The institutional quality of governments and control over corruption are cornerstones of economic development, especially for more advanced economies. Institutional quality deficits and corruption not only have a negative impact on a country’s politics and wellbeing, they also represent an economic cost over and above the sum of productivity, higher unemployment and lower wages than would obtain if the country’s human capital and technology were used appropriately.

This report examines perceived institutional quality and corruption in Spain compared to the rest of the world, assesses the potential economic cost of the country’s apparent deficit of institutional quality, and reviews some potential avenues for overcoming this deficit.

Although Spain ranks globally among the top 25% of countries by the measure of quality of governance, it underperforms with respect to its level of economic development. Among the advanced economies, Spain lags behind on regulatory quality, rule of law and, particularly, inappropriately used public funds, in that they negatively affect key elements in the functioning of the economy.

Poor governance and corruption, for instance, discourage entrepreneurship, innovation, competition and effort, all of which translates into lower the control of corruption. Calculations of the potential effect on Spanish income of improving institutional quality accommodate different scenarios and results. However, all our calibrations give rise to significant potential positive impacts.

Improving the quality of institutions is not a trivial endeavor, as it involves a wide range of issues that go beyond controlling corruption, such as the independence and dynamism of control and regulatory institutions, the timely working of the judicial system, the transparency of the public sector, and the efficiency of the administration. At any rate, improving the quality of governance should be a key element in the long-run growth strategy of the Spanish economy.