The Italian Economy 1961–2010: From Economic “Miracle” to Decline

Abstract

Long-term trends suggest that Italy’s current economic crisis is not the result of an unfavourable business cycle or of the recent global economic and financial crisis. Instead, Italy’s crisis accompanied by persistent slow economic growth is the result of decade-long structural shortcomings and inefficiencies. Many factors explain why and how Italy experienced sluggish economic growth and increasingly uncompetitive productivity over decades. The causes of Italy’s economic crisis, this author argues, are deeply rooted in the past and closely interconnected. This chapter discusses and analyses these causes from a historical perspective. Export-led growth in the 1950s and 1960s favoured the consolidation of a productive system centred on small and medium-sized manufacturing firms, many of which are located in Italy’s northern regions (Veneto, Lombardo and Piedmont). Such firms needed low labour costs, cheap natural resources and energy to survive in an increasingly competitive international setting. Social cohesion and strong domestic consumption, in a setting of relatively low wages, was supported and indeed guaranteed by generous public expenditures. After the oil crisis of the 1970s up until the beginning of the 1990s, Italy was able to remain internationally competitive through the regular devaluation of the Italian lira. At the end of the 1980s, the converging path towards other European countries stopped. The burden of a rising public debt, the distorted composition of public expenditure, the decline of the country’s manufacturing sector industry and insufficient investments into research and development had a negative and lasting impact on the country’s competitiveness. But also failures coming from the institutional and political setting and a ruling class above all oriented at short-term profits instead of long-term commitments and benefits, contributed to what is referred to as the ‘years of lost opportunities’ in the 1990s and beyond. In order to stop Italy’s economic decline, this author argues that not only effective monetary and fiscal policies, but also and indeed above all structural reforms, administrative and industrial policies are needed. Reducing the different kind of dualism is imperative to promote investments in research, infrastructure and human capital and to decrease the high dependence on energy imports, reduce the country’s high youth unemployment rate and tackle rising inequality and poverty.