The World Economic Forum have just published their Global Competitiveness Report 2006-2007 (hat-tip to New Economist).Italy continued its downward trend, dropping another four places to 42 in the Global Competitiveness Index. You can find the Italy country summary here (in Italian).
Of course, as New Economist says "one needs to take these rankings with a large pinch of salt. The annual WEFreport is a quirky compendium of disparate data of varying quality, along with opinions from their own survey", but still, no smoke with fire, as they say.
The Italian summary does not make for light family reading. According to Lopez-Claros, Chief Economist and Director of the Global Competitiveness Network:
"L'elenco dei problemi è lungo. Il contesto macroeconomico italiano è mediocre e i conti pubblici sono in disavanzo da 20 anni. La situazione di bilancio si è gravemente deteriorata dal 2000 e il debito pubblico, ben al di sopra del 100% del PIL, è tra i più alti al mondo. La grave situazione in cui versano le finanze pubbliche italiane può a sua volta riflettere problemi istituzionali più profondi, evidenziati dai pessimi risultati di variabili quali l'efficienza della spesa pubblica, l’onere della regolamentazione, l'inefficienza dei mercati del lavoro e, più in generale, la qualità delle istituzioni del settore pubblico."
There is, however, one small silver lining in that very dark cloud:
"Per contro le debolezze sopra elencate sono parzialmente compensate dal buon livello di preparazione tecnologica e dalla modernità delle imprese del settore privato, indice di una grande riserva di potenzialità non ancora sfruttate. Le riforme potrebbero contribuire a migliorare in misura significativa la posizione dell'Italia nei prossimi anni"
This is, of course, more a hope for things to come, rather than a proclamation of what has already been achieved. As he says the reform process can contribute to some realisation of these potential benefits, and we will be here, on IEW, watching to see how it all works out in practice.
Italy Economy Real Time Data Charts
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?
Wednesday, September 27, 2006
Welcome To Paola and Jon
Well, this blog just got a facelift, and in various senses of the term. In the first place I have just swept a new broom clean through the sidebar, and in the second the blog is expanding its reach and being joined by Paola Silli and Jon Worth. Paola is a young Italian economist currently studying in Canada while Jon is a website designer and prolific writer. Welcome to both of you.
With Jon and Paola joining the focus of the blog will also change. As Jon is at pains to point out he is *not* an economist, his interest is more in policy and the political process in Italy. Equally Paola can be in no way held responsible for my views, which have been pretty pronounced. So this is a step in the direction of pluralism and diversity. I hope it works, and that you, gentle reader, will enjoy it. 2007 promises to be a very interesting year indeed in Italy.
With Jon and Paola joining the focus of the blog will also change. As Jon is at pains to point out he is *not* an economist, his interest is more in policy and the political process in Italy. Equally Paola can be in no way held responsible for my views, which have been pretty pronounced. So this is a step in the direction of pluralism and diversity. I hope it works, and that you, gentle reader, will enjoy it. 2007 promises to be a very interesting year indeed in Italy.
Friday, September 22, 2006
Italy's Supply Constraint
The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 - 0.1%: 2004 - 0.9%: 2005 - 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..
But why is potential growth capacity in Italy so low?
Well, as you might have imagined, my focus here will be more or less on the limited capacity for Italy to increase the size of its workforce after 20 odd years of low fertility. In this sense this post is a practical case study of my more theoretical "Of Population Pyramids and Value Chains". Now again according to the OECD:
With employment rising by only about ½ per cent per year, there should be some recovery of productivity, in turn accentuating disinflation and facilitating export growth. Without bold structural reforms by the new government to raise the economy’s low supply potential and reverse its huge cost disadvantage......... sub-par growth is likely to persist.
This again is just one example of why I was so tenacious in the comments on the recent 'Reform Has Become A Dirty Word' thread. Italy urgently needs reform. And it is because of the apparent difficulty that Italy has in carrying out reform that I am so adamant that Italy may well reach a situation where it has little real option but to default on the public debt, with all that this implies. Indeed Italy seems set to become the 'test bed' of how the ageing process works out in practice.
Of course the 'drying up' of the labour supply in Italy which is reflected in this low potential growth estimate is producing historic lows in the Italian unemployment rate (a phenomenon we are also seeing in Japan):
Italy's unemployment rate fell to the lowest in more than 14 years, a government report showed today. The unemployment rate fell to 7.0 percent in the three months through June from a revised 7.3 percent in the first quarter. That was the lowest the statistics institute started its survey in 1992. It was expected to remain at 7.3 percent, according to the median forecast of 23 economists in a Bloomberg News survey.
Italian joblessness has fallen to the lowest of the euro region's four-largest economies even though growth has averaged just 0.6 percent in the past five years. The expansion in Italy's $1.8 trillion economy will lag behind that of the euro region for at least a 10th year in 2006, expanding 1.7 percent, compared with a 2.5 growth rate for the 12-nation bloc, according to the European Commission.
So what we have in Italy is pretty low unemployment, and a miserable growth record, strange isn't it? Even stranger perhaps is the fact that most economists don't seem to be giving much importance to thinking about just why this is happening.
The latest data from the Italian Statistical Office ISTAT is interesting (in Italian only unfortunately), since it shows that, year-on-year, the number of people actively seeking work declined to 1.621.000 which was a reduction of 11.8% (or 216.000 people) over the second quarter of 2005. And this situation has only produced an annual estimated growth rate of 1.4%. Put simply, this is because - without a significant change in participation attitudes, especially among women (and which is, in part, what the reforms are about) - Italy's available workforce is now set to decline.
Of course Italy is creating new jobs, but as Bloomberg point out, to a great extent it needs immigrants to do the work:
More than 30 percent of the rise in registered employment in the quarter and almost 40 percent of the increase in the past year came from immigrant workers, the national statistics institute said today in Rome. Many of these registered jobs are low-skilled positions, meaning the economy isn't as healthy as the numbers might otherwise suggest.
The statistics show that the biggest gains in registered employment have come from immigrants gaining legal status, many of whom are already working. More than 900,000 foreign immigrants, the equivalent of almost 2 percent of the population, have won residency in the past three years through a series of government amnesties.
Italy's position is in fact even more complicated since the recent employment growth is largely in low skill activities (which means that if Italy is moving up the value chain it is in fact doing so very slowly, far too slowly for its needs):
``I've worked at unpaid internships for years, but the number of jobs out there isn't growing,'' said Carlo Massoni, 32, who's only been able to land short-term contract work since earning a degree as a telecommunications engineer six years ago.
``I haven't had a break since I graduated.''
The number of workers with non-permanent contracts grew 8 percent in the second quarter and those short-term contracts now account for 9.5 percent of total employment, up from 9.0 percent a year earlier, Istat said today.
The lack of permanent job opportunities has left Italy with the second-highest youth jobless rate in the European Union after Greece, currently 24.1 percent of those aged between 15 and 24. Almost half the increase in registered employment in the first half came from people over the age of 50, Istat said.
So those seeking work in low paid unskilled jobs are finding them, whilst those who are young and qualified seem to be finding the going tough. Something somewhere is going very wrong here.
And even if the Italian economy did finally manage to break into more new sectors the supply problem still exists, since a very significant proportion of Italians in the 25 to 34 age group have very low education levels. Again lets look at what the OECD had to say last year:
Compared with other OECD countries, an above-average proportion of the Italian population has only lower-secondary education. This is especially true for older age-groups, but it is also true for younger ones. Forty per cent of 25-34 year-olds are in this category compared with an EU and OECD average close to 25%, and the results of the OECD Programme for International Student Assessment (PISA) show that Italian 15-year olds have attainments well below the average in particular in mathematical and problem-solving skills. There is a high proportion of youth which is in neither education nor the labour force, suggesting a difficult school-to-work transition. The risk of unemployment later in life is also considerably higher for those with only lower secondary education.
Furthermore, a smaller proportion than the OECD average has completed tertiary education, even though a relatively high proportion embarks on it. Years spent in obtaining an undergraduate degree are greater than the average, raising the opportunity cost of tertiary education and discouraging the formation of high level skills. The demand for high-skill workers may be hampered by the specialisation of Italian industries in low tech sectors and the small size of Italian firms, which reduce their R&D spending capability. At the tertiary level, a problem is an insufficient number of younger professors, for whom there are barriers to entry. Academic appointments lack transparency, promotion is not always linked to productivity, and Italy spends far less than the OECD or EU average on research and development, and significantly less on tertiary education. As a consequence Italy suffers from a pronounced net brain-drain.
So there we have it. Italy seems to be caught in a very strange kind of trap, where a very inefficient education system means that only a small proportion of young Italians stay the distance to get their final qualification, and as a result there are insufficient qualified people to help make that much-needed leap upwards. And even if Italy was succesful in attracting a large number of older women into the workforce (but in which case who would look after the increasing number of dependent old people?) this wouldn't resolve the problem, since the low educational level would strongly constrain the kinds of work which they could do. As I say, a strange kind of trap.
But why is potential growth capacity in Italy so low?
Well, as you might have imagined, my focus here will be more or less on the limited capacity for Italy to increase the size of its workforce after 20 odd years of low fertility. In this sense this post is a practical case study of my more theoretical "Of Population Pyramids and Value Chains". Now again according to the OECD:
With employment rising by only about ½ per cent per year, there should be some recovery of productivity, in turn accentuating disinflation and facilitating export growth. Without bold structural reforms by the new government to raise the economy’s low supply potential and reverse its huge cost disadvantage......... sub-par growth is likely to persist.
This again is just one example of why I was so tenacious in the comments on the recent 'Reform Has Become A Dirty Word' thread. Italy urgently needs reform. And it is because of the apparent difficulty that Italy has in carrying out reform that I am so adamant that Italy may well reach a situation where it has little real option but to default on the public debt, with all that this implies. Indeed Italy seems set to become the 'test bed' of how the ageing process works out in practice.
Of course the 'drying up' of the labour supply in Italy which is reflected in this low potential growth estimate is producing historic lows in the Italian unemployment rate (a phenomenon we are also seeing in Japan):
Italy's unemployment rate fell to the lowest in more than 14 years, a government report showed today. The unemployment rate fell to 7.0 percent in the three months through June from a revised 7.3 percent in the first quarter. That was the lowest the statistics institute started its survey in 1992. It was expected to remain at 7.3 percent, according to the median forecast of 23 economists in a Bloomberg News survey.
Italian joblessness has fallen to the lowest of the euro region's four-largest economies even though growth has averaged just 0.6 percent in the past five years. The expansion in Italy's $1.8 trillion economy will lag behind that of the euro region for at least a 10th year in 2006, expanding 1.7 percent, compared with a 2.5 growth rate for the 12-nation bloc, according to the European Commission.
So what we have in Italy is pretty low unemployment, and a miserable growth record, strange isn't it? Even stranger perhaps is the fact that most economists don't seem to be giving much importance to thinking about just why this is happening.
The latest data from the Italian Statistical Office ISTAT is interesting (in Italian only unfortunately), since it shows that, year-on-year, the number of people actively seeking work declined to 1.621.000 which was a reduction of 11.8% (or 216.000 people) over the second quarter of 2005. And this situation has only produced an annual estimated growth rate of 1.4%. Put simply, this is because - without a significant change in participation attitudes, especially among women (and which is, in part, what the reforms are about) - Italy's available workforce is now set to decline.
Of course Italy is creating new jobs, but as Bloomberg point out, to a great extent it needs immigrants to do the work:
More than 30 percent of the rise in registered employment in the quarter and almost 40 percent of the increase in the past year came from immigrant workers, the national statistics institute said today in Rome. Many of these registered jobs are low-skilled positions, meaning the economy isn't as healthy as the numbers might otherwise suggest.
The statistics show that the biggest gains in registered employment have come from immigrants gaining legal status, many of whom are already working. More than 900,000 foreign immigrants, the equivalent of almost 2 percent of the population, have won residency in the past three years through a series of government amnesties.
Italy's position is in fact even more complicated since the recent employment growth is largely in low skill activities (which means that if Italy is moving up the value chain it is in fact doing so very slowly, far too slowly for its needs):
``I've worked at unpaid internships for years, but the number of jobs out there isn't growing,'' said Carlo Massoni, 32, who's only been able to land short-term contract work since earning a degree as a telecommunications engineer six years ago.
``I haven't had a break since I graduated.''
The number of workers with non-permanent contracts grew 8 percent in the second quarter and those short-term contracts now account for 9.5 percent of total employment, up from 9.0 percent a year earlier, Istat said today.
The lack of permanent job opportunities has left Italy with the second-highest youth jobless rate in the European Union after Greece, currently 24.1 percent of those aged between 15 and 24. Almost half the increase in registered employment in the first half came from people over the age of 50, Istat said.
So those seeking work in low paid unskilled jobs are finding them, whilst those who are young and qualified seem to be finding the going tough. Something somewhere is going very wrong here.
And even if the Italian economy did finally manage to break into more new sectors the supply problem still exists, since a very significant proportion of Italians in the 25 to 34 age group have very low education levels. Again lets look at what the OECD had to say last year:
Compared with other OECD countries, an above-average proportion of the Italian population has only lower-secondary education. This is especially true for older age-groups, but it is also true for younger ones. Forty per cent of 25-34 year-olds are in this category compared with an EU and OECD average close to 25%, and the results of the OECD Programme for International Student Assessment (PISA) show that Italian 15-year olds have attainments well below the average in particular in mathematical and problem-solving skills. There is a high proportion of youth which is in neither education nor the labour force, suggesting a difficult school-to-work transition. The risk of unemployment later in life is also considerably higher for those with only lower secondary education.
Furthermore, a smaller proportion than the OECD average has completed tertiary education, even though a relatively high proportion embarks on it. Years spent in obtaining an undergraduate degree are greater than the average, raising the opportunity cost of tertiary education and discouraging the formation of high level skills. The demand for high-skill workers may be hampered by the specialisation of Italian industries in low tech sectors and the small size of Italian firms, which reduce their R&D spending capability. At the tertiary level, a problem is an insufficient number of younger professors, for whom there are barriers to entry. Academic appointments lack transparency, promotion is not always linked to productivity, and Italy spends far less than the OECD or EU average on research and development, and significantly less on tertiary education. As a consequence Italy suffers from a pronounced net brain-drain.
So there we have it. Italy seems to be caught in a very strange kind of trap, where a very inefficient education system means that only a small proportion of young Italians stay the distance to get their final qualification, and as a result there are insufficient qualified people to help make that much-needed leap upwards. And even if Italy was succesful in attracting a large number of older women into the workforce (but in which case who would look after the increasing number of dependent old people?) this wouldn't resolve the problem, since the low educational level would strongly constrain the kinds of work which they could do. As I say, a strange kind of trap.
Thursday, September 21, 2006
De Gregorio Defection: More Problems
Following hot on the heels of the opionions expressed by George Kopits(see my last post)to the effect that:
The new Italian government is composed of a loose coalition of divergent political parties holding only a razor-thin majority. Any initiative to reduce the budget gap through spending cuts (as the government is rightly committed not to raise taxes but even to trim payroll taxes) requires painstaking consultations and negotiations with individual coalition partners.
today's news that the Italian senator Sergio De Gregorio has left the Prodi coalition can hardly be considered welcome, especially with the vote on the 2007 budget looming:
Political power on Tuesday seeped away from Romano Prodi, Italy's centre-left prime minister, after a senator defected from his ruling coalition, leaving its majority in parliament's upper house hanging by a thread.
The effect of Sergio De Gregorio's departure became instantly clear on Tuesday, when Mr Prodi's coalition lost a full vote on the Senate floor for the first time since it won a narrow general election victory in April.
With the two houses co-equal in powers, the defection means that the government will devote all its efforts to passing the 2007 budget, which is already under attack from the coalition's leftwing elements.
This adds to the pressure on Mr Prodi whose government is already in turmoil over a controversy involving Telecom Italia, the country's biggest telecommunications company, which has exposed the prime minister to criticism from his coalition's two main political parties.
The government will face more difficulties next week when it puts the final touches to the 2007 budget, which contains €15bn (£10bn, $19bn) of deficit-cutting measures that leftwingers in the coalition want to water down.
The new Italian government is composed of a loose coalition of divergent political parties holding only a razor-thin majority. Any initiative to reduce the budget gap through spending cuts (as the government is rightly committed not to raise taxes but even to trim payroll taxes) requires painstaking consultations and negotiations with individual coalition partners.
today's news that the Italian senator Sergio De Gregorio has left the Prodi coalition can hardly be considered welcome, especially with the vote on the 2007 budget looming:
Political power on Tuesday seeped away from Romano Prodi, Italy's centre-left prime minister, after a senator defected from his ruling coalition, leaving its majority in parliament's upper house hanging by a thread.
The effect of Sergio De Gregorio's departure became instantly clear on Tuesday, when Mr Prodi's coalition lost a full vote on the Senate floor for the first time since it won a narrow general election victory in April.
With the two houses co-equal in powers, the defection means that the government will devote all its efforts to passing the 2007 budget, which is already under attack from the coalition's leftwing elements.
This adds to the pressure on Mr Prodi whose government is already in turmoil over a controversy involving Telecom Italia, the country's biggest telecommunications company, which has exposed the prime minister to criticism from his coalition's two main political parties.
The government will face more difficulties next week when it puts the final touches to the 2007 budget, which contains €15bn (£10bn, $19bn) of deficit-cutting measures that leftwingers in the coalition want to water down.
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