(Interview to Matei Dobrovie, of Adevarul, Romenia. “How Italy lost its economic competitveness” , 9/1/2012 Google translation)
PM
Monti announced new measures to support the liberalization and
competition in key sectors of the economy and industry to enhance
economic growth. Italy
has lost high-tech competition with the U.S., Japan, China and India
and is short of steam because domestic lobbies are powerful and hinder competition in many areas
of the economy. Monopolies
in areas such as services create major obstacles for small firms, says
Paolo Manasse, an Italian economist in an interview for FP Romania.
What keeps Italy in the G8? What are the structural weaknesses and strengths of its economy?
As you know Italy is the seventh economic power in the world in terms of GDP. This is due to a strong industrial tradition in a number of areas such as car industry, truck and mechanics. In these sectors, Italy is one of the leading exporters. The
Italians are good and the textile and fashion industry, but even if they are
well-known sectors theys are not as important as the car industry, components,
agricultural machinery. This is the largest export sector. And then we have strengths in fashin , design and tourism, as well as pharmaceutical and chemical industry. We export more to Europe, especially France and Germany, but also in the U.S. Before Italy had had important other hi-tech sectors. It had a strong IT industry, Olivetti was a leader in the industry. We
manufacture and export civil aircraft, but in the last 20 years Italy
was not able to compete with the U.S and Japan, so it lost this
comparative advantage.This is the origin of our problems today: the fact that Italy was not able to keep up with competition in high-tech sectors. It
suffered from the competition from India and China, which became
very strong in the standardized productions such as cars, washing machines.
The Italian economy has lost competitiveness because of rising production costs. It
was based on multiple SMEs in the 60s and 70s when this
industrial model was an asset for it was very flexible and able to adapt to changing
conditions. Then
with new and advanced technologies, it took large investment and fixed
costs as production scale increased, so that an industry based on SMEs has
become a limitation. The problem is that these companies find it difficult to grow and be competitive in a globalized economy.
Then Italy had a problem with the fiscal policy. In the late ’70s, early ’80s, Italy began to accumulate a large debt, moving from 60% to 120% of GDP in 10 years. Then the idea was to fight the recession through financial expansion. Then in the late 90s there were partially successful attempts to reduce public debt to enter the euro area. Between 1995 and 2000 there wasa fiscal consolidation and public debt ratio was reduced to 100% of GDP.But
with the arrival of the first Berlusconi cabinet and once Italy entered the
eurozone, fiscal discipline was relaxed and the debt increased again
and reached 120% of GDP. With
the debt crisis in the U.S. and Europe, this high level of debt
has become a source of vulnerability as foreign investors began to fear
the Greek scenario.
What is the economic dimension of “Berlusconism”?
We
had four governments since 1994 Berlusconi and it is clear that the debt per capita has grown faster than in these periods than during the left-wing governments. The
main problem is that Berlusconi was elected based on promises that he
will reform the country, that he will reduce bureaucracy, will
liberalize the market of goods and services, that will reduce taxes and
public spending, that will reduce the state involvement in the economy, things that people wanted And
now the tax revenues as a percentage of GDP, is greater than ever about 44% and
the level of public spending amounts to a record 45% of GDP. There had been no liberalization. Not to mention corruption and tax evasion. Especially the rich do not pay taxes. Berlusconi has promised much, but kept none of his promises.Now we have a paradox: after a center-right government we have more bureaucracy and more state, more taxes and more debt. Besides, Berlusconism damaged Italian society culturally. Liberal
or Conservative government should put emphasis on the idea of
​​meritocracy, competition so that those who are able, but not rich, can succeed.But with Berlusconi merit never mattered. Even his choices of the people to work with were only based to loyalty to him. He sent beautiful women in Parliament. The message presented to the entire country, particularly thropugh his televisions, was that what matters is loyalty to the boss. All sort of people without any merit became famous. The message sent to firms and workers was: It does not matter if you work hard, you are
able, what matters is the connections you have. You’ll need several years to change this mentality in Italian society.
Are the Austerity measures sufficient to reduce the huge debt , or will be Italy be the next Greece?
It depends on market reaction to these measures. So far the reaction is positive. And even before Monti was appointed to government, our budget was almost balanced, if we esclude interest payments. I refer to the primary balance, the difference between government spending (not including interest) and income taxes. Thr entire fiscal deficit is due to accrued interest on old debt. And you can raise taxes, reduce public expenditure, but can not get rid of debt immediately. It
takes time, particularly because with so large a debt, 120% of GDP, any
increase in interest rates may have serious consequences.In
the summer, when scandals Berlusconi erupted has been involved, and facing opposition from within its majority, investors were scared and the
interest rate on Italian bonds with a duration of 5 years maturity
increased from 2.5% to 7%. Such an increase can you blow up the deficit for incurring debt to pay more and more interest. It was a crisis of confidence in the political system’s ability to reduce high debt.Now the hope is that Monti’s measures will be approved by Parliament, which would give an important political signal … Things may change when and for the same reason that interest has increased from 2% to 7% – confidence, it could decrease. Italy is not Greece. Its
economic fundamentals are ok, while Greece deficit at one
time reached 20% of GDP. We are close to a zero deficit. Our problem is related to the interest payments.If we want to convince markets that are serious about reducing EM debt, we need some tax adjustments and so did Monti. Of
course there is a danger that the economy into recession and revenues
to fall while unemployment benefits sand pending will increase. The recession will only worsen the deficit, and then you get into a spiral as Greece.But I think Monti’s fiscal plan is good enough that it will not lead Italy into a major recession. I
am optimistic because although there will be some tax increases, we see
a reduction in expenditures that have not occurred during the
Berlusconi-Tremonti. Not only public employees and especially left-voters will be be required to tighten up, but a large number of people both of left and right. Homeowners
are also affected, so the costs are shared more equitably, and that is the
condition sine qua non for the Italians to accept sacrifices.
What is the reason for the current economic crisis in Italy?
This has more to do with the business cycle. Being
a very open economy, Italy is felt as a result of global economic
slowdown and exports suffer when they do not expand its foreign markets.
The problem is that lack of productivity growth in recent years. This is because the power of lobbies in Italy is very high and in many areas there is little competition. There are monopolies in services. Many public services are closed to competition. Some segments of the labor market are not flexible. There are oligopolies, which limited access. Small businesses have difficulty entering these markets. The banking sector is not competitive. It is very difficult for young companies to access finance, credit and grow.Many big companies block entry into certain areas. There are barriers in many professions such as lawyers. If you are an outsider you do not have access even if you’re good.
Paolo Manasse is a professor of economics at Bologna University.