World Review | Italy’s lack of productive growth

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Italy’s lack of productive growth

Italy’s lack of productive growth
The Italian economy has been stagnating for years (photo:dpa)

ITALY’S economic problems stem from a fundamental weakness in its inability to grow.

The current crisis struck when the international community feared the Italian government would no longer be able to meet its debt.

The Italian economy reacted well to the first oil crisis - between 1973 and 1992 - when its gross domestic product (GDP) grew at an annual rate of 3.1 per cent - higher than Germany, France, the UK and the European average.

But between 1992 and 2008, Italian GDP growth fell to a modest average rate of 1.3 per cent, lower than other major European economies.

The data would have been even worse, had Italian policymakers not decided to engage in irresponsible profligacy by increasing public spending, expanding the size of the public sector and running up debt.

This is what has happened in Italy over the last decades.

Debt financing ensured that nobody felt the cost of this reckless policy. The trick worked almost seamlessly for many years.

Unsurprisingly, however, Italian public debt soared, from 57 per cent of GDP in 1980 to 122 per cent in 1994.

Thanks to the euro, which allowed the Italian treasury to enjoy low interest rates, the debt-to-GDP ratio declined in the following years reaching a low point of 103 per cent in 2007.

But when the euro-effect vanished, it shot up again and is now beyond 126 per cent.

The Italian economy has been stagnating for at least two decades.

Almost by definition, the source of low or zero growth in production is low or zero growth in productivity.

Italy’s productivity growth was top of the list in the 1970s. Manufacturing output per hour grew at an average annual rate of 6.5 per cent.

It dropped to 3.2 per cent in the 1980s, 2.6 per cent in the 1990s, and to 0.4 per cent in the first decade of the 21st century.

Italian productivity growth fell so much because of low investment and a low-quality labour force.

The Italian judiciary is slow and often ideologically biased while legislation is subject to ongoing and often erratic change.

The labour market is highly regulated, and bureaucracy is heavy, incompetent and totally indifferent to the needs of producers.

Italian investors have taken their money abroad and foreign investors have chosen other locations.

If aggregate investment stalls, two things happen - workers have less equipment to work with and, since a large part of technological progress is actually embodied in new machinery, technological progress and productivity growth slow.

None of this happened suddenly. It was the result of a decades long process which has affected virtually every sector and has now all but paralysed the Italian economy.

Several phenomena have gradually worsened the labour market at the same time. The result is that youth unemployment is currently around 37 per cent and rising.

Many Italians appear to behave as if jobs and salaries were a right, or some kind of minimum guaranteed income rather than wages being remuneration for a service provided.

This explains why the Italian crisis has little or nothing to do with the subprime explosion, derivatives, or the housing bubble.

Financial investors started fretting in 2008 and 2009, when public expenditure and indebtedness surged, while growth turned negative. Despite the 2008-2009 shock, very little has changed in the past couple of years.

Italy’s response to its economic crisis has been based on the theory that it is ‘too-big-to-fail’, that about a third of its debt is abroad and on the lack of courage of most European leaders.

These leaders have hesitated to take responsibility for letting Italy sink and are possibly destroying the project for a European super-state.

Professor Enrico Colombatto

ENRICO Colombatto is a professor of economics at the University of Turin, Italy. Professor Colombatto is also Director of Research, Institut de Recherches Economiques et Fiscales (IREF) in ...

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