Neglecting Spain’s Mediterranean Arch

In an editorial last week this newspaper mentioned the so-called Mediterranean Arch --Catalonia, Valencia and the Balearics-- highlighting the fact that, in the first quarter of 2015, this was the area that grew the most in Spain, even though Madrid has traditionally neglected it. Year over year, the Balearics and Valencia’s GDP grew by 3.4 per cent, while the increase in Catalonia was 3.1 per cent. They are the three Spanish regions that saw the biggest growth in this period.

I fully agree that the Mediterranean Arch has traditionally been neglected by Madrid’s economic policies and I will use some figures to support this claim.

The three autonomous regions that form the Arch are poorly financed and hindered by the current regional funding system in Spain; besides, Madrid’s public investment in the area is relatively low. These are the main factors that account for their bloated fiscal deficit. If we follow the monetary flow method, these three are the regions with the highest fiscal deficit in Spain: about 14 per cent of the GDP in the Balearics, 8 per cent in Catalonia and 6 per cent in Valencia. Besides, Valencia is not nearly as wealthy a region as the other two: its GDP is currently 12 points below the Spanish average. Therefore, Valencia should have a fiscal surplus, rather than a deficit. Galicia, for instance, has a similar GDP per capita and enjoys a fiscal surplus of about 8 per cent.

Furthermore, the bottom line of the regional funding system for these three regions grossly contravenes the principle of ordinality. This principle states that the ranking of the regions in resources per capita should remain unaltered after their individual contribution to the interregional solidarity kitty. According to the latest figures of Spain’s regional funding system, the Balearics and Catalonia drop from the second and third places to the ninth and tenth, respectively, whereas Valencia falls from the ninth to the thirteenth slot. This means that there are nine regions in Spain whose resources per capita are higher that in the Balearics; ten, in the case of Catalonia, and thirteen for Valencia. In contrast, there are Spanish regions for which the opposite is true: Extremadura, for instance, rises from the thirteenth to the second position on the list, with €2,514 per capita, versus Valencia’s €2,019, Catalonia’s €2,125 and €2,150 in the Balearic Islands.

Again, if we compare Valencia to Galicia --they have similar GDPs and fiscal capacity per capita-- Valencia’s grievance becomes immediately apparent: Galicia receives €2,385 per inhabitant from the interregional funding system, while Valencia gets only €2,019.

Insufficient funding causes residents of the Mediterranean Arch to have a flimsier welfare state than in other Spanish regions, as proven by their lower social expenditure (education, health care and social services): €5,927 per capita, as opposed to the overall Spanish average of €6,363.

Another shocking figure is that of Madrid’s public investment in the region. Even though 29 per cent of Spain’s population concentrates in the Mediterranean Arch and they contribute 30 per cent of the Spanish GDP, this year Madrid will spend in the region a paltry 17,64 per cent of the total public expenditure budgeted for 2015.

Public investment as a means to foster regional development is one of the most frequently cited arguments to justify this uneven distribution of funds. Nevertheless, we should not forget one proven fact: the marginal productivity of public capital is an increasing function of private capital stock and a decreasing one of public capital. In order to achieve greater growth and economic efficiency, therefore, public investment should be directed mainly to those regions where the ratio of public to private capital stock is lowest. In other words, to Catalonia, Valencia and the Balearic Islands. In contrast, private investment should be fostered in regions where this relationship is highest (Extremadura and Castilla-La Mancha).

This is not the criterion that Spain’s governments have followed historically. Spanish PM Mariano Rajoy recently stated that the Mediterranean corridor would be competitive indeed, but that there is more to life than being competitive.

Despite all of Madrid’s misguided policies for the Mediterranean Arch, this region remains the most competitive in Spain --as shown by the fact that it accounts for 36 per cent of all Spanish exports--. It also shows the strongest growth and its economy is very dynamic, thanks to tourism and the recovery of the industrial sector. Can you imagine how much better off it would be, if Spain’s policies were actually suited to the area? That is why a large majority of Catalans want independence; they want a state that works for them. Needless to say, we had never been so close to achieving it.


Núria Bosch is Professor of Economy at UB