During the last 50 years, Spain built one of the most successful welfare systems in the world. Highly regarded by its citizens, the system offered top-quality health services, support for workers who had lost their jobs and free, compulsory education. Spain’s expenditures on social policies represented more than 60 percent of total public spending and totalled more than $402 billion, with close to $200 billion in cash benefits for social security and more than $50 billion for unemployment benefits. It was described as a true safety net, protecting most in times of need.
Fast-forward to 2008 and the economic crisis. Suddenly there was a dramatic imbalance in the system. With unemployment levels around 26 percent, an aging population, greater demands on the pension system and severe banking issues, this successful model was put at risk.
Spain was in a critical situation. Public debt doubled to almost 100 percent of the GDP. Because of the debt market, there were concerns about rising interest rates. And, to further complicate matters the country had to listen to the demands of the European Union and modify a human services system managed by 17 different regional governments.
Today Spain has reformed their public sector, banking system, labor market, healthcare, and pensions to ensure sustainability. The country brought its public deficit below 3 percent of the GDP, and has continued to provide high quality health services to more than 40 million citizens.
So, how was a crisis averted and turned into a win? What tactics did Spain use to increase efficiencies, develop a lighter administration and reform major systems?
Antonio Nunez Martin, the Director of Social Policies at the Executive Office for the Prime Minister, attributes success to:
The changes Spain made were widespread. First the country focused on reforming the public sector, balancing the budget and fixing the banking system. To transform its public sector workforce the country created a commission to improve public administration. This commission developed strategies to restructure the public sector, reduce redundancies, simplify and integrate systems and cut administrative costs by more than $22 billion. They also passed new laws to increase transparency and efficiency by providing wider access to public data, better public expenditures accounting and an improved governance framework. At the local level they passed laws clarifying duties and responsibilities, defining structure and funding mechanisms and creating a more business-friendly environment.
In addition to changing the governance model to find cost savings, Spain balanced the budget by adjusting non-essential investments and focusing the administration’s efforts on increasing national competitiveness. Moving forward, the country will stay on this path and invest in education to build a skilled workforce and enable long-term growth.
To regain international trust in its financial markets, Spain knew it had to reform its banking system. Before the economic downturn there were approximately 50 banks. Now it has consolidated to about 10 resulting in more solvent banks.
In order to ensure the sustainability of the country’s welfare system, Spain restructured the pension system, enacted new policies to improve the labor market and transformed the national health system.
With an aging population, an increase in pensioners, and very high dependency rates Spain had to make changes to the pension system. Most significantly, the country increased the retirement age to 67 and began promoting active and flexible approaches to retirement.
Given the high unemployment rate, reforming the labor market was a top priority for the Prime Minister. Spain had developed a reputation for a rigid labor market, which would have to change. The country took a more flexible approach to collective bargaining, made changes to decrease labor costs to attract business, led efforts to improve human capital and initiated an ambitious reform of unemployment benefits.
Finally, Spain transformed the funding and organization of the entire national health system. This reform created a new framework with clearer rules, better funding instruments and improved incentives for efficiency. Madrid and Castile-La Mancha, for example, became sites for an innovative public-private partnership where the public sector owns the healthcare system, but the private sector manages it. To date the changes to the healthcare system have saved more than $21 billion.
Many of these changes did not come easily, and during this transition the country had to make some unpopular decisions. Spain increased taxes and introduced unpopular changes like a drug provision that has saved significant dollars, but disappointed a number of citizens. To minimize backlash, Spain has relied on citizen-centric technology and increased transparency to regain citizens’ trust.
Spain’s strong leadership, creative use of technology, willingness to adapt on the fly, and emphasis on integration and coordination have helped the country weather a very serious storm. This model for change offers another powerful example of a human services system that has found a way to turn a crisis into an opportunity. As one participant shared, “I respect the comprehensiveness of the reform, but also the iterative nature of it and managing expectations. I’m very impressed with what you’ve done here.”
Leadership for a Networked World’s applied research, student innovation challenge, and on-campus summit programs are an initiative of Dr. Antonio M. Oftelie, Innovation Fellow at the Technology and Entrepreneurship Center at Harvard (TECH), part of the Harvard John A. Paulson School of Engineering and Applied Sciences. TECH is a hub for students, faculty, alumni, and government and industry leaders to learn together, collaborate, and innovate. LNW accelerates these efforts by connecting leaders across sectors and developing cutting-edge thought leadership on innovation and organizational transformation.