BARCELONA: Espańa va bien (Spain is doing well). That phrase is on everyone’s tongue nowadays. So it should be. Spain has not boomed nor felt as self-confident since its Age of Discovery. Instead of sending out swashbuckling conquistadors, however, Spanish companies are exploring the world in search of new opportunities. From BSCH and BBVA in banking, Repsol-YPF, Endesa, Iberdrola in energy, and Telefónica in telecoms, Spanish companies have boldly displaced US firms as prime investors in Latin America. All this activity has put Madrid back on the map, not only as a force in the global marketplace but in diplomacy too.

Liberalization, accompanied by economic growth, is the engine for this overseas expansion. Spain’s economy has grown at over 3% for the past four years, and is now growing at 4%. In that time, the budget deficit was reduced 5 fold, and is now only about 1% of GDP, with unemployment dropping from 23% to 15%. Not surprisingly, strong growth rekindled inflation, now bumping up against the European Central Bank’s tolerance level. Nonetheless, Spaniards recognize that they have not had it so good for a long time, and recently returned Prime Minister José Maria Aznar to office with both a parliamentary majority no longer dependent on coalition partners and a mandate to modernize Spain even more.

Spain’s path to liberalization looks to the liberal British model, not, as is traditional in Spain, to the way things are done in France. During Prime Minister Aznar’s first term his Popular Party privatized most public sector firms and deregulated many service sectors. His new government vows to continue eliminating the public deficit and lowering unemployment. It also promises to cut income taxes, put the country’s Social Security system on firmer footing and reduce costs of shedding labor. Introducing real competition in energy and telecoms, lacking in the privatization process until now, is also pledged.

Aznar’s program is sensible yet ambitious. The question is whether his government, which has gone to great lengths to forge a consensus behind its reforms, will carry through on additional measures, the need for which have been hidden by a favorable economy and wage moderation by unions.

As in Thatcher’s Britain, one big problem is of the government’s making. Aznar’s privatizations maintained and reinforced, at least at first, the old oligopolistic market structure. This retarded competition. The government has learned the hard lesson that big privatized companies, when unchecked by truly competitive markets, concentrate too much power.

In a liberalization package just released, the government partially redresses its early mistakes in privatization by clawing back power from the incumbent near monopolies in oil, gas, electricity, and telecoms. Local access in telecoms, for example, will be open to competition beginning in January 2001. Cross-shareholdings that reinforce monopoly power will be strictly limited in these sectors as well.

Encouraging robust competition is essential because Spain must grow faster than Europe and so cannot be content with mimicking dozy Continental methods. In order to catch up with the rest of the Continent in wealth, Spain must remain daring in four big ways:

- Regulators and competition authorities must be made formally and materially independent of government control. Such a modern regulatory structure will foster Spain’s international role by keeping Spanish multinationals on their toes. For only vigorous internal rivalry will make Spain’s companies nimble enough to prosper in risk-filled emerging economies.

- Because political interference with regulation and competition policy (once old hat in Spain) makes companies uncompetitive, government must refrain from using regulation to control inflation as well as corporate activity. No one gains from the government’s ugly struggle with Telefónica that climaxed with the resignation of Telefónica’s boss, Juan Villalonga. That spat not only prevented a merger, apparently welcomed by the market, with the Dutch firm KPN, it put the Spanish Security and Exchange Commission (CNMV) in a difficult spot as broker between government and a powerful company boss.

- Spain must decide whether to let other countries innovate or to contribute to and catch up with, today’s fast paced global technological innovation. Without improved research and development (R&D), the gap between Spain and the world leaders will grow. Even meeting government promises to raise R&D spending from today’s 1% of GDP to 2% by 2004 may not be enough. The issue is not only increased investment, but also of a change in the organization of research to reward creativity and excellence as measured by international standards.

- To sustain growth, Spain’s welfare state -- basically pensions and health care -- must be overhauled to increase efficiency and promote fairness. Aznar’s current plans are too timid: they tackle only public health expenditures, not the underlying welfare state structure. Moreover, labor market liberalization must run parallel to welfare state reform. Without improvement here the benefits of increased commercial competition cannot be fully reaped. Public administration, too, must be overhauled to promote efficiency by rewarding hard work and quality of service, not seniority and over-manning.

Even if Prime Minister Aznar follows through on these bold reforms, his program might unravel if unmatched by domestic political daring. Imaginative solutions are needed to make Spain’s restless regions, particularly Catalonia and the Basque Country, fit comfortably within Spain. Without initiative here the prospect of both regions drifting away is real. Participation of Catalonia in Spain’s modernization project would probably be guaranteed if Barcelona were to become, effectively, the second capital of Spain.