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China and Spain: Partners for growth through trade, research and education

By Pedro Gete | chinadaily.com.cn | Updated: 2018-11-29 15:22

In the history of economic growth, China's performance merits a gold medal. Figure 1 shows the astonishing growth miracle that has transformed China into an economic giant. China's economic success is even more astonishing when compared with India, another highly populated country. Both India and China had similar levels of gross domestic product (GDP) 40 years ago, but, since then, only China's GDP has skyrocketed.

Figure 1: GDP for selected countries in billions of current USD dollars. Source: World Development Indicators

Spain's GDP growth shows some similarities to China, although in a lower scale of growth. Figure 2 shows Spain's GDP versus some European partners. We can clearly see a catch-up process with Spain growing much faster until the recent financial crisis. The crisis was especially severe in Spain. However, Figure 2 shows that with the recovery from the crisis, Spain is back to the top of the growth list among European countries.

Figure 2: Index of nominal GDP growth for selected countries. Source: World Development Indicators 

To recap, Figures 1 and 2 show that both China and Spain have been successful growth cases. A key common element in the growth success of both countries is openness to trade. Economists, since David Ricardo in the early 19th Century, have been studying the benefits and costs of trade. The academic literature agrees that openness to trade is highly beneficial for growth for multiple reasons, like better allocation of resources or faster technology improvements. That said, it is also well-understood among economists that trade openness triggers redistributive mechanisms. In other words, the gains and costs of openness to trade are not evenly distributed across the population and across countries. Overall, trade is welfare enhancing but it usually generates losers. Thus, the importance of designing mechanisms to compensate the losers from trade to prevent the adoption of suboptimal protectionist policies. In other words, trade must come with policies that make growth inclusive.

Openness to trade is not enough to generate sustainable economic growth. As emphasized by the work of Paul Romer, who was recently awarded the 2018 Nobel prize in Economics, sustainable growth requires the ability to generate technology progress. In other words, growth cannot only be driven by increases in the stock of capital or in the number of workers. Sustainable growth requires that the country is able to improve its productivity. That is, being able to produce more output per unit of capital or labor employed.

Investments in human capital through education are a great way to achieve both sustainable and inclusive growth. Better education increases the learning speed in the use of existing technologies and business practices. Education, together with research, will generate innovation. Thus, investments in education and research make growth sustainable. In addition, education can make growth to be inclusive by allowing people to adapt to change, by providing people with new skills and career options.

Therefore, for the reasons explained above, investments to promote trade must go accompanied with investments to improve the quality of education and research. In this regard, Spain can contribute much to China, which has taken the lead in promoting trade with programs such as the Belt and Road Initiative (BRI). The BRI plans to build roads, ports and railways to increase cross-border trade in more than 65 countries making a link to the historical Silk Road.

Spain has a long history of excellence in higher education, with several universities established in the 12th century. Especially remarkable, it is the success of Spain in business education. Several Spanish schools consistently rank among the best business schools in the world. China is recognizing this quality. For example, in 2016 the Chinese Ministry of Education granted official recognition to IE University, a top international university in Spain at the vanguard of higher education and research.

Spain has traditionally been a bridge between Europe and Latin America. Now, thanks to its comparative advantage in higher education and research, Spain can also create successful bridges with Asia. I am personally well-aware of the potential. Some of my most cited research papers are joint work with Chinese coauthors in which we study real estate markets.

Trade, research and education are key for sustainable and inclusive growth. Governments should jointly promote them. For example, including education exchanges and investments in research into the BRI, which should receive the support from Spain and the European Union.

Pedro Gete is Professor of Finance at IE Business School. He has a Ph.D. in Economics from the University of Chicago, a J.D. and B.A. from Universidad Carlos III. His research focuses on Banking, International Macroeconomics and Real Estate Markets.



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