Salvatore Rossi: The economic progress of Italy - historical heritage and
future prospects
Speech by Mr Salvatore Rossi, Senior Deputy Governor of the Bank of Italy, at the Economic
Conference to commemorate the 150th Anniversary of Diplomatic Relations between Italy and
Japan "The Economics of Italy and Japan: Historical Development and Future Policies for
Stability and Growth", co-hosted by Keio University and Bocconi University, Tokyo, 23 May
2016.
* * *
Accompanying charts can be found at the end of the speech.
I would like to warmly thank the organisers of this Conference for inviting me to offer my
view on the Italian economy before such a distinguished audience, and on such a solemn
occasion. I am particularly pleased to share the task of animating this second Part of the
Conference with my old friend Deputy Governor Nakaso, and I look forward to hearing from
him about the Japanese economy with great interest.
We are here to celebrate the 150th anniversary of the diplomatic relations between Japan and
Italy: one century and a half, during which our two countries have undertaken enormous
transformations, with differences but also with analogies. And because this occasion is a
historical one, my approach will be historical as well.
I am not a professional historian, so I beg the pardon of those who are. Yet I was helped,
in preparing this speech, by experts in the Historical Studies Division and also in the
Structural Economic Studies Division of the Bank of Italy, whose contribution I gratefully
acknowledge.
I will concentrate on the evolution of the Italian economy since the political unification of the
country, which took place only five years before the beginning of diplomatic relations with
Japan. But let me start with a quick glance at a more remote past, because when looking
at the evolution of societies, the ampler the view, the deeper the comprehension.
A long historical cycle
The Italian peninsula came out of the European Middle Ages, in the late XIII century, as a
nascent economic power. It's interesting to notice that one of the main driving forces was
monetary: gold, which had almost disappeared from coinage after the fall of the Roman
empire, reappeared in Florence in a coin named florin, minted in 1252. A monetary system
was actually essential to replace barter and develop manufacture and trade, which were
the engines of prosperity.
Since then, for about three centuries, and well into the Renaissance period, Italy maintained
the lead in western economic growth. The perfection of the arts, from Piero della Francesca
to Michelangelo, is witness of the wealth and sophistication of Italian society in those times
(slide 2).
But after that a long period of decline set in, both economic and political. The guilds,
which had been a growth factor in earlier times, became jealous custodians of their
privileges, stifling innovation. The ruling classes, satiated with consumption, stopped
searching for new horizons.
Most European countries achieved national unification in the XVI century, not Italy, which
became just their battlefield. In terms of GDP per capita, Italy fell far behind in the European
ranking.
The very same perception of Italy by foreigners changed. In the XVII and XVIII centuries our
land was avidly trodden by young aristocrats and wealthy bourgeois from all over Europe, in
search of Roman temples, and eager to buy antiques. Finally, Italy had become the scenario
of her majestic ruins (slide 3). Johann Wolfgang von Goethe, the famous German poet and
thinker, being a genius, was among the few able to break this arid and exploitative scheme
during his journey in Italy, the Italienische Reise he made in the late XVIII century: to him,
Italy offered not only the Coliseum, but also interesting conversations with craftsmen,
innkeepers, civil servants.
In the first half of the XIX century Italy was plagued by underdevelopment and poverty, hitting
the bottom of the European ranking in terms of per capita GDP.
The evolution since the creation of a unified state
Following a struggle lasted half a century, political unification was achieved in 1861,
though still partial: Rome and Venice joined the new kingdom only in the following ten
years. The new Italian state had to embark on a painstaking effort to put in place the
physical as well as the legal infrastructure of a modern country. The first two decades of
unity were far from brilliant in terms of growth. One of the major bottlenecks was the
inadequate transportation network, especially railways.
Only in the 1880s the annual growth rate of the economy surpassed 1 per cent. Early in that
decade Italy joined the Gold Standard, which was proof - at that time - that it had a viable
economic management. It seemed, for a moment, that the country had reached its place
among the European powers. But the international financial crisis of the Nineties had a
devastating effect on the economy: foreign capital fled and a housing bubble burst, leaving
many bankruptcies behind. Currency convertibility was soon suspended. Financial
reconstruction had to start again, but this time under the guidance of a central bank: the
Bank of Italy was founded in 1893. While not yet formally monopolist of the currency, the newly
created institution had the size and the capability to lead the reorganization, and to avoid
major financial crises until the Great Depression.
In the XX century Italy benefited from two successive "golden ages" of sustained growth
and catching-up with respect to the older economic powers: the fifteen years period
preceding the First World War, and the twenty years following the end of the Second World
War.
We might have expected, or hoped, a third episode of sustained growth following the ICT
revolution and the spurt of globalization taking place in the Nineties of the past century, as
we could observe in a number of countries, but that did not happen. On the contrary, years
of sluggish economic growth and slowing productivity followed. I shall come back to this.
The early XX century were a true belle époque for the Italian economy: it became almost
self-sufficient in the production of steam engines and locomotives, the equivalent of today's
smartphones as icons of progress (slide 4); it entered new fields, such as chemical production.
Overall, average annual real GDP growth over the whole period was a hefty 2.6 per cent
(slide 5). Substantial merit for this result must be given to millions of Italian migrants: their
savings, sent home, allowed the country to pay for the machinery needed to modernize the
industry.
After Second World War, Italy, in a new democratic political environment, started
reconstruction. A burst of hyper-inflation was successfully extinguished in 1947, which
allowed entrepreneurs, workers and consumers to focus on re-building the real economy.
Italian politicians understood that the future of the country was laying in its ability to thrive in
a larger community. The decision to join the European Community in 1957 allowed Italian
exports to expand at a dramatic pace. Italian country lands, especially in the South, supplied
enough workforce for fast-growing industrial sectors: construction, motorcycles, car making,
domestic appliances. While untrained, this workforce was good enough for the mass
production of those days. The Italian "miracle" (parallel to the Japanese one) set in.
Between 1958 and 1963, real GDP grew at an average rate of 7 per cent, 6 per cent on a per
capita basis.
To this miracle the Bank of Italy contributed by preserving a stable money, but also by
funneling savings towards key projects, such as road and telephone networks. In those
days, central bank independence was not perceived as a crucial issue. The central bank
shared with the Government the responsibility for key economic policy decisions, and
implemented those decisions using the powers it had on the financial market and on
banks.
Let me recall that in the Sixties Keynesian thinking became dominant in economics, and the
Phillips curve oriented decision-making in most countries. Stable money had ceased to
represent a goal per se, and was often sacrificed in order to achieve a higher rate of
employment. Monetary stability was essentially being judged in terms of the exchange rate,
rather than in terms of consumers' purchasing power.
The landscape dramatically changed in the Seventies and Eighties, with the oil shocks,
double-digit inflation rates in several countries, and a renewed emphasis put on the need for
central banks' independence.
The hypothesis of a new long-term decline
From the end of the Nineties, the Italian economy slowed down markedly. Low GDP growth,
falling total factor productivity and shrinking export market shares suggested the idea that
Italy was entering a phase of long-term decline (slides 6 and 7).
How come? There is a wide consensus by now, to which research done at the Bank of
Italy gave a significant contribution, that some features of our economic and social structure
had become unfit to the new technological paradigm and global trade environment. I am
referring first of all to the insufficient dynamics in firm demographics: that is to say, we had -
and still have - too many small firms, too few capable and willing to grow. That reduced the
general ability of the economy to exploit the potential gains from new technologies and global
export markets.
The reasons for such a chronic dwarfism of the Italian corporate sector were rooted in
our peculiar "doing business" ecosystem, characterized by a cobweb of laws and
regulations affecting economic activity, sometimes redundant and incoherent, often inspired
by an anti-market ideology; suffocating red tape; inefficient judiciary.
To give you an example, suppose that a successful Italian small firm saw the concrete
opportunity to make a dimensional jump, either through internal investment or acquiring a
competitor: more often than not it just gave up, and stayed as it was. Why? Because it
feared to become too visible to bureaucrats, to tax officials, to unions, to local politicians,
to judges. But even when those fears were not justified, the family owners of the firm could
decide anyway not to leave the small dimensional class in order not to lose control of the
firm.
The prevalence of small and medium sized firms was a strength of the Italian economy during
the Seventies, thanks to their flexibility, and helped Italy to navigate through the turbulent oil
crisis and the subsequent years of stagflation. This same strength turned instead into a
weakness when the combined two economic revolutions of the late XX century - ICT
and globalization - shocked the world. But the implication drawn by some that Italy had
entered a phase of historical decline, like the one following the Renaissance age, was too
simplistic. Actually, it was wrong.
During the first years of the new century the Italian economy as a whole showed clear
signs of reaction and dynamism. But the corporate sector started to split into two diverging
buckets: in the first one we could find firms - mostly manufacturers, medium-large size,
exporters - that were able to catch the opportunities of the new global environment and
raised their productivity and competitiveness. In the second bucket we could find other firms
- mostly in the services sector, small, domestically oriented - which were not.
According to revised figures recently released by our national statistical office (Istat), labor
productivity in the manufacturing sector has increased by 23 per cent since 1995, that of the
services sector has remained almost stagnant. As a result, total economy's productivity
has increased by a meagre 6 per cent in twenty years, one of the worst performances in the
advanced world.
Clearly the future of our economy will depend on the relative weights of the two buckets and
on the ability of the regulatory and institutional framework to incentivize corporates to climb
from the lower to the higher.
Since the mid-Nineties, and more decisively after the global crisis, a series of important
structural reforms started to be enacted. The inspiring principles were: less state in the
economy, a more market-friendly environment, a lighter regulatory burden. The markets of
several products and services were progressively liberalized: the banking system was fully
privatized, several utilities and publicly-owned firms were transformed into privately-owned
companies. Notably, the pension system became a full "pay-as-you-go" system, making it
one of the most sustainable in the world, notwithstanding the progressive ageing of the
population.
The Great Recession damages
In the most recent years the impact of the global financial crisis, first, and of the European
"sovereign debt" crisis, right after, have rocked the Italian economy, just while it was
struggling to adjust to the new technological and global market environment.
To give you a sense of the blow inflicted to the real economy by these two shocks combined,
the cumulate drop in GDP during the crisis reached 9 percent; industrial production fell by a
quarter. The fall in global demand severely hit exporting firms, precisely those that were
fighting hard to "go global". It was the Great Recession.
There is a big difference between the two shocks, and that regards the effects on the
banking system. In the couple of years following the default of Lehman Brothers, Italian
banks weathered the storm. Much like Japanese banks, they were not substantially involved
in the "toxic" asset kind of problem affecting banks of other countries. Hence, they were able
to absorb the turbulence coming from the recession with no support from taxpayers' money.
But the sovereign debt crisis kicked in. It paralyzed the cross border interbank market in
Europe. Credit started to decrease, especially to SMEs. The recession deepened. Italian
banks, facing a strong rise in non- performing loans and a sharp increase in the cost of
funding, saw their profits and capital squeezed, further impairing their ability to support the
real economy in a vicious spiral. When the sovereign debt crisis subsided the conditions of
our banks improved, but the issue of bad loans still figures prominently on the policy
agenda in Italy these days.
Risks and opportunities for the future
The macroeconomic scenario is now getting better in Italy. A recovery started one year
ago. Yet the rates of growth projected for this year and the next one look still insufficient to
reabsorb unemployment.
We still see a lack of aggregate domestic demand, determining an output gap that we
estimate at around 5 per cent. The common monetary policy put in place by the European
Central Bank is doing its best to contrast deflationary risks still visible in the euro area.
On the fiscal side, Italy has inherited from a long season of excessive current expenditure
started in the Seventies a high level of public debt. Hence, fiscal policy has now a limited room
for manoeuver, also given the constraints posed by the European rules. The Government is
fully using the available flexibility. In terms of composition of the budget, it is aiming at
changing it in a more growth-friendly manner.
Consumers' and investors' confidence has to be restored, with the help of macroeconomic
policies, in order for the Italian economy to eventually close the output gap. But we have to
solve an even more important problem, one of a longer term nature: productivity and
potential growth still too slow.
How to stimulate them is what structural policies should be concerned with. Some
important steps forward have been recently taken in this direction: I would just like to mention
the labor market reform, the "Jobs Act", which injected a decisive dose of flexibility into
the Italian labor market. Other very relevant reforms are in the making, such as that of the
judiciary and of the civil service.
Much remains to be done to boost potential growth. It's a long and multifaceted endeavor.
A key factor is innovation.
Let me mention an example of a successful innovation of the past which combines most
of the strength of the Italian scientific and artistic culture: the "Vespa" scooter (slide 8).
This is a symbol of the Italian design, but also of technological ability, which became a
global phenomenon so much that it has been exhibited even in the Museum of Modern
Art in New York.
The idea of the Vespa came to the manager of an aircraft manufacturer seeking to
diversify its products right after the end of WW2. He wanted a totally different product from
the existing motorbikes and therefore asked an aeronautical engineer who "hated motorbikes"
to design the new scooter. The engineer came up with a completely different design,
resembling a wasp, the English for "Vespa", and with several distinctive characteristics that
made it extremely comfortable to ride.
It took a few years, but the Vespa turned into an astonishing success, also promoted by
Hollywood movies, such as the ride of Gregory Peck and Audrey Hepburn on a Vespa through
the streets of Rome in "Roman Holidays".
The lesson that we draw from the Vespa example highlights two ingredients that, still
today, are crucial for successful innovations: human capital and what can be called
"managerial capital", i.e. the availability of managers with a risk taking attitude, able to use
the latest technology, and capable to think out of the box.
While it is difficult to maintain a high propensity to innovate in ageing societies, naturally
tending to be averse to "the new", this is a key challenge for policy, and it requires to keep
investing to strengthen the education system at all levels and to promote an entrepreneurial
culture in the population, especially among the youths.
What Italy and Japan can do together
Let me conclude this brief overview with a tiny episode of the past, back in the years
following the establishment of diplomatic ties between our two countries.
A printmaker, engraver and artist born near Genoa, whose name was Edoardo Chiossone,
was selected in 1868 by the Banca Nazionale (the main issuing bank in Italy at that time,
subsequently merging with other issuing banks to give birth to the Bank of Italy) to be sent
to Frankfurt, Germany, in order to learn updated techniques of banknote printing.
Banca Nazionale slowed down its projects in renewing printing technologies. Chiossone was
approached by officials of the Japanese Finance Ministry, and invited to move to Japan, to
reorganize the printing activity of the State Printing Bureau.
Chiossone moved to Tokyo in 1875 and became Head Printer within the State Printing
Bureau. The Bank of Japan was still to be founded. He realized there the first modern (i.e.
horizontal) Japanese banknotes (slide 9). He maintained this position until his retirement and
lived the rest of his life in Japan, never setting foot in Italy again.
This story symbolizes, to my view, some comparative advantages of our two countries and
the potential of cooperation between us: artistic inventiveness combined with openness
to new technologies, adventurous spirit, individualistic curiosity on the Italian part; superior
capacity in organizing productive factors, long-term vision, social cohesion addressed towards
collective endeavors on the Japanese part.
Italy and Japan already cooperate in many fields, from trade to finance, to international
institutions and policies. We must strengthen our cooperation, exploit our complementarities,
in the interest of our peoples' prosperity.
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