The Bank of Spain has released its annual report, revealing a notable decline in the quality of institutions in Spain over the last 20 years.

Governor José Luis Escrivá emphasized that economic literature demonstrates a positive correlation between institutional quality and productivity, suggesting that a robust institutional framework facilitates healthier and more sustainable economic growth.

Institutions play a critical role in managing social conflicts and regulating political, social, and economic relationships.

According to the report, Spain's institutional quality ranks in the intermediate range within the European Union but is still below the average.

Leading the ranking are Denmark, Finland, and Luxembourg, with Spain's institutional standards found to be on par with those of Portugal, the Czech Republic, and Lithuania.

The report also highlights a significant deterioration in institutional quality when comparing two historical timelines: the first decade of the 21st century (2000-2010) and the following decade (2011-2021).

The decline observed in Spain has been more pronounced than that of most other countries analyzed.

Specifically, Spain ranks fifth among 32 countries reviewed in the OECD, suffering a considerable drop in institutional quality.

Only Hungary, Poland, the United States, and Iceland have recorded larger declines in this indicator in recent years.

In terms of European countries only, Spain, alongside Greece and Hungary, exhibits one of the greatest declines.

The implications of these declining rankings are outlined in the report.

The Bank of Spain suggests that if Spain can achieve the same level of institutional quality as Denmark—the country with the highest ranking—productivity could increase by 5.5% over the following five years, assuming institutional quality is the sole determining factor.

This would translate to an average annual growth rate in total factor productivity of an increase of 1.1 percentage points during that period.

When compared to European nations, the anticipated productivity growth in Spain could be 19% higher over the same timeframe, potentially raising the average annual growth rate by 3.8 percentage points, addressing somewhat the stagnation experienced in recent productivity advancements.

Institutional quality is positively correlated with investor confidence, a critical element in economic relations.

A stable legal framework fosters foreign investment, encourages innovation, and minimizes transaction costs incurred during commercial operations.

The report warns that institutional quality is closely linked to corruption levels, which hinder efficient resource allocation for both public and private sectors.

Evidence suggests that perceived corruption can negatively influence economic actors' behavior, deterring investment as expectations deteriorate.

Bureaucracy also plays a role, adversely affecting business investment.

The Bank of Spain employs multiple methodologies to measure institutional quality, including the Worldwide Governance Indicators, which derive insights from surveys of businesses and households regarding their perceptions of public and private sector performance across approximately 200 countries.

Complementing this, the Bank has developed its own database covering 32 developed OECD nations, enabling a comparison among countries similar to Spain in terms of development.

Key metrics for assessing institutional quality used in the report include the rule of law, government effectiveness, legal structure and property rights security, quality of regulations, and accountability.

The report also examines political polarization, identifying a sustained increase in polarization across Spain, France, Italy, and Germany.

In Spain, the most significant changes in political polarization occurred post-2015, with continued growth until 2021, followed by a transient decrease.

However, polarization has risen again since 2022, attributed to factors such as political tensions arising from the management of the COVID-19 crisis and a no-confidence motion in Congress.

This polarization trend is evident in other nations as well; in France, it has evolved from an episodic phenomenon into a structural characteristic of the political landscape, increasing consistently since 2010 without signs of stabilization.

Italy has experienced similar growth since 2014, while Germany saw a resurgence of polarization from 2010, after a decline during the early 21st century.

Current levels of polarization in these countries are markedly higher than those observed two decades ago, indicating profound transformations in political dynamics.

To arrive at these findings, the Bank of Spain incorporates a diverse array of methodologies to analyze polarization, whether through elite or citizen behavior, utilizing texts, surveys, and various data types.

Some researchers generate polarization indices based on parliamentary speeches, while others assess opinion perceptions through surveys such as the Eurobarometer.

Economic and social metrics, including the Gini coefficient and residential segregation, further enhance the understanding of social fragmentation.

These tools facilitate a comprehensive analysis of polarization across institutional, social, and economic dimensions.