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Economic activity
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Spain’s economy still in good form
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Investment and exports now engines of growth for Spain’s economy.
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Spain’s economy continues buoyant with indications this will continue or show a slight easing off in the growth rate of economic activity. Investment and exports are now acting as the real engines of growth.
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In this context, industry continues to show strong growth. The industrial production index for April (adjusted for calendar differences) grew by 4.0% year-on-year although three decimals less than in the first quarter. It therefore seems that the growth rate is tending to ease slightly, which is logical following the strong drive seen in the past two years.
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Industry maintaining strong growth rate...
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Among the branches of economic activity heading the growth classification are machine building, electrical material and the furniture industry, with increases between 15% and 22% year-on-year. We should also mention the increases marked up in some key sectors, such as motor vehicles, metallurgy and the chemical industry, all close to 5%.
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...except in some branches such as textiles and electronics, both still in recession.
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On the other side of the coin we find the textile sector and the electronics industry which continue in recession. Other figures referring to the good state of Spanish industry are to be seen in the trend in indices for orders and business volume which in April rose by 8.9% and 7.7% respectively compared with one year earlier.
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With regard to construction, no significant change can be seen in the rate of business activity in spite of the signs of a cooling off in the real estate market. Nevertheless, there was a noteworthy drop in cement consumption in recent months of the order of 5% in seasonally adjusted terms in the April-May period. In any case, it is likely that this is a transitory adjustment that could be at least partly compensated in coming months.
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In services, the general tone is expansionist with information technology and company services standing out as the most dynamic sectors. Retail trade is also maintaining sustained growth whereas, on the other hand, transport and tourism are tending to ease growth. In fact, for the moment the balance of the tourism sector is fairly modest. In the first five months of the year increases in the number of foreign tourists and overnight stays in national hotels dropped by 1.3% and 2.8% respectively, below the high rates recorded in the last two years.
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Construction holding to notable rate of activity despite cooling down in real estate market.
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On the demand side, we note that consumption is still maintaining considerable strength, especially in certain segments, such as non-durable goods. In other segments, however, such as food and durable goods we note increased moderation.
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Modest tourist balance up to May.
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Registrations of passenger cars and four-wheel-drive vehicles, for example, for example, are maintaining a downward trend (drop of 0.9% in 2006 and 1.6% in the first five months of the year). Nevertheless, thanks to the rise in exports, production of the motor vehicle industry located in Spain grew by more than 8.5% up to May, with an increase of sales abroad of more than 10%.
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With some exceptions, consumption maintaining good level...
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The consumer confidence index remains at low levels, as in 2006, which turns out to be contradictory if we take into account the high growth rate of consumption. The reticence of consumers, according to the European Commission survey, shows up especially in trends in the general situation (more than in those in the home itself), employment prospects and the difficulty in saving.
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...although consumer confidence remains stagnant.
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Finally, investment in capital goods continues to show great strength, if we are to go by the performance both in domestic production and in imports of goods of this type. Registrations of commercial vehicles stand outside this trend, showing stagnant growth so far this year.
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Being poor in Spain
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Women, elderly persons and children are groups most affected
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Being poor clearly has different connotations in a developed country and an emerging one. Like other countries of the European Union, Spain considers that a person is poor if his/her resources are so limited that they do not come up to the minimum acceptable in terms of the living standards of the country. This is therefore a relative concept. Among the less developed countries, on the other hand, poverty is usually understood as the inability to meet certain basic necessities (see box entitled «Social exclusion and poverty» on page 29). In any case, policies for reducing poverty demand an understanding of who is most vulnerable to becoming poor. On the following pages we give a detailed picture of the situation in Spain.
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According to the latest survey on living conditions carried out by the National Institute of Statistics (INE) in 2005, some 19.8% of Spain’s population stood below the poverty risk threshold. This poverty line varied depending on the composition of the household. In the case of a household where one adult lived alone, INE placed the poverty line at 6,347 euros, a figure equivalent to 60% of the median net income (after taxes and social transfers) of households by «consumption unit». Two clarifications may be necessary at this point. First, the median is the point that divides 50% of the population with highest incomes from 50% of the population with lowest incomes. Second, the number of consumption units of a household is calculated according to the standard methodology utilized in the European Union, giving a weighting of 1 for the first adult, 0.5 for other adults and 0.3 for those under 14 years of age. For example, the number of «consumption units» for a household with two adults and two children under 14 is 2.1. The poverty line for this type of household in the 2005 survey was 13,328 euros.
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Statistics also show that the risk of poverty does not affect all groups equally. As shown in the accompanying table, the incidence is greater among women, especially those over 65 years of age, and among children. One in three women over 65 and one out of four children live in a household below the poverty line. At-risk-of-poverty rates also tend to be higher among these groups in other countries of the European Union but the differences are not usually as large as in Spain. The highest rate (nearly 50%) is found among those persons over 65 who live alone although this segment of the population represents only 3% of the total. The figures show the importance of having employment (or living in a household where the adults are employed) in order to avoid economic penury. This reduces the rate of poverty risk to close to 10%. As is to beexpected, the incidence of poverty is also reduced with a higher level of education. In this respect, it is troublesome that in Spain a high proportion of young people (among the highest in the EU-25) leave school at the end of compulsory attendance. As an also high proportion go on to university this is certainly due to the well-recognized phenomenon of the lack of attraction of trade (or vocational) schools.
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The at-risk-of-poverty rate in Spain is among the highest in the EU-15 where the average stands at 16%, according to Eurostat figures. This figure, however, hides significant differences between countries. The lowest rate is found in the Nordic countries closely followed by the Netherlands, France and Germany. None of these countries has a rate above 13%. On the other hand, the situation in Spain is similar to that of Italy, Ireland, Greece and Portugal. The last three countries not only show the relatively highest poverty rates in the EU-15 but they also are the countries with the lowest poverty lines measured in euros. That is to say, these are the countries with the most poverty in the EU-15 not only in relative terms but also in absolute terms.
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The phenomenon of poverty is especially troubling if it is difficult to escape from it. This is a situation in which most of those who are poor today will be poor tomorrow. The same poverty rate, however, may reflect a situation of high mobility when falling into a situation of poverty is just a temporary matter (for example, related to losing a job for a few months). To capture these differences, Eurostat calculates what it calls the at-persistent-risk-of-poverty rate. This is the proportion of the population below the poverty line in the year of the survey that was also below it for at least two of the three previous years. According to this index, Spain is at almost the same level as the EU-15 (10% and 9% respectively in 2001, the last year figures are available). No doubt, this is a figure that significantly qualifies (in a positive direction) the position of Spain in relation to its neighbours. Ireland, Greece and Portugal, with at-persistent-risk-of-poverty rates between 13% and 15%, continue to be the countries with the highest rates in the EU-15.
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Looking at various studies, for example those of Olga Cantó, Coral del Río and Carlos Gradín, we note that, following a substantial reduction in the Seventies, the relative poverty rate in Spain has fluctuated around levels close to present figures. Poverty rates rose during the recessions at the beginning of the Eighties and Nineties, periods when the unemployment rate in Spain went above 20%, but dropped again in following years. In any case, comparisons between various years are not simple due, among other reasons, to methodological changes in the surveys. While some may be surprised that the poverty rate has not decreased along with the strong economic growth in recent years, it should be remembered that we are talking about relative poverty and a poverty risk threshold that also has risen substantially. Unfortunately, figures available do not make it possible to clarify what may have been the contribution of the immigrant population to the poverty rates.
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In conclusion, the situation of poverty in Spain, especially regarding the poverty that is most damaging, permanent poverty, is comparable with that of its European neighbours. In any case, there is obviously room for improvement. The statistics underline the relevance of three areas for reducing poverty – a labour market that fosters job creation and keeps the unemployment rate low; the possibility of access to a good education; and a policy of support to families with children and to the most elderly, two groups that are especially vulnerable.
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Labour market
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Growth of employment eases off
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Employment continues to grow at more contained rate.
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The labour market continues to show great strength but the rate of job creation is tending to ease off. The number of those registering with Social Security grew by 3.2% year-on-year in the April-May period, close to a half-point less than in the first quarter. In absolute figures, the total number of those registered rose by close to 594,000 in the past 12 months. Of these, nearly 72% were registered in economic activities related to services, 17% in construction and 11% in industry.
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Total foreign workers registered with Social Security goes up to 10.5%.
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In May 2007, the total number of foreign workers registered was nearly 10.5% of the total. By sector, the highest percentage of foreign workers was registered among domestic servants (52%), hotels and restaurants (26%), construction (21%) and agriculture (16%). In industry this proportion stood at around 6.5%, while retail trade took up 8%.
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Permanent hiring contracts grow in greater proportion to temporary contracts.
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Permanent contracts continue to rise at high rates although somewhat less than in the early months of the year. In the period April-May they grew by around 15% year-on-year as against the 2.5% marked up by temporary contracts. The latter, however, continue to be well in the majority (representing around 88% of all hiring contracts signed in May).
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Drop in unemployment slowing down
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Unemployment down sharply in industry while rising in construction.
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Unemployment was down by 49,893 persons in May, again putting the figure below two million. In year-on-year terms, registered unemployment continued to show decreases (1.6% in May) although these decreases were more and more moderate.
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In the past 12 months, unemployment has dropped sharply in industry (5.4%) and to a lesser extent in services (1.7%). On the other hand, unemployment was up significantly in construction (1.8%) making it clear that the high point of the growth cycle in that sector is now a thing of the past. In the period under consideration, unemployment rose only in Andalusia, Canary Islands, Valencian Community, Madrid Community and Murcia with various decreases in the other autonomous communities.
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Labour costs rise
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Wages grow by 4.3%...
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In the first quarter of 2007, average wage costs per worker per month rose by 4.3% compared with the same period last year, according to figures from the quarterly labour cost survey carried out by the National Institute of Statistics (INE). Nevertheless, we should mention that the results of that survey do not coincide with those from other sources that rather point to a slight slowdown.
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...and recover purchasing power.
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According to the information supplied by INE, the higher growth in relatives terms arose from construction (5.5% year-on-year). In services, the rise in wage costs was 4.5% while in industry the increase came to 3.7%. According to the INE figures, there would have been a loss of purchasing power between 2004 and 2006, a situation that would have been completely turned around toward the end of last year and the beginning of 2007. This development may be noted in the above graph which compares the trend in wages with inflation.
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Prices
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CPI marks up lowest level since March 2004
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Lower rise in fresh foods and bigger drop in energy products bring annual inflation rate down to 2.3% in May...
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A smaller increase in fresh foods and a bigger drop in energy products meant that the annual inflation rate for the consumer price index (CPI) dropped by one decimal in May going to 2.3%. As a result, the CPI showed the lowest level since March 2004 with a drop of 3 decimals compared with the end of 2006.
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...but background inflationary pressures persist.
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In fact, unprocessed foods reported a more moderate rise following the sharp increase seen in previous months. The annual growth rate went from 6.4% in April to 6.0% in May. It is worth noting that the annual change in potatoes and potato products dropped from 23.8% in April to 11.5% in May. Poultry also eased although to a lesser extent going from 19.0% in April to 16.4% in May. In any case, poultry is still showing a big increase in the past 12 months as a result limited supply related to a recovery in demand following the avian flu scare.
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The improvement in inflation in recent months, however, is more apparent than real. The more stable core of inflation, so-called underlying inflation that excludes the more volatile elements such as fresh foods and energy products, held at 2.5% in May. This came about because the slowdown in prices of durable industrial goods was counteracted by higher inflation in services and processed foods.
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Prices of durable industrial foods, subject to sharp competition in international markets, have risen by only 0.5% since May 2006. For example, appliances prices dropped by 0.8% on average last year while male clothing was down 0.7%. On the other hand, processed foods have risen by one decimal to 2.3% in the past 12 months. Bread rose by 6.3% last year, one decimal more than the year before, showing the sharp increases in cereals in international markets.
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Rise in oil prices makes continuation of downward trend in CPI difficult.
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It was especially in services, however, where the persistence of inflation was most to be seen these are more sheltered from international competition. The annual change rate for services thus stood at 4.0% in May, one decimal more than in the previous month. In any case, some services, such as hotel, cafés, restaurants and communications made a slightly negative contribution to CPI growth in May. On the other hand, the drop in recreation and culture slowed to 0.2% in May given that the cut in prices for organized tours following the Easter Week season was less marked than in the same month last year.
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Inflation differential with European Monetary Union drops to low levels.
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With regard to prospects for the trend in inflation in coming months, the recent rise in oil prices could be a blow to the downward trend in the CPI. What is more, in the second half-year the base effect brought about by the sharp drop in oil prices in the second half of 2006 will work against it. At the same time, it is expected that world farm price pressures will continue which could have an effect on the prices of fresh foods and processed foods. If to this we add the persistence of core inflation, the picture indicates a rise in the CPI as of the summer so that the year could end at around 3% or even higher.
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On the other hand, the annual inflation rate for consumer goods in terms homogeneous with the Euro Area dropped by one decimal in May to stand at 2.4%. In this way, the inflation differential with Spain’s Euro Area associates dropped slightly to 0.5 points, the lowest level since March 2004.
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Favourable performance in wholesale prices
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Annual change rate in producer prices marks up lowest level since March 2004...
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The drop in prices of intermediate goods brought about a slight drop in inflationary pressures in wholesale markets. While over the very short term this trend could continue the trend in international prices for raw materials would indicate a darker picture on in inflation in the second half of the year.
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The general index of producer prices rose by 2.4% in the past 12 months ending in May. This year-on-year change rate meant a drop of 3 decimals compared with the month before and puts it at the lowest level since March 2004.
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...but capital goods prices show highest inflation in past 11 years.
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Most producer price components contributed to the slowdown in the year-on-year change rate in May. Prices of consumer products thus eased their annual advance to 2.0%, 2 decimals less than in April. Intermediate goods also slowed to 6.0% while energy products showed a stronger drop going to –2.8%. On the other hand, prices of capital goods rose to 3.4% in the past 12 months, the highest rate since February 1996, thus reflecting the increased cost of intermediate goods and strong investment demand in recent times.
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In addition, thanks to the strength of the euro in April, prices of imported products stood at the same level as in the same month last year, according to figures supplied by the National Institute of Statistics survey of importers. This stabilization of prices was opposed to year-on-year inflation of 7.4% in April 2006, when oil prices were fully on the rise.
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Imported products record zero annual inflation thanks to appreciation of euro.
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Nevertheless, the various components performed in quite different ways. Whereas intermediate goods rose by 5.7% in the past year, energy has dropped by 9.5%. While consumer products have risen by 0.6%, capital goods dropped by 0.3%. Under consumer goods, durable goods were down 2.2% but non-durables rose by 1.5%. On the other hand, the trend in these in the past month has been uneven. Prices of intermediate goods continued to ease but the drop in energy has tended to halt. Capital goods continued to show an annual drop of 0.3% while consumer goods reported something of an increase.
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Information and social exclusion: the digital divide
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Access to information and communications technology generates growth
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Just a few years ago, fishermen in Kerala, a region in the south west of India, on coming to land had to make a quick decision about which market where they would sell their day’s catch. Fish is a perishable good and once they decided to go to one market they could not change their choice or their catch would go to waste. It could therefore happen that most fishermen would go to the same market making it impossible to sell the whole catch while at the other market nearby there was not enough fish to meet demand. This meant that the price of fish could vary as much as 50% between two points on the coast of the region that were quite close together and that part of the day’s catch would have to be thrown out because there was no buyer. Nevertheless, everything changed with the arrival of the cell-phone in 1997. From then on the fishermen who decided to buy cell-phones could obtain information about demand and supply of fish at the various markets along the coast when they were still at sea and they went to the market offering the best results. Many of them even sold their fish before tying up at quayside. Access at this new technology resulted in big income differences between those fishermen who had cell-phones and those that lacked them. This case, presented by Robert Jensen in a result study, shows the importance of the use of information technology in matters of productivity as well as being a good example of what has become known as the «digital divide».(1)
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The digital divide is a term to describe the disparity that exists in access to information and communication technology (ICT). Within a country we may find this disparity between different socio-economic groups, ethnic or geographical groupings. In developing countries these differences frequently occur between urban areas, with better digital communications infrastructures, and more isolated rural areas. The e-choupals in India, centres with a computer and Internet connection located in rural areas that provide information on agricultural prices in real time, are an example of investment aimed at narrowing the divide with the cities. Thanks to these establishments, small farmers can learn the prices of the crop they are producing and avoid being tricked by farm intermediaries, something that constantly used to happen before the arrival of the digital kiosks.
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Differences in digital technology between regions also occur in the industrialized countries, as is the case of Spain, although in these countries this concept at first appeared to be linked to socio-economic groups. At the beginning of the Nineties, the then US president Bill Clinton was one of the first to draw attention to the problem of the widening digital divide between socio-economic groups in the United States. Specifically, he noted that private schools were more likely to provide their students with computer and Internet access than public schools and stressed the negative consequences that this had on the Afro-American population. The economic gap already existing between the two types of young people going to the different categories of school was widening even more as it was the «rich kids» (also largely white) who had greater access to and knowledge of the new ICT.
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On the other hand, the concept of the digital divide is also used in a context where different countries are being compared, in which case we talk of the global digital divide. Specifically, the richer and more industrialized countries have greater and better access to ICT and this advantage may mean that existing economic differences between advanced countries and developing countries are more difficult to reduce and may even increase. In a similar way, in the group of advanced countries we also find different levels of access, making it more difficult for those countries left behind in this new information «race» to reach the economic levels of those countries in the lead. This situation is exactly what we find in Spain.
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Nevertheless, before looking at the case of Spain, it would be of interest to further examine ICT and its importance as a growth generator. For this purpose, we go back to the study of the fishermen who, as well as helping us to understand the concept of digital divide, shows the importance of information and communications as basic instruments for the good functioning of the market. In other words, if we understand the market as a place where two groups of individuals meet (the buyers who represent demand and sellers who make up supply) and where prices are not anything more than a signal that coordinates the desires of both groups, if information does not flow properly this may create an excess of supply or demand. Jensen shows empirically how cell-phones improved coordination problems that had been causing market failures in the fish market in Kerala by reducing the high volatility of prices and avoiding the cost involved in throwing out part of the catch. The use of this new technology raised the efficiency of this market and the investment of the parties involved. In fact, cell-phones fostered economic growth. In the case of developed countries such as the United States, the adoption of ICT has contributed to the sharp growth in productivity in the past decade.
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Having clarified the broad results of access to ICT, we shall proceed to look first at the situation of Spain in the information technology «race» compared with the countries of the Economic and Monetary Union (EMU). Secondly, we shall see whether there exist major differences in accessibility within its population.
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There are a number of indices that attempt to measure the degree of ICT development by country. One most frequently quoted is the number of Internet users per thousand population, a measurement in which Spain stands fairly well below the EMU average (see accompanying graph). Specifically, in 2004, some 336 persons per 1,000 population in Spain had access to Internet; 412 in the EMU; and 630 in the United States. Nevertheless, to draw conclusions about the use and development of ICT using only statistics on Internet users would be to oversimplify. The Economist and IBM have set up an e-readiness index that is more sophisticated and exhaustive and establishes a ranking of 65 countries related to ICT use. This index is based on 100 quantitative and qualitative criteria classified into 6 different categories – connectivity and technology infrastructure, business environment, consumer and business adoption, legal and policy environment, social and cultural environment and supporting e-services. Spain stood 23rd in this ranking in 2005, just below countries such as France and Japan and ahead of Italy, Portugal and Greece. Compared with 2004 Spain lost a couple of places in the classification. Other indices, such as that appearing in the «Global Information Technology Report» confirm Spain’s somewhat backward position in the area of information technology as well as the widening of the digital divide in relation to leading countries in the use of ICT.(2) It will be difficult for Spain to catch up to the richer countries of Europe if it does not move ahead in accessibility and adoption of the new information and communication technologies.
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With regard to the different degree of accessibility to ICT in Spain, we shall concentrate on regional disparities and the differences in the level of studies completed. We note that the autonomous communities with the highest per capita income are those with the highest percentage of Internet users. According to figures from the National Institute of Statistics (INE) for 2006, Madrid Community, the Balearic Islands and Catalonia were the autonomous communities with the largest percentage of persons accessing Internet. Compared with 2004 and using only this indicator of Internet users, the divide between the autonomous communities does not appear to have increased. With regard to access to Internet by level of studies completed, we should not be surprised to find that the percentage of users among those persons with higher education is much greater than all others. In any case, the large increase in accessibility of the large group of persons with first level secondary school education is not to be dismissed. This went from 26.4% in 2004 to 37.1% in 2006. Therefore, the digital divide arising from the level of studies completed does not seem to have widened either.
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In conclusion, every day it becomes more important, both for individuals and countries, not to miss the boat on new information technology. To do so would mean giving up major gains in productivity and risking the exclusion of a segment of society.
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Foreign sector
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Trade deficit continues to ease
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Growth of trade deficit slowed down by lower negative contribution from energy balance.
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In the first four months of 2007, exports of goods and services reported nominal growth of 7.5%, one decimal more than imports. Export prices were up 3.5% putting the real increase at 3.9%. On the other hand, the slight increase in import prices (0.3%) meant that the real rise was 7.0%, twice that for exports.
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In the period under consideration, the trade deficit came to 29.98 billion euros, 7.1% higher than the figure for one year earlier. Growth of the trade deficit continued to ease although this was thanks entirely to the easing of the negative figure in the energy balance. Growth of the deficit generated by non-energy goods stabilized, as may be seen in the following graph.
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Capital goods sectors and motor vehicles take up 40% of sales abroad.
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From January to April, nearly all export sectors showed a positive performance. In nominal terms, sales of capital goods were up 5.3% year-on-year and those for cars rose by 7.6%. Both sectors reached a share of total exports close to 20% each. Other groups to record notable growth were those in food and chemical products, showing increases above 9%.
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Increased volume of trade with European Union.
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With regard to imports, we should mention the increase in value of capital goods purchases (12.7% year-on-year) boosted by the drive seen in investment in Spain and in consumer durables (14.7%) in keeping with the growth rate of consumption. The value of energy products bought was down by 8.3% because of the drop in cost of oil and oil-derivatives.
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From a geographical point of view, the increase in exports to the European Union (7.9%) went above that for all other countries (6.6%) although in the latter group the increases in sales to Russia (40.6%) and the OPEC countries (15.1%) were of note. In this way, the increase in Spain’s purchases from the European Union (7.6%) was higher than those going to all other countries (7.0%).
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Balance of payments: trade deficit stabilizing
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Current account balance deficit holds at 88 billion euros.
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In the first three months of the year, the deficit in the current account balance was 25.49 billion euros, some 3.37 billion euros higher than the result for the same period last year. The trade deficit is tending to ease and has been showing a downward trend since the end of last summer. While it still represents nearly two-thirds of the current account deficit, it contributed only 565 million euros to the worsening of the current account balance. On the other hand, the worsening of 2.34 billion euros in the incomes balance explains two-thirds of the increase. Also taking on new significance is the deficit in the current transfers balance which, in the period under consideration, underwent a worsening of 368 million euros.
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Lower downslide in trade deficit compensated by increase in net outflows for current transfers and incomes.
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In financial account, we note an improvement in the negative balance of direct investment but this is less drastic that what we see in the year-on-year comparison due to the substantial base effect. This was due more to a slowdown in foreign investment abroad than the entry of funds from outside.
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Seen more from a trend point of view, in the past 12 months ending March 2007, the cumulative deficit in the current account balance was 88.11 billion euros, thus repeating the figures for February and adding 17.32 billion euros to the negative balance for the same period the year before. This drop accounts for 49% of the increase in the trade deficit whereas one year ago it was 73%. The rest may be attributed to the sum of the incomes balance and the current transfers balance whose negative contribution should go up in view of more recent trends.
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Drop in flows for direct investment, both in and out.
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With regard to financial account, in the 12 months ending in March, net direct investment outflows amounted to 31.53 billion euros, very much in line with the month before and now leaving out the distorting figure for February 2006. Both outflows and inflows for direct investment, however, continued to show a definite downward trend.
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Public sector
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Tax reductions fail to depress central government revenue
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Central government revenue grows four points more than nominal gross domestic product.
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The central government continues to swell its coffers at a good pace thanks to revenue which has scarcely been affected by the changes in personal income tax and company tax. Over the period January-May central government non-financial revenue rose to 65.52 billion euros, an increase of 12.8% over the same period in 2006. If we include the share of personal income tax, value added tax (VAT) and special taxes of the regional and local governments, the rate would be 12.0%, four points higher than the growth of nominal gross domestic product (GDP).
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Little initial impact of personal income and company tax reforms on collections.
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In the first five months of the financial year, personal income tax provided 29.54 billion euros, 12.3% more than in the same period the previous year. Hold-backs on wages rose considerably owing to higher pay. We should point out that part of the revenue received was not yet affected by the reduction of tax rates under the reform. If we discount that, the change rate is still high, which shows the limited initial impact of the reforms. Moreover, owing to the rise in the withholding rate from 15% to 18% on income from capital, together with the increase in returns on bank deposits and larger dividends paid by companies, withholding tax on capital and investment funds grew spectacularly. Furthermore, withholding tax on rents also rose sharply.
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Meanwhile the Tax Office announced that during the present personal income tax campaign for the financial year 2006 it expected that 17.6 million tax returns would be submitted. That figure is an increase of 5% over the previous year and above all is the result of a larger number of people employed.
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Higher wages and income on capital boost personal income tax collections.
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The other major heading for direct taxes, company tax, brought in 22.2% more than in the first five months of 2006. This was due to the increase in profits and in withholding tax on capital. The impact of company tax reform through the reduction of tax rates could also be less than initially estimated, to judge by the first figures of the year.
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Indirect taxes rose at a considerable pace, 9.1%, though notably lower than direct taxes. The star in this chapter, VAT, brought in revenue of 31.99 billion euros, an increase of 9.6%, in line with the growth of consumption. Special taxes, in turn, rose by 7.9%. The increase of 18.2% in the tax on tobacco is notable. The rise in the tax on fuel was far smaller, 2.6%, affected by the first repayments to farmers and stockbreeders in compensation for the boost in the price of diesel fuel in 2006.
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Sharp increase in investment spending.
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Other non-financial revenues reached 15.0% in year-on-year terms. The profits paid in by the Bank of Spain and capital transfers from European Union funds had a positive influence on this chapter.
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Central government cumulative non-financial spending up to May amounted to 54.30 billion euros. That sum represents an increase of 7.5% over the same period last year. Payments for current transfers rose by 5.6%. Staff costs were up by 6.0% owing to the improvement in salaries in some government departments. Spending on goods and services increased by 17.8%, affected by election expenses, unlike the previous year. Financial spending fell by 11.0% due to a different calendar for payment of interest on the public debt. Meanwhile, real investments rose by 15.0% and capital transfers by 32.8%, continuing the strong trend in investment.
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The central government thus recorded a Treasury surplus of 11.22 billion euros in the first five months of the year, 47.6% higher than the same period of the previous year. In national accounting terms, that is recording amounts at the moment rights and obligations, respectively, actually take place, the central government obtained a surplus of 14.36 billion euros in the period January-May, a year-on-year increase of 38.7%. In relation to GDP, the central government surplus was 1.38%, some 0.32 points more than 2006, which shows the excellent trend in the public accounts, thanks largely to the economic boom.
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Central government obtains GDP surplus of 1.4% over January-May period.
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The good accounting results of the public sector do not end here. The budget for 2008, to be submitted shortly after the summer and now in preparation, forecasts a further surplus in the coming financial year, for the fourth consecutive year, which continues the line of budgetary stability. Revenues would increase by 7%, incorporating a 2% reduction in the personal income tax rate. The limit for central government non-financial spending will rise by 6.7% compared with 2007.
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Savings and financing
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Financial institutions toughen loan conditions
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Notable increase in loan interest rates in real terms.
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The upward move in loan interest rates continues, driven by progressive removal of easy money policies by the European Central Bank. The average interest rate on loans and credits granted to companies and households stood at 5.43% in April, an increase of 109 basis points in the past 12 months. The 1-year Euribor rose to 4.37% in May, an increase of 236 basis points compared with the low in June 2003. No doubt this reference index will continue to rise in June, discounting further increases in the Eurosystem interest rate. In addition, given that the annual inflation rate has dropped in recent months, the 1-year Euribor has risen even more in real terms.
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In this environment of rising real interest rates, funding granted to the private sector continued to ease in April. In any case, the good state of the economy continues to stimulate demand for credit from the private sector, so that the growth rate is nearly twice that for the euro area as a whole. In fact, funding granted to companies and households rose by 20.5% in April compared with the same month last year, a rate 3.7% lower than that recorded in December 2006.
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Mergers and restructuring of companies and investments continue to raise demand for corporate funding.
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Funding going to non-financial companies slowed more than that granted to households although it still shows a high growth rate. Funding granted to non-financial companies rose by 22.8% over the past 12 months ended April, 5.1 points more than in December. In any case, demand for credit from companies remains high. A number of factors have contributed to the strength of this demand, on the one hand, the reason is investment. Leasing showed an increase of 15.8% in past 12 months. In addition, commercial credit (used to finance working capital) rose by 6.9% in the same period. Also playing part was demand for funding for mergers and company restructuring.
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Housing loans slow down more than other funding granted to households.
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Financial resources granted to individuals continue to ease growth to the point where it marked up an annual change rate of 17.6% in April. This drop was mainly due to the trend in housing loans. These loans rose at an annual rate of 18.1% at the end of the first four months, down 6 points from the figure recorded at the beginning of 2006. The increase in real estate prices also contributed to ease demand for mortgage loans. Loans for other purposes showed a much smaller drop in recent months, although the growth rate of 16.3% is lower that the figure for mortgage loans.
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Financial institutions toughen access to loans and borrowing conditions in spite of low default rate.
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The default rate for loans to the private sector as a whole stood at 0.76% in April, practically the same level as in the previous three months and only 4 decimals above the all-time low recorded in December 2006. Nevertheless, the financial institutions are not letting down their guard. At least, the «Survey of Bank Loans in Spain» for April 2007 issued by the Bank of Spain shows that the financial institutions toughened their loan conditions slightly. In the first quarter, margins of financial institutions rose and expenses increased, along with securities and commitments. At the same time, the maximum amount lent was down, as well as maturity term. Criteria for approval of home-purchase loans were also substantially toughened, as well as conditions applied to new borrowers, although the maturity term continued to lengthen slightly. Financial institutions also tightened conditions applying to consumer loans and those for other purposes.
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Higher wages boost growth of time deposits.
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In the second quarter, Spanish financial institutions foresee a tightening in criteria for access to long-term corporate credit. Similarly, the toughening of criteria for household financing is expected to continue both for housing and other purposes. As a result, it can be seen that supply factors are also contributing to the current slowdown in credit to the private sector.
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Sharp growth in bank deposits
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Net sales of mutual fund participations in January-May period...
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Bank deposits of households and companies continue to grow at a fast rate. The change rate in the last 12 months ended April was higher than for credits. In absolute terms, however, the increase in deposits continues to be insufficient to finance the high level of loans granted. As a result, financial institutions have largely been obliged to issues bonds to cover this gap in their balance sheets.
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The heading to show the biggest increase in the past year was deposits in foreign currency, which benefited from the differences in interest rates in their favour, although the total balance is relatively low. Time deposits also rose notably, by 39.2% in the case of a 2-year term. This big increase may be explained by the higher interest rates now being paid on such deposits. Average return on time deposits stood at 3.60% in April as against 0.60% for on-demand accounts and savings accounts.
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...in spite of annual yield of 7.4% and positive real return over very long term.
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As a result, bank deposits are providing tough competition to other financial products such as participations in mutual funds. Assets of mutual funds rose by 3.3% in the past 12 months ending in May going to 261.03 billion euros, in spite of an average yield of 7.4% in the past 12 months. In fact, in the first five months of the year there were net withdrawals from mutual funds of 339 million euros. The biggest net sales in mutual fund participations in the January-May period took place in guaranteed share-based funds and short-term bond-based funds. On the other hand, there were notable net flows toward guaranteed bond-based funds and European share-based funds.
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Hedge funds attract 196 million euros and 300 participants in early stages of showing face in Spanish market.
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The yield obtained on mutual funds in the past year ended May showed a high yield in real terms as a result of the decrease in inflation. The medium-term yield on mutual funds was also above inflation. While over 10 years it is true that average inflation has been slightly higher than the average yield on mutual funds, over the longer term (say, 16 years) the yield on mutual funds works out clearly above inflation. As a result, it is maintained that, while the yield on mutual funds fluctuates according to underlying assets (both bonds and shares), with the trend being affected by some volatility, over the long term the real yield is positive.
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On the other hand, hedge funds, which are characterized by greater freedom in investment strategies and the possibility of higher returns (while involving greater risk), for some time now have begun to show their face in the Spanish market. According to figures supplied by Inverco, the association of fund managers, the money attracted by hedge funds had risen to 196 million euros at the end of May 2007. At that date, total participants numbered 300.
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