no traffic, they threatened to let the latter go broke. The main creditors were - surprise! - the savings banks. So nobody knows how to pay the more than three billion euros in debt, which will ultimately fall on the taxpayers' shoulders.

THE THEORY

The principle is very simple. Spain's political class has not only turned itself into a special interest group, like air traffic controllers for example; it has taken a step further and formed an extractive elite in the sense given to this term by Acemoglu and Robinson in their recent and already famous book Why Nations Fail. An extractive elite is defined by:

"Having a rent-seeking system which allows, without creating new wealth, for the extraction of rent from a majority of the population for one's own benefit."

"Having enough power to prevent an inclusive institutional system - in other words, a system that distributes political and economic power broadly, that respects the rule of law and free market rules."

Abominating the 'creative destruction' that characterizes the most dynamic forms of capitalism. In Schumpeter's words, "creative destruction is the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Innovation tends to create new centers of power, and that's why it is detested.

What does this simple theory have to say about the four questions set forth at the beginning of this article? Let us see:

1. Spain's political class, as an extractive elite, cannot effect a reasonable diagnosis of the crisis. It was their rent-seeking mechanisms that provoked it, but obviously they cannot say that. The Spanish political class needs to defend, as it is indeed doing to a man, that the crisis is an act of God, something that comes from the outside, unpredictable by nature, and in the face of which we can only show resignation.

2. Spain's political class, as an extractive elite, cannot have any exit strategy other than waiting for the storm to pass. Any credible long-term plan must include the dismantling of the rent-seeking mechanisms that the political class benefits from. And this is not an option.

3. Nobody apologizes for defending their particular interests. Air traffic controllers didn't, and neither will our politicians.

4. Just as the theory of extractive elites states, Spanish political parties share a great contempt for education, innovation and entrepreneurship, and a deep-seated hostility towards science and research. The loud arguments over the civics education course Educación para la Ciudadanía are in stark contrast with the thick silence regarding the truly relevant problems of our education system. Meanwhile, innovation and entrepreneurship languish in the midst of regulatory deterrents and punitive fiscal measures. And spending on scientific research is viewed as a luxury that politicians cut back savagely on, given half a chance.

THE FORECAST

The crisis has underscored the conflict between the particular interest of Spain's political class and Spain's general interest. The necessary reforms to keep the country in the euro are in direct conflict with the rent-seeking mechanisms that sustain this particular interest. On one hand, budget stability requires a structural reduction of spending in public administration that is upwards of five percent of GDP. This cannot be achieved with further superficial cuts; now we need deep reforms that will reduce the main source of rent for the political class. On the other hand, in order to grow, the Spanish economy needs to become more competitive. The necessary reforms to make that happen will also make it more difficult to create new bubbles.

The infinite reluctance with which our political class is tackling the reform process illustrates how, collectively at least, it is pondering the consequences that these reforms will have on their particular interest. The government is deliberately getting reform confused with cost-cutting and tax hikes, offering the second rather than the first in the hopes that the storm will let up and that, in the end, nothing really essential will have to be changed. But since this is not going to happen, at some point the Spanish political class will have to consider the conundrum of either seriously embracing reform or abandoning the single currency. And this, I believe, is going to happen sooner rather than later.

The theory of extractive elites predicts that the particular interest will tend to prevail over the general interest. I see a likely scenario in which both majority parties will quickly develop a "pro peseta" sentiment. The confusion created between cuts and reforms has the perverse consequences of preventing the population from seeing the long-term advantage of the reforms, although it does feel the short-term pain of cuts that are invariably presented as a foreign imposition. This creates the necessary conditions to present a departure from the single currency as a defense of national sovereignty in the face of outside aggression and unacceptable cuts to the welfare state.

Leaving the euro, either on its own initiative or because northern countries have gotten tired of living with southern ones, would be disastrous for Spain. It would mean, as Jesús Fernández-Villaverde, Luis Garicano and Tano Santos accurately wrote in EL PAÍS last June, a return to the 1950s economically speaking, but also a return to the patronage system and a political and social corruption that would take us back to much earlier dates and amply surpass today's situation, which is already very bad.

There is a very significant danger of all this happening in the short term. Can something be done to avoid it? Not much, except to keep publishing articles like this one. Spain's political class has no short-term alternatives. In the long run it does, as I will now explain.

ELECTORAL REFORM

Spain's political class, as we have seen, is the result of several factors, chiefly the proportional representation system with closed, blocked lists that are drafted by party leaders. This system grants the latter enormous power and has produced a dysfunctional political class. There is no perfect electoral system, but because of everything that's been discussed here, Spain should change its voting system to obtain a more functional political class. First-past-the-post systems produce elected officials who answer to their voters, instead of just to their leaders. As a result, party leaderships have less power and the representation afforded by the polls is less influenced by the media. These are the advantages. There are also drawbacks. A proportional system ends up awarding seats to minority parties that might not get any with a majority system. This would hurt state-wide minority parties, but benefit regional minority parties. In any case, the most relevant feature of a majority system is that the voters have power of decision over the parties and over the candidates who are elected, and this right now is a peremptory need in Spain that compensates the drawbacks of the system. It would not heal all wounds, but it would very likely create a different political class more attuned to Spain's needs. In Italy, there is an imminent legal initiative to change the current proportional system to a corrected majority system. It seems that the technocratic government of Mario Monti has reached similar conclusions to my own here: without changing a dysfunctional political class, one cannot embrace an ambitious program of reform. As I once heard former Socialist Economy Minister Carlos Solchaga say, a "technocrat" is a politician who also happens to be knowledgeable about a topic. How long until we have electoral reform in Spain? Will we have to wait for the "technocrats"?