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Italy’s new government has a huge economic challenge ahead

Voters are set to be disappointed. EPA-EFE/Ettore Ferrari

Italy’s general election delivered a result as astonishing as it was predictable. After 20 years of sluggish growth, a deep recession, a number of bank bailouts, and a large influx of refugees from across the Mediterranean, Italian voters turned against the parties most recently in power.

They rewarded those with wildly optimistic goals to turn the struggling economy around. These voters are likely to be disappointed with the outcome.

Both the Northern League party and Five Star Movement share a dislike for the European project, and distrust for “elites”. They both toy with the idea of exiting the euro, and share an economic agenda of policies to redistribute wealth, such as introducing universal basic income and lowering retirement age. They also share protectionist ideas, with talk of introducing import tariffs, and stopping the (alleged) negative effect of immigration on natives’ salaries and public finances.

Both have a very expensive shopping list for extra spending, with little detail on how to fund these policies. They often resort to overly-optimistic estimates of how government spending can spur growth.

They also resort to an anti-EU narrative: “We’ll revise the EU treaties”, “We’ll scrap the EU fiscal compact”. In other words: more deficit, and more debt. Yet public debt is something Italy already has in abundance, as it is now well above 130% of GDP.

Unfortunately, many of the proposed recipes will do little to solve Italy’s longlasting problems, and possibly worsen others.

Curing the ‘Italian disease’

New research by Bruno Pellegrino and Luigi Zingales explored the origins of this “Italian disease” of slow growth and stagnating salaries. The research highlights what Italy needs now – and what Italy is not very likely to get with its new government.

The authors don’t point their fingers beyond the Alps, towards Brussels, the European Central Bank or the German chancellor. Looking at Italian company data across sectors, they establish that one of the main causes of the sluggish Italian economy can be found by observing how firms reacted to the ICT “revolution”.

Italy has been slow to take advantage of the productivity gains created by this technological progress. Investment in ICT has been comparable to other neighbouring countries, but its full exploitation has been limited by a number of factors. One is the sheer old age of managers, as pointed out by other research, but also the lack of meritocracy within firms and the inefficiency of local and central governments.

Non-meritocratic, loyalty-based systems are common in Italy. And bribery and tax evasion are widespread, which exacerbates this.

The inefficiency of Italy’s government is best understood by looking to the country’s civil courts. It takes just over a year to have a tribunal decide on a civil case, more than 800 days in case of appeal. Even more worryingly, Bruna Szego from the Bank of Italy calculated that 50% of appeals are successful – so the appeal reverses the first judge’s decision. This is dangerously high. It makes the use of court too similar to a lottery, and opens the door to recourse to justice for frivolous litigation as a delaying tactic.

This has a significant effect on firms’ performance. In their working paper, Silvia Giacomelli and Carlo Menon compared Italian firms in neighbouring localities, which are in different judicial districts, and found that the more efficient the judiciary, the better effect it has on firms’ employment and productivity. Needless to say, these problems are present across Italy, but more strongly so in its southern part.

As another example, take the educational attainment system, as measured by PISA test scores in maths.

This is on average comparable with other OECD countries, but shows once again the huge territorial divide between the north and south, with students in the northern region of Trentino showing attainment similar to that of Japanese or Korean students. Calabrian students in the south, on the other hand, enjoy a similar level of attainment to Turkish or Mexican children.

All of these problems – the lack of meritocracy, the inefficiencies of the civil service, corruption – which are exacerbated by the territorial differences, call for action. Italy’s productivity crisis needs to be tackled by reforming the civil service, incentivising investment in human capital both in schools and in the workplace, and attracting foreign investors. Toying with a euro break-up and setting out poorly planned spending sprees is not going to be of much help.

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