SUMMARY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01012A001000010010-7
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 9, 2016
• Document Release Date: July 26, 2000
• Sequence Number: 10
• Content Type: SUMMARY

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SUNM&RY
Except for its manpower resources and actual or potential exportable
surpluses of certain strategic minerals, the Spanish economy at the
present time presents an almost unrelieved picture of stagnation and
deterioration. In brief, the main weaknesses characterizing Spain's
economy are the followings
1) Depression of agricultural production as compared to
civil war, which has had the effect of reducing exports and domestic
consumption and has given rise to the need to import substantial quantities
of foodstuffs, Spain before the civil war was self-sufficient in basic
foods.
2) Depreciation and deterioration of the transportation,
mining and most manufacturing sectors as a result of the inability to
maintain plant and equipment for two decades.
3) Greatly reduced worker productivity as a result of
depressed consumption levels, state-enforced "feather bedding prac-
tices," and general underemployment.
4) Administrative inefficiency and corruption.
5) Repressed inflation of large dimentions which is becoming
increasingly difficult to contain, and which may at any time erupt into
open inflation.
6) General misallocation and misuse of scarce resources as a
result of militant economic nationalism and unrealistic appraisal of the
economy's limited indigenous capabilities.
State Dept. declassification & release instructions on file
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-Age
The deterioration of the Spanish economy began at least two decades
ago. bond retarded in its industrial development, Spain found itself
even then, before the advent of the world depression, unable to absorb
the annual increment to its labor forces
Under conditions of domestic tranquillity, Spain might possibly
have succeeded in the early thirties in the formidable struggle to
insulate its economy from the spreading impact of the international
trade collapse, to maintain its productive equipment properly, and to
check the growing unemployment,
Instead of. internal peace, however, it experienced the apocalyptic
sequence of a violent social revolution with all its traumata of strikes,
riots, boycotts, lock-outs, land-seizure, military counter-revolution,
civil ward reprisal and exhaustion, The pacification of Spain by the
Franco forces had barely been achieved when World War II broke out.
Economically prostrate, Spain was compelled by the Allies' control
of the seas and their power to shut off essential supplies at first to
non-belligerency and. later to neutrality, in spite of its pro-Axis orienta-
tion. As a neutral, Spain traded with both Allies and the Axis and
actually developed a small export surplus, but the total volume of its
trade was small, and it could not import the machinery, equipment, raw
materials and other producers goods needed to halt and reverse the dis-
investment process which had been initiated in the early thirties, The
bitter realization of the extent of its dependence on foreign sources of
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 supply during the war, the postwar international shortages of critical
materials and manufactures, and its political isolation have thus greatly
reinforced the Franco regime's inherent predilection to dirigism and
autarchy. The economic nationalsim which characterized Spain long
before Franco has consequently been exaggerated and sanctified to such
a degree and officially so identified as a cardinal precept of the
regime that it is difficult to see how the Franco Government can change
its economic program without subverting itself. This is the meaning of
its complex multiple exchange and import licensing system, its obdurate
curbs on private foreign capital, its comparative neglect of agriculture,
and its ambitious industrial development schemes, with their long range
aim of virtual self-sufficiency,
Agriculture and forestry with an active labor force of some 51 per-
cent of the total labor force traditionally provided the Spanish economy
65-75 percent of its export proceeds, and was thus the main source of
the capital equipment and industrial raw materials needed to maintain the
rate of industrialization. Self-sufficient in foodstuffs before the
civil war, Spain experienced a deterioration of its agriculture in the
last fifteen years which, combined with the large growth of its popula-
tion, compelled it to divert a large share of its foreign exchange to
the import of basic foods, particularly cereals. It would thus appear
that the reconstruction of agriculture should be the primary concern of
the Spanish Goverment. While to some extent the recovery of agriculture
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has been impeded by factors beyond the control of the Franco regime -
the loss of natural markets during World War II, the world-wide shortage
of fertilizers in the early postwar periods, severe postwar droughts,
the loss of draft animals and the destruction and damage to farm struc-
tures as a result of the civil war -- to a greater degree the fault lies
with the regime itself. Confronted with a reconstruction task of Herculean
proportions in agriculture, mining, transportation, and manufacturing,
it has in effect concentrated the greatest part of its energies, with
mixed success, on the expansion of a few basic industries such as
electric power, cement, and heavy industry.
While it has poured billions of pesetas into its state-owned develop..
meat corporation, the Institute Nacional de Induatria (I.N.I.) to carry
out an industrialization program that is unbalanced and beyond the
resources of the economy at the present time, the regime has spent
annually less than 1 percent of its national budget on agriculture. It
has fallen behind the pre-civil war rate of reclaiming arid land by
irrigation projects. Its price policies and the way they have been ad-
ministered by a corrupt bureacracy have sustained a black market which
still flourishes today and encourages the diversion of agricultural
production from essential cereals to industrial crops such as cotton,
tobacco and esparto and to less essential foodstuffs such as meat, fruits
and vegetables. This two-fold misallocation of depleted agricultural
resources has thus aggravated the seriousness of the decline in general
agricultural production due to drought, fertilizer shortage and poor transport.
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SECRET IMO
Every sector of the Spanish economy suffers today from the prolonged
inability of the country to maintain its capitalxesources intact. In certain
fields -- mining, electric power, manufacturing -- indexes of total output
exceed pre-civil war levels as a result of the concerted effort of the Franco
Government to increase the pace of industrialization. But even within these
sectors, with the exception of electric power, increases in output of many
key products have not recovered their prewar levels. Where production levels
surpass those of prewar they have been achieved at a staggering cost of labor
input. Nor do the indexes of physical output reflect the deterioration of
quality that is inevitably the consequence of improvisation, substitution of
inferior materials, diminished labor productivity, and poorly devised price
controls. The effect of these factors may be readily seen in those areas where
the Spanish Government has been most successful: electorie power, cement, coal,
and steel. Despite the tremendous emphasis placed upon the development of hydro
power, the average annual increment of capacity (59,000 kw) in the period 1940-48
was roughly 34 percent less than in the period 1931-35 (59,000 kw). Approximately
15 percent of total real investment is embodied in hydro projects whose huge
construction requirements in reservoirs, dams, spillways, etc. have absorbed a
large part of the total cement production. Yet the whole hydro program has
suffered immensely from transportation difficulties, inefficiency of construc-
tion labor and sup ervisory personnel, and the unavailability of certain
installation machinery, and critical materials which have meant long periods
of delay before additional power became available. And despite the increase in
electric power generated, roughly 75 percent above the volume in 1935, demand
for power is still greatly in excess of supply, particularly in the seasonal
periods when the reservoirs are low. Rainfall is always a critical factor in
Spain, and the prolonged droughts of the postwar years have considerably reduced
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the effectiveness of the huge hydro program on Spanish industry.
The drive to expand hydro-electric power has been intensified by the
inability of the S ianiah economy to import the one million or so tons of
high grade coal and coke it normally obtained abroad. The Franco Government
has persisted in its endeavor to increase indigenous coal production, and has
effected a production rise of 60 percent. This figure was reached in 1945.and
1946. Despite continued emphasis, by means of additional incentives and.ach
higher pay this peak has not been surpassed since then. At the peak of produc-
tion, it was estimated that 20 percent more workers could be employed, but
there has been a continual shortage of miners and the absenteeism rate is notoriously
high. The increase in coal production has been achieved at a labor input
proportionately greater than in the pre-civil war years and the quality of coal,
never too high, has dropped considerably as a result of poor washing practices,
and the tapping of low grade veins. Coal production probably still remains the
most serious bottleneck in the Spanish economy, and the iron and steel indwtry
and the rail transportation system have suffered thereby. The remarkable thing
is, that production increases have been achieved at all. The depreciation of
mining equipment, the inability to import new machinery and pit props in
sufficient volume, and the increasing deterioration of the transport system
have been apparently offset by the greater input of labor which, however becomes
ever more difficult to sustain as safety measures and working conditions
continue to deteriorate.
Increases in capacity of blast furnaces and cement plants have permitted
expansion of output, but, despite the pronounced emphasis of the Franco regime
on such development, the rate of growth in both these industries has been
considerably below the precivil war period. Blast furnace capacity increased
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at an average annual rate of about 14 percent in the period 1929-35 and only
about 5 percent per year in the years 1940-48. Cement capacity increased at
an annual rate of 140,000 tons in the 1929-45 period as compared with an annual
increment of 20,000 tons in the postwar period. Pig iron output in 1950
surpassed tIE 1935 level but was still. significantly below the peak production
of 1929. Steel production also surpassed the 1935 level but was substantially
below the 1929 and 1930 levels.
In other fields of mining and manufacturing output the levels of
production so far attained have generally been below the 1931-35 levels, and
in some highly important sectors, such as textiles and chemicals, greatly
below 1931-35 levels. In great measure, the paucity of foreign exchange
resources and the necessity for diverting a large part of them to imports of
cereals and other foodsttffs has prevented the Spanish Government from importing
the raw materials necessary to expand industrial output. To a substantial
extent, too, the effect on electric power of the droughts and the shortage of
coal have impeded manufacturing. But these bottlenecks have, on the other
hand, concealed the impact of the general disinvestment process that has
characterized the economy for twenty years. To the extent that plant and
equipment operates at 40 or 501ercent of capacity and is idle forlong periods,
the actual effect of ddpreciation and obsolescence is masked. Only the less
antiquated and more efficient equipment will be used and what is carried on the
books as idle capacity may when put to the test of sustained operation turn
out to be fictitious.
 Nowhere in the Spanish economy is the failure to maintain capital
equipment and to replace machinery more in evidence than in the
transportation sector. EOn January 1, 1950 there were approximately
10 percent fewer steam locomotives, and freight cars and 50 percent
fewer passenger cars than in 1935 in service in the State-owned
railroad system. In 1948, it was estimated that 35 percent of the
locomotives in operation were 45 years old or older. It is estimated
that annual track replacement should be 270 kilometers per year. In
the ten year period, 1940-49 average track replacement was 66
kilometers per, year, with almost none replaced in 1936-39.
The
accumulated cross-tie deficit is estimated at .4 million.
In 1949,
for the first time, the normal tie replacement rate of 2 million
per year was reached. With an accident rate ten times higher than
that of the U.S. with major overhaul machinery and equipment in poor
condition. With grave deficiencies in signal and switching equipment it
no wonder that only
/ the average commercial velocity of freight trains in 1949 was h2.6
kilometers per hour compared to 17.4 in 1930,/ Passenger/velocity and that train
per hour
was 35.6 kilometers/in 1949 compared to 43.5 in 1930.
The merchant fleet was larger by 29,000 tons in 1949 than in
1935 but still not as large as in 1932, and consists in large part
of old ships of obsolete design. The number of commercial vehicles
is larger now than it was in 1935 but imports during the postwar
 period were far 'below the estimated 13,000 vehicles needed annually
to replace worn-out equipment. Seventy-five percent of the trucks
in operation in 194 were 15 years old or older.
The limited industrial expansion that has occurred has thus
been in effect at the expense of agriculture, transportation, the
whole infra structure of the economy -- housing, road network, farm
structures, ports and harbors, and within manufacturing industry such
as textiles, chemicals and metallurgy, and within mining, such as
iron ore, copper, lead. In short, the partial development of a few
sectors has been achieved at a cost of depreciation and deterioration
in all the other sectors.
But in a fundamental sense it is the primary resource, manpower,
of the economy that has depreciated the most. Consumption per head
of food and clothing has declined at least a third on the average and
for the urban working classes and fixed income groups it has probably
declined more than 60 percent. A housing deficit of 500,000 dwellings
was estimated in 1950 and according to Spanish housing authorities,
37 percent of total existing housing in 1948 was "unhealthy."
Reports from Spain continually stress the hardships of the urban
population and the need of workers to find extra part-time jobs to
supplement their income from their normal positions.
 But the deterioration of morale and physical well-being is not
apparently limited to the urban population. In the extractive
industries the high rate of absenteeism is continually being deplored
officially. In agriculture while hectarage cultivated to crops and
yield per hectare are still below pre-civil war figures, the
agricultural labor force is believed to exceed the ratio it bore to
the total active population in 1930. in the manufacturing industries
frequent complaints are reported over the compulsory retention of
labor in slack periods, and padded payrolls in normal periods. The
tragic experience of the last two decades has left its mark on the
Spanish labor force and has no doubt accentuated certain traits,
i, e., "soldiering," resistance to new techniques, listlessness
which marked it even before the Franco regime. Spelling out greatly
reduced worker productivity, they are naturally come by in a stagnant
economy characterized by a surplus labor force.
 The effects of declining consumption levels have been aggravated
by a steadily growing suppressed inflation since 1935. In its origins
the inflation is basically the result of certain real factors which have
together diminished the total supply of goods and services in the face
of a rapidly growing population. The inflation has been fed, however,
by the monetary and fiscal policies of the government. The combination
of real and monetary factors has worked to build up an inflationary potential
that grows each day more difficult to contain.
Even in its very best years, the Spanish economy was characterized
by a relatively low rate of savings. Its normal savings capacity permitted
even with the help of foreign capital only relatively small accretions to
its productive structure. To repair the devastation of the civil war alone
it would probably have taken the normal savings of many boom years. The
reconstruction effort necessary to restore Spain+s national wealth to its
pre-civil war position, to make up the accumulated deficits of capital
plant and equipment and stocks of industrial raw materials of the war and
postwar periods was certainly far beyond the normal savings capacity of a
population whose national real income in 1939 was 3/4 or less of what it
had been on the average in the 1931-35 period. The total Spanish national
income never recovered its prewar levels in the post-civil war years, and
has fluctuated around a level roughly 9 percent less than the 1929-35 average.
Real income per head in the period 1940-49 has been roughly 20 percent less
than in the 1929-35 years.
 Without new foreign private investment capital, the normal level
of voluntary savings is inadequate for the reconstruction and expansion
schemes projected by the Spanish Government. The consequence has been
"forced" savings at the cost of financial instability and greatly reduced
consumption levels which have affected probably three-fourths of the
Spanish people.
The remarkable point about the Spanish inflation is neither its
severity nor its duration, but the fact that it has continued to remain
repressed. For even with the inflationary shock which the Korean war
imparted to all the economies of Western Europe, the rise of some 26
percent in wholesale prices and 8 percent in the cost of living in Spain,
even allowing for the probable inaccuracy of the indexes, is not too far
out of line with the increases that have been registered in Western Europe,
The potential disruptive power of the inflationary forces up to now
more or less successfully repressed, should not, however, be minimised.
Since 1940, in addition to the monetary "overhang" inherited from civil
war financing, the accumulation of inflationary pressure as a result of
deficit financing, public investment programs, and pyramiding costs has
reached a critical phase which may soon turn into open, runaway inflation,
in the absence of sound corrective measures and large scale United States
economic aid.