DP11144 Growing like Spain: 1995-2007

Author(s): Manuel García-Santana, Enrique Moral-Benito, Josep Pijoan-Mas, Roberto Ramos Magdaleno
Publication Date: March 2016
Date Revised: May 2019
Keyword(s): Cronyism, Misallocation, Spain, TFP
JEL(s): D24, O11, O47
Programme Areas: International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11144

Measured TFP fell at an annual rate of 0.7% in Spain during the boom years of 1995 to 2007. Using administrative data from the quasi-universe of firms for all sectors we show that deterioration in the allocative efficiency of productive factors across firms was at the root of the low TFP growth in Spain. Cross-industry variation reveals that the increase in misallocation was more severe in those sectors where connections with public officials are more important for business success, which represents novel evidence on the potential macroeconomic costs of crony capitalism. We write and estimate a simple model of cronyism in which heterogeneous firms invest in political connections. The model is consistent with the facts that (a) there is more dispersion in firm productivity in those sectors more prone to cronyism and (b) a general decline in the quality of institutions generates a larger increase in the dispersion of firm productivities in those sectors more prone to cronyism. Our quantitative exercise concludes that the institutional decline over this period costed 1.9% growth in TFP per year and a 0.8% annual increase in the resources spent by firms in establishing political connections.