Diego Puga is a researcher at the Social Sciences unit of the Madrid Institute for Advanced Studies (IMDEA). He holds a PhD in Economics from the London School of Economics, he has taught at the prestigious school at the University of Toronto and the Pompeu Fabra University in Barcelona. Today, despite his youth, he is one of the most renowned specialists in urban economics, international trade and, particularly, in economic geography. In 2009 he was one of the economists who signed the Manifiesto de los 100 (a proposal on labour market reform in Spain signed by 100 economists), which proposed a single employment contract as one of the measures necessary to revive the Spanish labour market. In the following interview, Diego Puga offers his vision of the current economic crisis, particularly with respect to Spain.
How do you see the crisis in Europe and in the world, and its impact on urban and regional economies?
The situation is tough and we are not doing enough to improve it. However, I think it’s possible to come to a broad consensus on measures that would contribute favourably. In fact, many leading national economists, with very different ideologies, have been proposing a joint program of structural reforms for several years now.
Which measures would contribute in a positive way?
First, we should do away with the duality of the labour market by instating a single contract with severance pay that increases over time. It’s necessary to offer young people better prospects than a succession of temporary contracts interspersed with periods of unemployment in which they are trapped now. Also, we would have to adapt negotiation between workers and employers and face a realistic reform of the pension system in order to establish a stable and sustainable framework. Moreover, it would be necessary to adopt criteria of cost-benefit analysis for investments in infrastructure, so we invest money more rationally. And finally, we must improve education, especially vocational training.
«To talk of markets as if they were evil creatures, who play with us on a whim or out of enmity creates the false impression that we cannot do anything to improve the situation»
Do you believe in the theory of hostility towards the Euromarket, or do you think what is happening is a warranted correction after past excesses?
It’s true that the mere fact that there is widespread perception among investors that Spain cannot pay off its deficit may raise the cost of loans to such an extent that it will lead to a self-fulfilling prophecy. But to talk of markets as if they were evil creatures, who play with us on a whim or out of enmity creates the false impression that we cannot do anything to improve the situation. And we can, we can do a lot.
What about the latest rescue plan to bail out Ireland?
It is grossly unfair and ineffective. Unfair because it means taxpayers have to pay for the bad bets made by investors, who get out of bearing the cost; and ineffective because it plunges the country into turmoil that will make it even more difficult to get out of the crisis. A few banks can make mistakes without us falling into chaos. It is reasonable to restructure banks’ debts, guaranteeing deposits, but making sure the cost doesn’t fall on taxpayers alone but, more importantly, on the creditors, who must bear the cost of their misguided ventures.
Does industry have a future in Spain?
Yes, but Spanish industry of the future must be very different from the industry of the past. It should be an innovation and design-based industry, not based on cheap labour. Germany and northern Italy have higher labour costs than Spain, and yet they have highly successful export industries. The main businesses in our country, including some industries, are as productive as any other. But there are still relatively few compared to other countries. A key to improving our competitiveness is getting the most innovative small and medium-sized Spanish companies to grow and export.
In the Valencia region industry has long been in decline and currently occupies only 12.7% of the GDP (2009) and agriculture even less. Wouldn’t it be the best bet to go mainly for services, especially tourism and transport?
Industry and agriculture gradually lose importance in all developed economies. But while Valencia has a particularly appealing environment for tourism, it doesn’t mean we should neglect developing a host of other activities. For example, there is a large concentration of software companies in Valencia, which have made a place for themselves in the market by offering higher quality products from the outset, despite having higher wage costs. Failures are becoming increasingly costly to businesses and quality is an effective way to get an edge over companies located in countries with lower labour costs.
What is the geography of innovation in our country and within our cities and what can we do about it?
In Spain, like in almost all countries, innovation is concentrated in the major cities. What is surprising about Spain is not so much the geography of innovation but that, generally speaking, it has not reached a higher level. It’s true that there has been a substantial improvement in terms of quantity and quality, but it is still well below what one would expect in an economy the size of Spain. The tremendous concentration of credit in real estate development in recent years has made it difficult for innovative and potentially risky –but likely successful– projects to find the necessary funding.
«We should do away with the duality of the labour market by instating a single contract. It’s necessary to offer young people better prospects than a succession of temporary contracts»
Are you satisfied with the current links between universities and the business world in Spain?
Cutting-edge research is essential to train students to overcome the frontiers of knowledge. However, we should not be tempted to direct university research towards the immediate benefit for companies. Most of the great innovations come from basic research, the true value and potential of practical applications are often slow to come to light.
Are there sufficient incentives in Spain to attract, or at least preserve, its human capital?
We often train great professionals, implying both high personal and social costs, only to lose them almost at once due to the structure of our labour market. It is sad to witness, for example, the number of professionals who leave the country, discouraged by the high number of temporary contracts and lack of clear career prospects. It is helpful to have professionals completing their training abroad, but only if we can eventually recover a significant number of them.
How can we encourage the concentration of human capital in a city like Valencia?
The quality of education, from preschool through college, and the quality of local life are the basis for accumulating, i.e. attracting or retaining, human capital. In addition, people who represent great human capital are the ones who benefit most from having others with great human capital nearby, so any progress in this respect often has an important snowball effect.