The Basque Country is an autonomous region located in the north of Spain, separated from it by the Pyrenees mountains. It has a population of 2.1 million and an area of 7,233 square kilometers. This case study discusses the history of the country, its growth as a prosperous region in the 20th century and how it reached near bankruptcy in the 1950s. It also tackles the issues and threats the Basque is facing amidst the separatist extreme, a slow global economy, and the play of power between its own government and the government of Spain.
Michael E. Porter; Christian H.M. Ketels; Jesus M Valdaliso
Harvard Business Review (713474-PDF-ENG)
January 11, 2013
Case questions answered:
- Why was the Basque Country historically among the most prosperous regions in Spain? What went wrong?
- What was the Basque Country’s economic development strategy in the 1980s?
- Evaluate the new economic strategy introduced in 1990?
- How was President Ibarretxe’s strategy in the 2000s different? Why were the changes made?
- Why has the Basque country achieved superior economic performance compared to Spain over the last three decades? What role has the cluster approach played in this success?
- What are the strategic issues facing the Basque Country in 2009? What should the government do?
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The Basque Country: Strategy for Economic Development Case Answers
1. Why was the Basque Country historically among the most prosperous regions in Spain? What went wrong?
The Basque country, a region in the north of Spain endowed with scenic beauty, rich natural resources, dense forests and fertile land suitable for agriculture was historically among the most prosperous provinces in the Iberian Peninsula.
A natural transit zone between the Southern Peninsula and Northern Europe due to its location and the availability of good natural harbors and navigable estuaries, the Basque Country encouraged free trade through its policy of no tariffs. This policy benefited commerce and played an important role in helping the region become the home of the largest shipbuilding industry in the Kingdom of Spain. The region’s industrial development was heavily supported by rich iron ore deposits, forests and the availability of hydraulic energy. The industries, alongside trade, transport, and firearms formed the foundation of the Basque economy. A solid legal system together with the emergence of schools and research centers attracted leading European scientists whose endeavors led to the first discovery of Wolfram.
The development of the Basque economy continued during the Industrial Revolution. Investments in transport and communication infrastructure as well as in a dense network of training and educational centers coupled with favorable tax rates prompted foreign entrepreneurs to modernize traditional sectors and create new ones. In the second half of the 19th century, two of the Basque Provinces were among the most industrialized territories of Spain. During the same period, the Basque iron mines were increasingly demanded. As a consequence, foreign companies joined local investors to further develop the Basque mines. Iron ore exports boomed, which fueled trade and shipping. Local entrepreneurs further contributed to the prosperity of the Basque economy by modernizing the large – scale iron and steel industry and investing in a steam-propelled merchant fleet. Various other sectors of the economy grew as well, encouraged by investment and technology mainly from Britain and America.
The population of the region doubled and new educational institutions were established. Many Basque residents were educated in engineering and business. Similarly, during the 19th and 20th century several trades and employer organizations emerged.
The prosperity of the region was hindered by the political turmoil in Spain. Francisco Franco takeover of the region, as well as Nazi intervention, led to the fall of the city of Bilbao in 1937. Franco’s brutal regime caused many Basque leaders, businessmen, and skilled workers to leave. Economic output fell by at least 20%, as citizens fled dictatorship and access to goods was reduced. An approach based on self-sufficiency gave rise to price and wage controls and allocation of supplies and import quotas. Exports remained limited to low value-added goods, while imports fueled a persistent trade deficit. Despite the region’s growth prompted by the Stabilization Plan of 1959, its industry was severely affected by the oil crisis. Labor turmoil, terrorist violence, and political uncertainty became the new national climate.
2. What was the Basque Country’s economic development strategy in the 1980s?
In 1980, the newly elected president, Garaikoetxea and other government officials soon realized that in order to restore public confidence it was imperative that the industry is rebuilt. The economic development strategy was heavily focused not only on rebuilding the industry but also on providing support to help the region’s businesses survive and grow. The targeted sector were small and medium-sized companies. Subsidies were given to firms to help them conduct business.
Similarly, several organizations established by the Basque government made their objective the promotion of the region’s exports and entrepreneurship together with internationalization. The responsibility of restructuring the most important Basque industries in terms of employment remained with the Spanish government. R&D services and joint research projects with firms and cluster associations were provided by the newly founded research centers. Technical assistance to companies in the energy sector was also provided and a new gas distribution infrastructure was developed.
In 1985, a new president was appointed and during his tenure, new programs were added to support companies. Business creation was backed by Centers for Enterprise and Innovation and a government-owned venture capital firm was founded. With the economy growing and integrating into the European market, the policy shifted from restructuring to trade promotion and technology upgrading. Lastly, a new cluster-based approach to business was initiated and a study identified nine clusters in the Basque economy – Machine Tools, Automotive, Steel, Ports and Logistics, Paper, Financial Services, Fisheries, Tourism, and Agroindustry.
3. Evaluate the new economic strategy introduced in 1990.
In the 1990s, the Basque economy slumped and the upgrading of the industry became the centerpiece of the Basque officials. Azua refocused the government’s economic strategy on clusters and on supporting productivity growth. The government took equity stakes in these companies to finance a reorientation from basic steel production towards more complex products and higher value-added markets, such as automotive and aerospace. In 1992, the Government presented analyses and recommendations to private sector representatives from the nine established clusters that had been identified three years earlier. As economic growth resumed in 1994, the Basque government moved to strengthen existing programs in infrastructure, venture capital, investment support, internationalization, management training, technology, and innovation.
The government officials during the 80s as well as the 90s built the region’s economic strategy based on the goals set after the fall of the Franco regime. Economic policies were effectively designed to respond to both political and social changes. Top-down initiatives diversified the region’s economy to respond to different market needs and trends.
4. How was President Ibarretxe’s strategy in the 2000s different? Why were the changes made?
Juan José Ibarretxe, who had been Vice President since 1995, succeeded President Ardanza in January 1999. In 2001, President Ibarretxe coined the term “Second economic transformation of the Basque Country” to launch a new phase of the region’s development. The second transformation would move the Basque Country towards a modern information society with knowledge-based activities throughout the economy. It was sought to build on past efforts but move the economy to the next level where innovation was the key driver. Similarly, the governance of the cluster program was modified. Each cluster organization was asked to create a Board of Directors comprised of leading CEOs.
5. Why has the Basque country achieved superior economic performance compared to Spain over the last three decades? What role has the cluster approach played in this success?
Superior economic performance of the Basque country can be mainly attributed to effective government policies aimed at gradually developing the region’s economy. Indeed, natural endowments, as discussed in the previous sections played a role in positioning the province as one of Spain’s most prosperous regions. The history of the Basque region, with its rich culture and industry, as well as its educated labor force contributed greatly to the region’s prosperity. Cluster initiatives helped consolidate state of the art sectors such as bio and nanotechnology. For example, Ikerbasque, a new state-agency, recruited foreign researchers and scientists to the region. Also, since the mid-1990s, Basque exports to foreign countries grew faster than those to the rest of Spain. These cluster policies helped shape an economy based on knowledge and information, which brought the region into an advanced stage of development.
6. What are the strategic issues facing the Basque Country in 2009? What should the government do?
By 2008, the Basque Country had become the autonomous region in Spain with the highest income per capita, 33% above the Spanish average and 36% above the average EU-27 level. The country, however, was facing issues with the manufacturing sector. Similarly, the consumer goods sector, except food and paper, had almost disappeared. Furthermore, the region’s three private universities and one public university were ranked in the middle of European universities overall. However, management training was not well developed and about half of the cluster groups relied heavily on government support.
In 2009, economic activity was falling sharply in the wake of the global economic and financial crisis. Faced with these challenges, the Basque government should call on the central government for assistance with these issues. R&D and internationalization should continue to be the focal point for further increasing the competitive capacity of the region. Further, higher education institutions might have to adapt their curricula to include management training and the government could sponsor mobility programs for academics in countries with a strong tradition in management training.
Along the same lines, it could prove to be a good initiative for cluster groups which are heavily dependent on government funding to present quarterly results. Those who do not manage to address their challenges during subsequent evaluation meetings should be requested to present new development plans and partner with other groups in order to share experiences and best practice.