How to Fix Italy’s Stagnant Economy
As the world’s seventh-largest exporter, Italy was supposed to emerge from the economic crisis when the rest of the world did. How’s that working out?
In a word, it could be better. In 2009, Italy’s GDP decreased by 5%. It is expected to grow modestly, by 0,8%, this year, and by 1,4% in 2011. In the same years, the euro area’s GDP either decreased less (by -4,1% in 2009) or is expected to grow faster (by 0,9% and 1,5% in 2010 and 2011, respectively). So, during the crisis and immediately after, Italy is doing slightly worse than its peers, and its recovery seems to be lagging.
But these are minor issues compared to what happened in the preceding, crisis-free years. In 2000—2008, the country’s average annual rate of growth was about 1,15%. Meanwhile, the EU’s 27 national economies grew at an average annual rate of 2,2%, while the euro zone grew 1,95% per year. Italy today is part of the global economic bust, but it didn’t experience much of a boom in the first place.
The reason is that Italy’s public enemy No. 1 was never the global recession: It is Italy itself, or at least the structural problems from which the country was suffering well before the crisis. Such problems include, but are not limited to, an unsustainable fiscal burden; unrestrained tax evasion; a large, inefficient public sector that crowds out private investments; and a legal and regulatory environment that is hostile to business and encourages corruption. As a result, Italy has consistently been one of the slowest growing countries in the EU.
Not content with the popular argument that Italians are simply anthropologically ill-suited to economic success, we at Istituto Bruno Leoni have developed two indexes that may help to explain where our major problems lie. Our Index of Freedom of Enterprise-which suggests Italy is the least business-friendly country in the European Union-shows that the leading reason things are so bad is the lack of «freedom from regulation.» Compared to its peers, Italian regulation is of poor quality, and enforcement lacks transparency, stability, and effectiveness. Our Index of Liberalizations-which measures the level of legal, regulatory and fiscal barriers to entry in 15 key economic sectors-estimates that our economy is only 49% open, as compared with the best practices in Europe. Given all that, it’s little surprise that 17,5% of Italian business is transacted on the black market.
Where Rome deserves credit in recent years is its refusal to respond to the financial crisis with Keynesian «stimuli» as did so many of its EU partners. Italian Economy Minister Giulio Tremonti-ironically, a staunch critic of free markets-should be especially lauded for resisting still more government spending that would only have squeezed out more private players. But while we initially avoided making our problems worse, we have done little to alleviate the problems themselves.
The package of fiscal reforms currently dominating the attentions of the Italian parliament are not enough: They neither streamline bureaucracy, nor do they open markets, nor do they lower taxes. Indeed they may raise taxes, directly or indirectly. Hence, the overhauls may have little, or even a negative, effect on growth.
True enough, the single most obvious way to gain competitiveness-cutting supply-side taxes-may be very hard to achieve under the current budgetary and political circumstances (although not impossible). There are, though, a number of cost-free reforms that might also stimulate GDP growth.
First, we need to see a major effort in eliminating red tape: Virtually every international survey shows that complying with Italian law is so time- and resource-consuming that it creates a major competitive disadvantage. For instance, it takes some 257 days to settle an Italian construction permit, a full 100 days more than the OECD average, according to the World Bank’s 2010 Doing Business report. Meanwhile, it takes roughly 1,210 days (more than three years and four months) to enforce a contract. It would be naive to try and understand the extent of corruption and black-market dealing in Italy without seriously looking at the government-created incentives for such activities.
Second, the government should aggressively pick up on its privatization and liberalization efforts. Italy made some progress on this front in the late 1990s. But since then little has been done. Mail services should be completely liberalized by Jan. 1, thanks to the EU’s postal directive, but it is not yet clear how seriously Rome is taking this challenge. Next, local public services-particularly water services-need to be reformed, and quickly. Too many consumers and local businesses remain locked out of these markets, and so prices remain artificially high. A recent Bank of Italy paper calculated that «reducing the [public] service sector markups to the levels of the rest of the euro area» would, long-term, boost Italian GDP by 11%, adding that half of those gains would come in the first three years after implementation.
To make liberalization and privatization work, though, the rules must also be fairly implemented. To that end, conflicts of interest must be addressed, particularly those that come up when-as is often the case in Italy-a public body simultaneously serves as regulator and shareholder of some market actors. Privatizing all government-owned companies (including those that are only partially-owned by the government), would not only liberate competition and level the playing field, but also generate extra revenues that might be employed to reduce the public debt.
The failure to address these problems held Italian prosperity back long before the financial and sovereign-debt crises hit. The late writer Giuseppe Prezzolini used to say that «time is the most abundant resource in Italy, given how much of it is wasted.»
But if the last six months of European economics have taught us anything, it’s that Italy, and governments like it, have run out of time to waste.
08/5/2010
— Filed under: Finance
Tags: Italy, Stagnant Economy
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