Made In Italy At Chinese Prices?

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.

Industrial Production Rebounds in October

Following the 1% decline in September industrial production rebounded in October, and was up 3.7% year on year:

Italian industrial production rose in October for a second month in three on stronger demand for consumer goods such as washing machines and clothing.

Production rose 0.6 percent from September, when it declined 1.0 percent, the national statistics office Istat said today in Rome.

Production of durable goods for consumers rose 1.3 percent in the month, and output of food and beverages jumped 3.5 percent, while clothing production gained 3.7 percent from a month earlier, today's report showed. Production of automobiles gained 15.4 percent in October from a year earlier, Istat said.


But watch out for the future:

The appreciation of the euro may weigh on demand for EU exports in the coming months, slowing growth in 2007. The euro has gained 12 percent against the dollar this year, climbing to $1.3367 on Dec. 4, the highest since March 2005.

New Immigration Law In The Works

Just following on from the previous post about the role of immigrants in Italian GDP growth it is interesting to note that Welfare Minister Paolo Ferrero has announced that the government is working on the draft of a new law which would be more coherent with Italy's growing need for and increasing dependence on immigrants:


Italy should have a new immigration law before summer, relaxing restrictions adopted by the previous centre-right government, Welfare Minister Paolo Ferrero said on Thursday.

Speaking after a meeting with local authorities and immigrant associations, he explained that his department, together with the interior ministry, had nearly finished drafting the bill. "The measure should start its passage through parliament in January and be finalized by spring," he said. The law would relax restrictions introduced by the government of former premier Silvio Berlusconi in 2002.

"There are many reasons for changing this old law," said Ferrero. "One of them is the long time it takes to issue residency permits [...] The waiting period can be endless". The 2002 law has also been criticized for the fact that only foreigners with an Italian work contract are allowed a residency permit. Residency permits last just two years and if immigrants lose their job before the expiry date they are required to leave the country.

Ferrero said that one of the most important ideas under consideration was doubling the residency permit's two-year duration. "Part of the idea is to reduce the amount of work involved, which is pointless if the person applying for the permit is legal and has all the necessary prerequisites. "Increasing the length of the permit will reduce the number of requests that need to be dealt with".

Other legislative changes under discussion include the introduction of a single asylum law and a points-based entry system to encourage managed migration. Proposals are also being drawn up to grant certain immigrants the vote and make it easier for them to gain Italian citizenship. Meanwhile another major change, involving the way residency permits are issued, is in the process of being implemented. This transfers authority to grant residency permits from the hands of the police to the control of local municipal authorities.

Immigrants and Italian GDP Growth

Looking for something else I just stumbled across this:


Italy’s 3.6 foreign residents are an added asset to the country’s economy and their labours account for 6.1% of its GDP, some 86.7 billion euros in 2005, according to a new report.

Published Monday in the authoritative financial daily Il Sole 24 Ore, the report pointed out how Italy’s immigrants were responsible for “keeping the nation from suffering two heavy recessions in recent years”.

Without their contribution, Il Sole explained, “Italy’s GDP would have fallen by 0.1% in 2002, 0.6% in 2003 and 0.9% in 2005.

Almost 2.1 million immigrants hold regular jobs and they totally dominate the domestic services sector, accounting for 80% of the sector’s contribution to the country’s GDP to the tune of 9.6 billion euros.

Immigrants play an even bigger role in the services sector contributing 37 billion euros to the nation’s wealth, equal to 4.3% of the sector’s GDP.

According to the report, the contribution immigrants make to the economy has been growing constantly.

From 1993 to 2000, GDP rose 15.4% in real terms, but this would have been 13.5% without immigrants, Il Sole calculated.

In the following five years, GDP rose by 3.2% “of which 3.1% was thanks to the work of immigrants. This is equal to 96% of the increase,” the study concluded.

The data presented here is fascinating. The picture is pretty similar in Spain, although since Spain's population ex-immigration isn't actually falling all we can say is that Spain's economy has risen substantially more than it would. Any Il Sole reader (Paris??) out there know what the actually study they are referring to was, and where it is to be found?

I suppose I don't need to ram this point home, but it does rather confirm my argument that those countries with ageing populations who cannot attract immigrants will actually see GDP shrink at some stage.