New Economist has a post linking to a recent paper by Francesco Daveri on Italian productivity, and by this somewhat circuitous route (being directed by a comment towards a blog called Business Hackers on my way) I found this article in Spiegel Online about how the arrival of Chinese migrants was changing the face, and economic substructure, of Prato:
Outsiders have long since made their way into Prato....new home to 2,000 Chinese entrepreneurs and an army of low-wage workers, 25,000 strong, which is growing rapidly in front of the walls of this small city of 180,000. One in five of the workers is undocumented and, officially at least, isn't even here. Meanwhile Prato's citizens look on and curse their new neighbors as sewing machines rattle through the night.
Prato's residents call the immigrant neighborhood, which has grown rapidly in the last five or six years in an area once inhabited by local factory workers, "San Pechino," or St. Beijing. When the first Chinese, their suitcases filled with cash, arrived in the early 1990s and leased their factories, the Italians laughed at them. But now that their numbers have quadrupled and they own a quarter of the city's textile businesses, where they make "Made in Italy" fashion at "Made in China" prices -- often illegally -- the newspapers are full of op-ed pieces about the "yellow invasion," low-wage competition and the Chinese mafia. The president of the city's chamber of commerce, who also happens to own a textile business, says: "We underestimated them. What they're doing here is called unfair competition. We need a battalion, an operation like the one in Iraq, to keep them under control."
Prato's residents are now frantically asking themselves questions to which they have no answers. Who are these Chinese? What is their objective?
continue reading Spiegel online
Well placing carefully to one side the paranoia which seems to be revealed by the last sentences, what I find slightly worrying about the situation brought to light in this article is the way some parts of the Italian economy seem to be sliding down the value chain, just as China itself is starting to move up it. Expanding activity in this kind of manufacturing industry is a dubious enough thing to do with global prices as they are in any event, but doing so by allowing the needs of the tax system to support the spending demands of the elderly population to be flouted in just this kind of way is quite another.
There is considerable evidence for the existence of this kind of activity here in Spain too (and I imagine in Greece). But really bringing in undocumented workers to create work which would otherwise be unprofitable (and note that I support inward migration where it has some kind of rationale) seems to be a more or less pointless activity. At best you are renting the land to allow your overseas competitors to get even nearer their market of interest.
In the long run none of this has much future, since as I say, this kind of activity is simply not cost effective in Europe any more, and all it does is create unnecessary resentment among ordinary Italians who cannot understand what the hell is going on.
One example of where all of this can lead is to be found in the Spanish town of Elche (in the Community of Valencia):
The Chinese community in Spain has not yet forgotten the events that took place in Elche, Europe's shoe capital, on September 16, 2004.
That night, a group of Spanish shoemakers set on fire the factories of Chinese entrepreneurs. Local shoe industry workers say the Chinese competitors were playing dirty by offering cheap products distributed in Spain and the rest of Europe but manufactured across the world. Those criticisms, not limited to Spain or the shoe industry, clearly illustrate concerns in Europe with cheap Chinese products.
Now what seems to be happening is that attempts to contain the flow of products by the use of quotas are being got round by renting land and premisses, and importing workers to do the production within the EU. All of this is very difficult to control since, as China Economic Review notes, it is taking place in areas where a blind eye has traditionally been turned to underground economic activity, and it is now virtually impossible to start having an 'eyes wide open' policy overnight, too many other people might be 'found out' at the same time:
Elche, in the east of Spain, is close to Valencia and not far south of Barcelona. It is a city of 200,000 people that has lived for decades on the returns from its shoe industry. For most of this time, it has been known as a place that lives outside labor and tax laws. Employees have often worked illegally without fixed salaries or social security.
Half a century ago, US shoe companies moved their production there, only to transfer it later to markets with even cheaper labor such as India, China and Vietnam.
Invaded by migrants from all over the world (mainly South America, Eastern Europe and Sub-Saharan Africa), European societies are not coping well with change. Europe's economies are struggling to overcome the structural challenges derived from the WTO's Agreement on Textiles and Clothing. In some cases, manufacturers don't even need to move production to China. Chinese workers will work in the heart of Europe for a fraction of the wages European workers demand.
In Elche, Chinese shoemakers have set up warehouses and sell shoes at one tenth the price of locally made products.
Now to be clear, my beef here is not about immigration. My beef is about a degenerate application of public policy and how it always ends up acting against everyone's interests in the long run. We need migrants here to do work with a real economic basis behind it (to meet our man- and woman-power shortages and to help pay our health and pensions system) but, frankly, we don't need this, unless, that is, the respective local councils and governments are willing to pay the retraining costs of these soon to be displaced workers, once the regulations are applied and the no-longer profitable enterprises closed.
Naturally I will post on the somewhat more interesting arguments from Francesco Daveri on Italian productivity (the real variety) under separate cover.
Italy At A Glance - January 2008
Welcome to the Italian Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented on the blog. In what follows you can find charts for Italian male life expectancy, median age, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Basically this data provides a summary of the argument which we are presenting on this blog, which is that in order to understand Italy's long term and ongoing economic malaise you need to understand something about Italian demography, and it's macroeconomic consequences. Please click on thumbnails for better viewing.
With such weak internal consumption growth Italy badly needs to run a trade surplus to obtain the economic growth necessary to make public finances sustainable. In this Italy is similar to Germany and Japan, and different from domestic consumer driven economies like the UK, France and Ireland. Long term fertility and life expectancy really do matter, since they condition labour force growth
and consumption patterns, and with these productivity and the growth of internal credit and consumer demand. Above left you can find Italy's ferility rate, and above right the evolution of the 25 to 49 age group, which has just passed it historic peak. On either side here you can see charts for recent quarterly GDPand long run annual GDP.
Arguably these are all the data points you need to understand my lengthy post on The Euro Area and Italy's De-Facto Dependence On Exports, as well as why it is that the danger Italy may once more fall into recession presents us with the difficulty of what the credit ratings agencies will say about the resulting impact on the government debt situation.
2008 Forecasts: The OECD in December revised their 2007 Italian forecast down to 1.8%, and the 2008 one down to 1.3%. Confindustria also revised their forecast down in December, arguing that growth would slow to 1 percent in 2008 from an 1.8 percent this year, citing factors like the rising cost of food and oil and the rise of the euro against the dollar. Such numbers are clearly not encouraging, but arguably downside risk for 2008 is greater even than either the OECD or the Confindustria forecasts reflect Morgan Stanley's Vladimir Pillona is somewhat more sanguine. While presenting the MS central forceast for Italian economic growth to slow to 1.0%Y in 2008, from 1.8%Y in 2007, he goes on to note that "even annual GDP growth of 0.5%Y next year has a significant possibility of occurring, as shown by our model’s forecast error bands".
I personally will be very surprised if we still see calendar year 2008 anything like as high as 1.8%, but more to the point even 1.3% may be rather on the high side if we get a significant deterioration in the external environment, especially in Eastern Europe on which Italy is fairly dependent, and where the Italian banking sector has significant exposure. So that puts me much nearer to Pillona's "basement bargain" number of 0.5% than to any of the others. One of the reasons for my pessimism relates to my assessment of Italy's current trend growth rate, and to the level of fiscal and monetary tightening which may be operating on the economy even as it slows. During 2007 the Italian govenment has been running a fiscal deficit of comfortably below the 3% of GDP required by the EU commission. But since this fortunate situation was in part acheieved by the use of one off measures, and in part by the strong tax inflow from the above trend growth, the government will need to maintain a comparatively tight fiscal stance to keep things on course, and any attempt to further loosen may run into real problems with the EU commission and the credit rating agencies. And as I keep arguing, it is very hard to see an accomodative monetary posture from the ECB in the near future. The IMF in their October World Economic Outlook came in with a similar figure of 1.3% for 2008, the Economist Intelligence Unit is forecasting 1.7% in 2007 and 1.4 in 2008, and the latter 2008 figure was also endorsed by the EU commission in its November forecast.
As I indicate, my own view is well to the downside of all this. The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Italy's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Italy will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on Italian exports, and high oil and food prices will maintain pressure on the inflation front, at least in the firts half of 2008. At the same time, and despite rumours that Romano Prodi's government is compemplating a large tax cutting package, I anticipate that the fiscal environment will remain tight. Italy's large (106% GDP) accumulated debt, and the vigilance from the gentlmen at Standard and Poor's and the other credit rating agencies more or less guarantee that.
As most of the forecasts suggest, we have been seeing growth which is somewhat above trend during the upswing in the last couple of years, so it would not be surprising if we now saw some below trend growth. Trend growth (over a 5 year average) in Italy may even have fallen into the 0.5 to 1% range, so if I have to put a number I would say 0.7% with a definite "downside risk" tag attached. The nearest forecast to this that I have seen is the 1% one from the Morgan Stanley GEF team. The implications of such sustained low growth are, I think, important, since if Italy cannot find the way to raise trend growth up towards the 2% mark there is simply no way the government debt can be stabilised and sustained. And with each passing year we have one year less to crunch time.
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