What caused Italy’s stagnation?

More of a question than a post.

A while ago, after reading another interesting take on Italian politics describing the many failures of that state, which ascribed the 20 year-long stagnation in GDP/head to these, I wondered:  hasn’t it always been thus in Italy?  And in which case, why did Italy prosper so well before 1990?

Today, over lunch at the LSE, I got an interesting answer from a local.  The argument was that state failures got much worse from the 1980s onwards.  Left-wing terrorism prompted a political call to arms from a right-wing coalition in politics, which needed to orchestrate funding from business to buy votes to secure office to take action against the Red Brigade and similar.  This flow of funds set off a weakening in control over how public funds were spent, and all the things we associate with the Berlusconi era.

This argument is to be contrasted with another which puts the stagnation down to the emerging economies, which stole markets from the previously successful niche manufacturing sectors in Italy.

Any views?

 

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5 Responses to What caused Italy’s stagnation?

  1. Francisco says:

    Not really views of my own, but these are my recent readings on this topic:

    Why does Italy not grow? by Ashoka Mody and Emily Riley on Bruegel.
    Bottom line: “Italy has failed to reshape its comparative advantage. Low GDP growth and virtually non-existent productivity growth reflect lagging innovation and educational attainments. In turn, the incentives to invest in education and innovation are weak since economic prospects are bleak. In an aging population, this trap has become self-reinforcing.” http://goo.gl/jD0Jlv

    What is holding Italy back? by Daniel Gros on voxeu.org
    Bottom line: It’s not lack of capital, physical or human. It’s not structural handicaps. It’s not lack of innovation. It might be poor governance. http://goo.gl/yoWHUf

  2. If you didn’t see it at the time, I thought Bill Emmott’s (The Economist) doco in 2012 (?) called Girlfriend in a Coma was an interesting take on the demise of Italy post-1990. Don’t remember if it speaks specifically to your alternative hypotheses, but worth watching nonetheless.

  3. I definitely do not buy the politics argument. It is too much of a coincidence that Italy has experienced a huge decline in labour supply growth and its birth rate. This explains a decline in trend growth. What about GBP per capita? I think poor demography causes secular demand problems too. Why didn’t Italian domestic demand respond to a huge decline in real interest rates, which followed the Euro’s creation? Because the equilibrium was falling faster. A related point is that a collapse in youth dependency and household formation impacts credit demand – and Italy also suffers from credit repression for institutional reasons. Finally, and more ad hoc, Italy experienced on net a negative shock from the emergence of China – I think China overlapped with much of the Italian manufacturing sector, which may have had a bigger impact on domestic employment than the boost to the luxury good/high end manufacturing sector.

    In summary, Italy has long been a candidate for secular stagnation related to demography: declining household formation and low youth dependency disrupt the transmission mechanism of interest rates.

    A final aside, a mistake many make is to assume ageing populations eventually result in a fall in desired savings. This is a logical application of the life cycle hypothesis, but it is empirically invalid. The elderly save “too much”. Youth dependency is a better indicator of trends in equilibrium real rates.

    I have been of this view re Italy for a long time. I assumed the equilibrium real rate has been negative for the last decade, if not longer. However, I am increasingly also open to the view that declining real rates simply stop working at a certain point, but that is another story …

  4. Brett says:

    I always thought it was just an economic downturn/weakness that then got made worse by joining the Euro (which meant they lost their ability to independently devalue their currency). That of course made structural changes due to increasing trade worse, and so on.

  5. Phil says:

    The peak period for terrorist violence in Italy was 1977-9; the Red Brigades broke up in 1981, and even their splinter groups had gone pretty quiet by 1983. So I’m not sure it can be that.

    I’m not an economist, but AIUI the Italian economy was in crisis in 1977, with high inflation and a government response focusing on pay restraint and ‘austerity’. Did the economy ever really get out of that slump? The other big event of the period was the ‘Historic Compromise’, which saw the opposition Communist Party meeting the Christian Democrats rather more than halfway in the hope of getting a sniff of power. Not only did the HC strategy fail, it was disastrous for the longer-term prospects of the Communist Party itself, which effectively ceased to be an intellectually coherent opposition to the Christian Democrat system. So one reading of the period would be that Communist opposition through the 1960s and 1970s had been keeping the Christian Democrats relatively honest, and when this pressure from the Left was taken away the system degenerated into a full kleptocracy.

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