Riccardo Faini Memorial Conference
Italy's lost productivity and how to get it back
Bank of Italy, Via Nazionale 91
Opening remarks
by Ignazio Visco
Governor of the Bank of Italy
Rome, 13 January 2017
I am pleased to welcome all participants to this conference to remember Professor Riccardo Faini.
I first met Riccardo in 1978 when I presented a paper written with Stefano Micossi in the famous
monetary workshop held by Franco Modigliani and Stan Fisher at MIT (Riccardo was then a PhD
student with Giampaolo Galli and Luca Barbone...). We met often in the following years inside and
outside of Italy, socially and professionally, exchanging views and commenting on each other
writings. Indeed, issues related to the topic of today's conference - long-standing poor productivity
dynamics in Italy - happened to be at the centre of a couple of professional exchanges between us
in the mid-1990s and early 2000s, which I would like to briefly share with you.
In 1994, at a seminar on "The New Frontiers of Economic Policy" (Le nuove frontiere della politica
economica) organised by the Innocenzo Gasparini Institute for Economic Research (IGIER), I
discussed - along with Luigi Spaventa - a paper by Riccardo on wage and productivity differentials
(Stesso lavoro, diverso salario?, i.e. "Same jobs, different wages?") between Northern Italy and
Southern Italy - the Mezzogiorno. The starting point of Riccardo's analysis was that a convergence
in nominal wages between the two regions since the late-1960s had not been accompanied by a
parallel convergence of productivity levels; the ensuing higher unit labour costs in Southern Italy
were thus contributing to higher unemployment there.
In order to achieve more wage flexibility in Southern Italy's labour market, Riccardo's main
proposal was to introduce a third type of wage bargaining arrangement - a regional one - to
complement or replace bargaining at the centralised and firm levels, with a view to bringing closer
wages and productivity levels while addressing higher unemployment in the South.
In my comments I raised some criticisms, but on one major point we were in close agreement,
namely that the issue of lower productivity (and higher unit labour costs) in Southern Italy should
be addressed not only by reforming the labour market but also by implementing broader structural
reforms to overcome well-known distortions of the general institutional, economic and social
environment, notably infrastructural gaps, enforcement of property rights, efficiency of the justice
system and the public administration. I cannot help but notice that these areas are the same where
reforms are called for still today for the Italian economy as a whole.
In 2003 Riccardo and I wrote two papers on the dismal performance of the Italian economy. While I
was considering a number of structural deficiencies that were risking to have serious consequences
on our growth capabilities in the years to come, Riccardo tried to put the unsatisfactory Italian
productivity outcome in a hystorical perspective. It is interesting that the titles of our papers had
two elements in common: the word "decline" (so popular today) and a question mark. [Riccardo's
paper: Fu vero declino? L'Italia degli anni Novanta ("Was it truly a decline? Italy in the 1990s");
my paper: È veramente in declino l'economia italiana? ("Is the Italian economy really in
decline?"). Also noteworthy is that later that year a further paper was published by Giacomo
Vaciago, with the word decline in the title but without question mark: Il declino dell'economia
Italiana, ("The decline of the Italian economy").] And it is also interesting that in December 2003
we participated in a conference whose title used exactly these two elements to raise the provocative
question: L'Italia: un Paese in declino? ("Italy: a country in decline?"). The conference was jointly
organised by Mediocredito Centrale and the Associazione Borsisti Marco Fanno, under the
leadership of Michele Salvati, critical of the use of the word, and introduced by Mario Draghi, the
then President of the Association. To be sure, as Mario put it in his introductory words, the risk of
decline was to be understood not only as Italy-specific but rather as a broader European issue.
Riccardo and I were also both somewhat critical of the use of the term "decline" to define Italy's
situation at the time. But we both argued that the risk for the coming years had not to be
undervalued. I remember pointing out that Italy's economy was rather undergoing a phase of "long
and difficult transition" because of the need to adapt and respond to the shocks posed by both the
"new economy" and technological progress, which had taken the Italian productive system rather
unprepared. These issues were already widely debated in the Bank of Italy (where Salvatore Rossi
was leading work on the "new economy" and Pierluigi Ciocca summarizing Italy's challenges as a
"problem of growth"). And they were very much being discussed and analysed in the Economics
Department of the OECD, that I had been leading, within a wide-ranging and global project on "The
sources of growth".
Therefore, I underscored that Italy's low growth was first and foremost due to structural internal
causes, most notably low investment in capital (physical, human, knowledge-based) and
correspondingly low ability to innovate, which underpinned what still can be seen as the hallmark
of Italy's fundamental problems: the disappointing dynamics of total factor productivity over the
last twenty years or so.
Riccardo too related the increased attention paid to the worsening of Italy's economic performance
to the changes in the international economic situation: globalization and the rise of emerging market
economies, which threatened Italy's comparative advantages in sectors of specialization with low
intensity of both human capital and technology.
To counter the decline story, his main argument was that Italy's worse aggregate growth in the
1990s in comparison with its peers (France, Germany and the US) was biased by demographic
factors: in per capita terms Italy's growth was only marginally slower (he drew similar conclusions
in terms of purchasing power parity). Besides, Riccardo gave heavy weight to the importance of
economic developments in the South: in his view, Italy's decline - to be played down in itself - was
mainly a Southern Italy's problem ("un problema meridionale").
Contrary to what was often stated, in Riccardo's view the 1990s were not a time that set the
beginning of the decaying phase. Signals of underperformance had indeed appeared even earlier: in
his paper of 2005 with André Sapir in Oltre il declino ("Beyond the decline", a book edited by him
and others well known Italian economists, some of them here today), he underscored that average
labour productivity growth began to fall in the 1960s and 1970s (a result not limited to Italy and, I
would say, not unexplainable for a country that had so quickly caught up after WW2 with the most
advanced world economies). More importantly, he believed that the 1990s had in many respects laid
the groundwork - in terms of adoption of some initial structural reforms - for the country's
economic revenge. He aptly warned of the perils of not continuing the structural reform effort.
I shared this warning, and to some extent also the observation that we should look deeper into the
past to understand the present. Somehow, I felt that behind the difficulty to disinflate the economy
until the mid-1990s and the dismal growth performance following the establishment of the
monetary union there were common factors, most notably the very low productivity growth in the
(protected and inefficient) service sector of the Italian economy. This made it very difficult to
disinflate in the former period, as the increases in nominal wages that were matching the rise in
productivity in the manufacturing sector became the benchmark for a service sector lacking the
ability to produce similar productivity gains, with higher costs for the same manufacturing sector.
With a single currency, in a much wider area and lacking the necessary investment response, global
competition and the monetary union were not well responded and resulted in a prolonged period of
low growth overall.
Perhaps I was less optimistic than Riccardo, but our views were the closest on a few key issues: the
structural nature of Italy's problems, the specific challenges that globalization posed to the country
and the "absolute priority" for economic policy: strengthening human capital and investing in
education.
Italy's productivity problem today
It is unfortunate - to say the least - that Italy's structural problems of today are broadly the same as
those of 15 years ago and the key question remains how to resume Italy's growth. To this end,
getting back "lost productivity" is obviously critical. Perhaps the main difference from past
discussions is that today these challenges have to be addressed in a more complex global
environment dominated by the legacies of the global financial crisis and faster technological
progress.
The former has left most developed economies in a period of sluggish economic growth, spurring a
lively debate among economists on longer-term prospects and raising increasing concerns among
policy-makers. Many scholars have highlighted how financial crises are characterized by slower
recovery with respect to non-financial recessions because of inter alia a larger decline in capital
accumulation, the stronger impact of the credit shock on young and fast-growing firms, and the
huge costs incurred for banks' recapitalization. Currently, growth is also held back by financial
deleveraging, subdued demand, and low inflation (which raises real interest rates).
Besides these short-term factors, future growth prospects are weakened by the long-term decline in
productivity growth that is affecting all developed countries. Economists have pointed to several
factors to explain this slowdown. According to one view, growth in advanced economies may be
hampered by inadequate aggregate demand, driven by demographic trends, growing inequality and
raising government debt, resulting in a "secular" decline in interest rates. Others link the slowdown
to the types of innovation that have emerged overtime: those which took place in the second half of
the 20th century ("general purpose technologies" such as electrification) may be much more
significant than those that characterize the 21st century (such as ICT and the digital economy).
Recent evidence based on firm-level data from several OECD countries seems to show that
innovation has not slowed down; rather, the pace at which innovation is spread across the economy
("the diffusion machine") has weakened.
As I have already underscored in past occasions, technological progress is today's most powerful
agent of change: in the "second machine age", as it has been aptly defined, it poses distinct
challenges at both the economic and social level because of a few key features of the digital
revolution, first and foremost the greater speed by which new technologies tend to replace labour,
even in fields in which human intervention has so far appeared to be decisive. These developments
underpin a revival of the concept - proposed by Keynes in 1930 - of "technological
unemployment", which has come to be seen as a possible result of the diffusion of automation,
robotics and digitalization, with the risk of a substantial decline in job opportunities and stagnation
of wages and incomes in a number of industries and countries.
To which extent this general background relates to the Italian economy?
Understanding the sources of productivity growth is of utmost importance for Italy. As we have
seen, since the early 2000s Italian productivity has been disappointingly stagnant, performing
significantly worse than other European countries. It remains relevant to distinguish how much of
this poor productivity growth is to be related to Italy's structural weaknesses or rather due to
delayed adjustment to global changes that could be overcome in due time, hopefully earlier than
later: I am sure that today's debate will help make progress in this direction.
The work of many Italian economists, some of them are here today including those working at the
Bank of Italy, has long highlighted the importance of structural factors that are specific to the Italian
economy and to their interaction with the three fundamental changes that have taken place since the
second half of the 1990s: globalization, the technological revolution and the demographic transition,
especially, but not only, linked to population ageing. On top of all this we have had the
establishment of the Economic and monetary union and the adoption of the euro. To all these
changes the Italian economy has adjusted very slowly, if at all, and with substantial delay. The
result has been the inability to overcome well known structural weaknesses. Some of these
weaknesses are internal to Italian firms, which are, when compared to those located in other
developed economies, considerably smaller, older, with a lower propensity to innovate and adopt
new advanced technologies. Management skills and practices leave much to be desired and are
often old-fashioned. To finance their activity firms rely on bank credit much more than what
happens in other advanced countries: in this regard, it is well known that this is not the ideal source
for financing innovations.
The capability of Italy's productive economy to increase sales and create value added has been also
undermined by long-standing institutional weaknesses. Since 2011 Italy has undertaken a vast
programme of structural reforms, aimed at creating a more growth-friendly environment.
Legislators have approved, in various steps, measures to reduce red-tape, to simplify bureaucratic
procedures for starting and running businesses, to improve the efficiency of the public
administration and the judiciary system, to prevent and fight corruption, to stimulate innovation,
and to achieve a more flexible and dynamic labour market.
The process is still ongoing and far from being concluded, even if in several areas there are first
effects. The stock of pending civil proceedings is decreasing: our estimates show that some of the
measures adopted in the past to reduce red tape and to simplify business start-up regulations have
had positive effects on the entry rate of start-ups. The Jobs Act is a wide-ranging reform, that has
tackled employment protection legislation, unemployment insurance, wage supplementation funds,
active labour market policies and other aspects. But while its long-term effectiveness still remains
to be seen, we must understand the risks of going backwards, as reducing labour market
segmentation is fundamental in the quest to allocate labour from less to more productive uses, and
to boost aggregate productivity.
Factors that negatively impinge on aggregate productivity growth by constraining both efficiency
gains at the firm-level and the efficiency of the reallocation of resources from low- to high-
productive firms have to be decisively addressed. More generally, in order to overcome its low
productivity problem the Italian economy must improve its ability to fully seize the opportunities of
the digital revolution while governing the consequences that technological progress is exerting on
labour demand and the skills required to current and prospective workers. So there is a need to
fundamentally improve the environment in which firms are formed, grow and operate, and to invest
in knowledge, human capital and the new skills needed to succeed in the years ahead.
To a relevant extent, the current wave of technological progress may have made even more difficult
to reconcile productivity gains and employment (and wage) growth. This challenge may be greater
in Italy if one looks at the past. As recalled by Riccardo Faini in his 2003 papers, Italy did not
always succeed to overcome the above potential conflict: between 1992 and 1996, productivity
growth was satisfactory but employment decreased dramatically; on the contrary, between 1996 and
2001 rapid employment growth resumed while productivity growth collapsed and its level remained
stagnant afterwards.
Avoiding a repetition of these dismal dynamics is perhaps the greatest challenge for policy-makers
and academics alike.