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Abu Dhabi, UAEMonday 17 December 2018

How the Basque Country provides intriguing solutions to some of the world’s thorniest challenges

Sami Mahroum considers local taxes, cooperatives and the impact the opening of a new museum had on a small industrial region in the European periphery

Frank Gehry’s Guggenheim Bilbao. Tim Graham
Frank Gehry’s Guggenheim Bilbao. Tim Graham

Bernie Sanders, the American presidential hopeful, took inspiration from Denmark to outline his vision for a better America in last year’s election. The European country has income tax reaching 60 per cent on incomes as low as $55,000 (Dh201,000), so American voters might be forgiven for turning their backs on Mr Sanders's Danish idea. Suffering from lower wages than their counterparts in Denmark, voters in the US did not sufficiently warm to a candidate who wanted to tax them more, not less. But, like many people around the world, I was sympathetic to Mr Sanders’s progressive ideas. After spending my summer in the Basque Country this year, I now wish Mr Sanders had taken his inspiration from this small autonomous nation within Spain, rather than from northern Europe.

With only 2.2 million inhabitants and occupying an area of 7,230 square kilometres, this historic part of Spain is one of the wealthiest and most industrialised regions in Spain. It is among Europe’s top 20 per cent of regions in wealth. It has one of the highest percentages of employment for high- and medium-high-tech manufactured goods in Europe and benchmarks itself with other advanced manufacturing regions in Germany and elsewhere in the world. But what makes the Basque Country particularly interesting is how it has managed to withstand years of homegrown terror, globalisation and the demands of political memberships in both the Spanish state and the European Union. Several policy and social innovations have helped the Basque Country succeed.

In the matter of identity and national aspirations, the Basque Country has rejected the militancy of the ETA group and instead, in 1981, reached an agreement with Madrid that allowed it an extensive degree of autonomy. Its three provinces each run their own tax system and pay defence, foreign policy and other costs associated with running the state-wide system (such as federal courts) to the Spanish government. This type of autonomy serves as a model for many regions around the world seeking separation or a greater degree of autonomy.

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Mr Sanders could have done well borrowing from the Basque Country's cooperative economy model. Some 60 years ago, in the 1950s, Jose Maria Arizmendiarrieta (aka Arizmendi), formed the Mondragon Foundation, which is a federation of cooperatives. Since then the federation has made a substantial impact on Basque society. Today, Mondragon is Spain’s largest cooperative group, employing around 75,000 people, and contributing to 12 per cent of the region’s GDP. The cooperative is global too, and owns businesses in 125 countries around the world, with some 70 per cent of its output sold overseas.

The Mondragon cooperative model has its own rules. For example, no CEO at any of its companies can earn more than six times the lowest salary offered at the cooperative. Ten per cent of its profits are earmarked for new investments, including research and development. Employees contribute 6.5 per cent of their salaries to a provident fund that covers pension and other contingencies. The strong sense of solidarity and support within the 30,000 network partners provides it with a high level of resilience. When Fagor, its largest appliances company, went under a few years ago, instead of making workers redundant, they were found new jobs within the network. When the 2008 global finance crisis hit the region, workers agreed to take a pay cut to preserve jobs. Sharing ownership and control of market-based businesses with employees, I thought, is an effective way of managing the negative side of both capitalism and globalisation and something that would go down well with disenchanted citizens around the world.

Another innovation that sought to mitigate the perils of globalisation was the creation of funds to buy equity in local family businesses. Over the years different funds have been set up to mitigate the risks associated with the foreign takeover of local businesses. Family businesses in the region are an important part of the local political and social fabric and they make their decisions after taking into considerations the wider socio-economic impact. The effect of that is manifested in the relatively small presence of foreign capital in local businesses.

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A third innovation has been the use of arts and architecture for the economic regeneration of post-industrial cities. In 1994, when the Austrian city of Salzburg turned down the opportunity to host a new Guggenheim museum, the city leaders of Bilbao, the Basque Country’s economic capital, jumped on the opportunity and funded the entire project. Today, the city is home to the eye-catching Guggenheim Museum designed by the world-renowned architect Frank Gehry. The museum opened its doors in 1997 at a cost of $80m, By the year 2000, tax revenues had recuperated the entire cost and more of the museum. The project was catalyst for many other regeneration projects that have transformed the city from an industrial backyard into an internationally attractive tourist destination. Each year the museum receives more than a million visitors. It has been so successful that it sparked a global trend of similar projects seeking to emulate its effect from Abu Dhabi to Kowloon. Today, economic geographers speak of the notion of the “Guggenheim effect”.

The Basque Country provides innovative solutions for some of the world’s thorny challenges. Long before Tony Blair dreamt up the notion of the "third way", the Basque Country had already found a new way. It is here that Harvard’s guru Michael Porter found his way to the competitive advantage of nations and where the idea that the arts can be an engine of urban regeneration were put to work before Richard Florida had written his book on the creative class. For those disenchanted with globalisation, rampant capitalism as well as big government and high taxes, the Basque Country is a good place to look for inspiration. It combines comparatively low taxes with a relatively small state by deploying the “shared hand” of capitalism rather than the “invisible hand”. It is too late for Mr Sanders now, but it is not too late for the rest of us.

Sami Mahroum is director of the innovation and policy initiative at Insead in Abu Dhabi

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