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Max Krahé

Feb 13 • 32 tweets • 19 min read

🚨New Paper Alert🚨
Understanding Italy's Stagnation 📉🇮🇹

Today is #Eurogroup. In the €, Italy is a puzzle. 1980s: among highest per-hour GDP. Today: long stagnation & problem child of €Zone. We tried to understand why. Here's what we found. 1/n

dezernatzukunft.org/understanding-…

First, what's the problem? From 🇩🇪 & 🇪🇺 perspective, debt often foregrounded. Fear of default, too big to fail etc. etc.

True: Italian debt stock among largest in Eurozone (left chart). But the deeper problem is growth (right chart).

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So what happened to growth? Some say: regional story, southern Italy. And the Mezzogiorno did fall behind. But even Italy's fastest-growing region (North east) lagged Italy's European peers. It's a whole-of-Italy story. 3/n

Decomposition shows: Italy lagged 🇩🇪🇫🇷🇪🇸 in both productivity (here defined as GDP-per-hour) and in hours-worked growth. Productivity is main story. But worth briefly looking at hours worked.

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Pre-COVID hours per person employed high (1710 🇮🇹 p.a., vs 1382 in 🇩🇪, 1518 in 🇫🇷), but employment rate low (59% vs 76% 🇩🇪, 66% 🇫🇷). Total hours rose from 1999 (42.2m hrs worked) to 2008 (45.8m), then fell to 43.6m (2019), mostly b/c of more part time, less full time work. 5/n

🚨 Women and the young 😱: 24% of 15-29yr olds not in emplmnt, edction or trning (NEET) in 2019 (OECD avr: 13%). Only 50% of Italian working-age women in employment (OECD avr: 61%). Both are longstanding problems - but not recently worsened. So can't explain declining growth. 6/n

What about productivity? Since 2000, zero overall growth! Strongly lagging in both manufacturing & most services (& negative growth in construction, utilities). The real puzzle.

What's the explanation? I look at three. All provide insights, none of them convinces entirely.

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A) "Italy didn't reform". Often a generic criticism, sometimes specific to labour mkt (excessive protections undermining 🇮🇹 competitiveness etc). Neither is true -- see pp. 15-24 in paper for overview of i) fiscal, ii) labour mkt, iii) competition and iv) political reforms. 8/n

Some relevant data: Brutal fiscal consolidation in 1990s. Italy now highest effective retirement age in 🇪🇺. Wage share & structure of labour mkt transformed, esp. for young & women. Product market regulation (OECD PMR index): 🇮🇹 now more liberal than OECD average and 🇫🇷 🇺🇸🇨🇭9/n

But: reforms often partial. Dualised labour market, insider / outsider problems. Problematic privatisations. Cuts to education spending, esp. universities. Failure to establish either market for corporate control OR effective bank monitoring of firm management. 10/n

B - "It's the €": Italy could no longer devalue, lost competitiveness. Fiscal rules forced austerity.

Some truth, but can't be whole story. If tight fiscal was the problem, why didn't 1998-2005 loosening boost growth? 11/n

And internal devaluation is hard, but why happening (painfully, slowly) in 🇪🇸 but not 🇮🇹?

More promising take: bad reforms undertaken to qualify for & remain in €. 1990s privatisations: desire for quick sales at high valuations. Legacy of extractive firms, low investment. 12/n

C - "firm level perspective": competitiveness, productivity, etc. ultimately happens in firms. So let's look at Italy's firms!

Some striking findings: beyond micro firms (1-9 workers), Italian firms just as productive as French, German, Spanish ones. 13/n

But a) 🇮🇹 micro-firms less productive than 🇩🇪 🇫🇷. b) Composition effect: In all countries, small firms less productive than big ones. Italy has lots more small firms, few large ones. 14/n

And: lots of family-managed firms (= not just family ownership or family CEO, but ENTIRE management structure from owning family/families). Uniquely common in 🇮🇹 (note: chart only covers firms > 10 workers to exclude micro business). Bad for productivity. 15/n

Why are 🇮🇹 firms small & poorly managed? Tough to say. Partly historical, loss of large firms in 1970s. Partly legal system (google "Italian torpedo"), partly corruption (hard to quantify, but it's a thing), partly administration, partly lack of agg demand, partly unclear. 16/n

So, synthesis? Not straightforward. Our best attempt: two decisive historical moments to blame. First: contradictory, counterproductive reform wave of 1990s. Second: retention of bad paradigm after ~2010. 17/n

1990s reform wave: moment of crisis (Mani Pulite, Feb 1992; ERM-exit, Sept 1992). Neoliberal ideas in the air. Plus: never a clear hegemony of reformers (see esp. Berlusconi-led weakening of rule of law, p.43 in paper). Result: contradictory, counterproductive reform mix 👇. 18/n

- Partial labour mkt liberalisation PLUS heavy demand compression: "poor tertiarization", reduced human capital formation (esp. among younger generation), poor incentives for boosting labour productivity, instead creation of low-value add service sector jobs. 19/n

- Contradictory collective bargaining reforms. Centralisation in 1990s: push for greater firm-worker cooperation & LT strategies, towards 🇩🇪-style specialisation. But erosion of employment protection: encouraged short term strategies, 🇬🇧🇺🇸-style generalism. 20/n

- Or corp governance & private finance: privatisation of banking, liberalisation of trading, better minority shareholder protection = encouraged mkt-based monitoring of firm management (via mkt for corporate control). 21/n

But: cntd tolerance of pyramidal & cross-ownership networks plus lifting prohibition for banks to own shares in non-financial firms = more aligned with bank-based monitoring of firms's managers, along pre-1990s German lines. 22/n

Result of 1990s reform mix: low investment, both private (down by 20%, esp. striking in intl. comparison) and public (down by 40% since 1990). Beyond investment numbers: 🇮🇹 missed out on IT revolution & big restructuring of European manufacturing... 23/n

Rise of China + Eastern Europe 🇪🇺-accession => big opportunity, but 🇮🇹 corporates absent. German corps build central European manufacturing core, dense supplier-manufacturer-R&D-sales networks. Core-periphery dynamic now entrenched, mkt investment unlikely to reverse it. 24/n

But: If poor results up to 2008, why retain reform mix after Great Financial Crisis?

External constraint (vincolo esterno) finally bit. 🇮🇹policy makers (rationally) afraid of bond markets. Mkts & mkt-shaping policy makers in Berlin & Brussels still trusted 1990s playbook. 25/n

Econ profession in 🇩🇪 & elsewhere and its limited knowledge of Italy, (formerly) anti-empirical & -histrcl bias not blameless here. True re-thinking only took root in last years pre-COVID, reached institutions w/ COVID & NextGenEU programmes. Too late for post-GFC moment. 26/n

OK. So what now?

Paper is diagnostic, does not develop a new reform programme. But perhaps three-pronged approach cld be explored. 1) inclusive structural reforms: courts, rule of law, tax-enforcement, anti-corruption, also stronger incentives for good firm management. 27/n

2) Investment in public administration, education, healthcare, railroads, green & digital infrastructure (NRRP good start here).
3) Industrial policy to overcome core-periphery dynamic in manufacturing (still the heart of the Italian economy!) 28/n

Beyond this, single biggest challenge remains: breaking up rent-seeking structures & transforming Italy's political capitalism from the extractive-malcoordinated to the cooperative-productive kind. Easier said than done.

dezernatzukunft.org/understanding-…

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