The Canary Islands Economic Model
The economic model is a growth strategy with two important aspects: specializations (assets and preferences across agents) and the decision-makers in the growth strategy (investors, producers, and the public sector). Investors focus on productive areas that yield higher returns. The public sector (Government of the Canary Islands and the European Commission) creates market conditions (taxation, interest rates, and labor relations). There are local operators (operating in the Canary Islands) and foreign operators (operating in the peninsula). The institutional framework (rules, institutions, relations between the private and public sector, values, and customs) affects the growth strategy.
Points to Consider
1. Regions
The Canary Islands is a region with special economic, fiscal, and trade legislation. Goods and services are subject to low taxes, and there is the ZEC (ZEC) and ICN (Canary Islands Internal Reserves). The Canary Islands is decentralized in Europe. Most rules are created at the state level, so there are margins for interest rates, social security percentages, etc. The greatest benefit of the Canary Islands belonging to a state is that monetary policy is linked externally.
2. Externalities
The Canary Islands’ economy operates with many externalities (resources in the environment that are important for production). Two important types are: New market externalities (sun, climate, geographical location) and Externality-support resources (soil and water).
3. Connectivity (Accessibility)
The costs of insularity are those incurred due to distance from the national territory (e.g., transport costs). This impacts small companies as expanding beyond their island is expensive. Freight transport costs four times more than in the rest of Spain, as do storage costs. This forces businesses to make minimum purchases to cover transport costs and ensure profitability. The large domestic market (thanks to tourism) makes wholesale and retail businesses a primary source of wealth. The installation of large stores creates additional problems for retailers due to the inability to compete on price with large groups.
4. Impeding/Driving Factors
Several factors hinder the Canary model, while others drive strategies and growth. From a production function perspective, there must be changes in technology, working methods, and businesses. Socio-economic problems exist, such as skills shortages, market distortions in pricing and resources, and issues with health and education systems.
5. International Integration
Major constraints are the size of demand and foreign competition, leading to production in areas with little foreign competition. Small production quantities are related to company size; higher production leads to lower costs. The service sector often has lower productivity. Given the Canary Islands’ specialization in services and its many micro-businesses, average productivity and wages are low. The Canary Islands’ specialization in services (difficult to export) results in a small export ratio. The Canary Islands’ economy relies heavily on tourism, which demands services like shopping malls, restaurants, and spas. The Canary Islands’ market is divided into seven different sizes, each requiring services, further dividing the market. Few companies offer services across the Canary Islands; most operate on a single island, location, or county. The Canary Islands has a high proportion of imports due to its specialization. It may not produce certain goods or may import higher quality or lower-priced goods. Construction is a significant non-tradable sector in the Canary Islands. Petroleum products are among the most exported products, mainly within the Canary Islands (ports and airports). Water production has also increased. The Canary Islands has few economically profitable natural resources, leading companies to import materials due to better foreign supply or lack of local resources. Few Canary companies purchase technologies in their initial life cycle, indicating a lack of innovation. The Canary Islands supports a free trade system, leading to purchases from those offering better deals.