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A report about Bill Emmotts Good Italy Bad Italy.

Good Italy Bad Italy is a book about burdens and obstacles which ail contemporary Italy. It was written by Bill Emmott, the English journalist who was editor-in-chief of the Economist. Emmott followed closely the events that affected the country. He attacked several times the Prime Minister Berlusconi, while he was a journalist at the Economist, claimed that it was unfit to rule the country. The book begins by describing the steps of the crisis in Europe and how it spread to Italy. He highlights two anomalies of the crisis in Italy: how the sense of crisis was not new and how there was even selfcongratulation after Lehman Brothers collapse. First, sense of crisis was not new because the country has experienced a long span of stagnation since 1992, when government debt had risen to the colossal level of 120 per cent of the GDP. Second, there was complacency in September 2008 when Lehman went bankrupt not only in Italy but I guess in the entire Europe because people ignored that the crisis would spread to the weakest European countries and there was a general feeling that it would have been a problem restricted to the US economy. A funny thing is I remember is that there has been a general feeling of self-congratulation in Italy when Spain GDP per capital was overtaken by Italy again, because the same thing happened a year later but in the opposite direction (Spain overtook Italy). Italian politicians had been proud to have achieved an acceptable level of unemployment even in a period of recession and they blamed UK for their excessive reliance on FIRE sector when Northern Rock had been bailed out. They were simply shortsighted. It was only in 2011 that faith in Italys ability to service its debt started to wobble alongside faith in the still-young European single currency. In 2011, Eurozones largest debtor was Greece. Greek government made false accounting statement to have to possibility to join the Euro. Possibility of Greeces default increased and markets started to price in the possibility of such future default and restructurings, and even the chance of the euro being abandoned altogether by a few countries In particular, troubles for Italy started in August when Berlusconis government published five different budgetary measures (all not implemented). It became clear to financial markets, that the government had not a credible plan to reduce the sovereign debt. Since that, Italians started to hear day by day a new word spread. The spread is the difference between the return of Italian and German government bonds and it is a measure of risk premium that markets required to pay to bear the increasing risk to buy Italian bonds. Since August 2012, the spread skyrocketed from 150 basis points up to 550 bps. Italys sovereign debt yielded 7%: a number which is not sustainable on a long term. Possibility of a default became more concrete.

Pasquale Pacella, UTEID: pp8859 Even if the peak of the crisis in Italy was reached because of exogenous elements1, it is possible to state that Italy has been in a structural crisis for almost 20 years. Emmott talks about 20 wasted years that could have been used to make the country stronger. Who is guilty for this? Emmott points a finger to the billionaire businessman who has ruled the country for those 20 years during which the power of vested interests, the weight of corruption, the burden of politics, the importance of protected and uncompetitive industries had grown, tipping the balance against the good forces that had previously been victorious. The journalist mentions also some vices of the Italians, that is to say, nimbyism, local loyalties, family fealties, the importance of networks of mutual obligation, individual and clannish selfishness, corruption, criminality, and the urge to seek power in order to use it for self-interested purposes. In the second chapter, titled the Politic Hell, he focuses on Berlusconi. Emmott says that the premier introduced himself as a liberal, even though liberal reforms have been issued by center-left governments. He describes Berlusconi as a protector of the status quo who did not introduced much legislation but rather had simply used politics for the maintenance of his economic power and domination of the political agenda. Though I agree on Emmotts assessment of Berlusconi, I dont think he has to be judged as the primary person responsible for Italys fault. The journalist seems to be pretty obsessed with the figure of our premier. Rather, I think people who need to be blamed more are entrepreneurs. Essence of entrepreneurship is innovation but entrepreneurs simply sought for a rent by exploiting politics to create monopolies and lower competition. This is point is recognized by Emmott later. The third chapter contains a brief history of Italys economy following by an analysis of what are the obstacles faced by the country. It is outstanding how an economy which was ahead of United Kingdom in 1984 in term of GDP became stagnant with its 0.25% average growth rate after 20 years. In 1950-1970 Italy was behind only Japan and Korea in terms of growth and well ahead of other OECD member country. But in 1970-80 public spending climbed, steadily, as welfare provisions and corporate subsidies proliferated, while tax revenues failed to keep pace. So the average budget deficit in 73-95 was 9.8%. In 1992 the country was hit by a financial crisis which was followed by a big wave of privatization, pension and banking reforms. However, this did not resolve the Italys problem, since the 2001-2010 average growth rate has been 0.25%: consistently below the EU average. Only Haiti and Zimbabwe did worse. What are the reasons of Italys long stagnation? Emmott cites 3 elements: a rigid labor market, public finances and lack of competition by companies. Lets go through them. It is illegal to dismiss workers except for just cause for firms employing more than fifteen workers. Below that number dismissal is legal but requires payments in compensation. Above it, the case has to be
1

That is to say: toxic assets from Lehman Brother, fear of Greece default, lack of cooperation in the Eurozone, a central bank which is not lender of last resort like the Fed.

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disputed in the labor courts. But judges tend to side with to the worker so it is actually difficult to fire. So thousands of firms decides it was better to stay small by remaining below the 15-worker threshold. This leaded to the born of industrial districts. Though this model is said to be flexible, it also tends to not favor very research-intensive, high-technology industry, nor sectors requiring a lot of capital investment, nor sophisticated global exporting networks that might require after sales service. But, these are crucial factors to compete worldwide. A public debt of 120% acts as a long term drag on economic growth. This level of debt was brought about by generous public pensions, higher unemployment benefits and by a narrow tax base due to widespread tax evasion. Service industry is the most conservative parts of the economy: it is a wild forest of little privileges, rents and enclosures. Each has its own lobby group: together they conspire to make reform close to impossible. Each profession has it lobby group whose job is to make sure that newcomers do not disrupt the business, bringing in more competition to push down prices or wages. Notably, Emmott does never mention as an obstacle which is widely recognized as a problem by managers: bureaucracy. Company not just have pay high taxes but have to dedicate much time to deal with public administration in order to pay taxes or to get permissions. While public opinion would put as first problem for companies the slowness of public administration, Emmott claims rigid labor marker to be the main burden accounting for the lack of productivity of Italys firms. The fourth chapter makes us sigh with relief because it shows the case of city which managed to innovate itself as the entire country should do: Turin. The city, known for being the place were Fiat headquartered, achieved to diversify its economy becoming less dependent on car industry. This was due to several factors: The Politecnico (a kind of university/institute of technology) which brought innovation in the city; Slow food and Eataly: food companies which managed to be successful abroad by exporting Italian food. Turin also managed, in a country that has been fined several times by EU commission for its trials length, to achieve a fast justice. The successive chapter is about Hope in South. Previous chapters already described how national statistics are biased to the down when accounting for the South. The two parts of Italy are like two different country, even marriage between northerners and southerners are less than you would have expected. South has all the burdens which afflict North plus another burden: the organized crime. But Emmott sheds a ray of optimism on this point. Several anti-racket associations have born and guess what? That works! As a former mafia gangster said: if a shopkeeper joins Addiopizzo or an anti-racket association we will not go there any more, we will not call them anymore. After reading this chapter, I had a more positive view about companies who managed to be successful while working in a country which acts like a brake for enterprise: Luxottica, Ferrero, Autogrill, Loccioni, Eataly. The next to last chapter is named Enterprise obstructed and he analyses in-depth why companies failed to keep to the pace in compete worldwide. 3

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He first points out the positive aspects Italian firms can boast: a regulated and supervised banking system which depends on stable deposits, companies connected with their workers and which take a responsible approach to their employees, treating them as partners and real assets. Despite those advantages, he identifies lack of innovation and rigid labor market as reasons for the slow productivity growth of Italys companies. Firms failed to recognize as a crucial factor for compete not just innovation in process and product but in all activities not directly involving production such as R&D, design, advertising, marketing, reorganizing using new IT and boosting sales networks. In other word in improving services associated with the business rather than manufacturing itself. Most firms just focused on cutting production costs (also lowering wages, which now are even lower than Spains) but this did not work because you cannot compete with countries (i.e. Eastern Europe) which have very low wage: mature business survived only increasing the element of design, technology and service in their products. Why, despite growing competitive pressures, did firms refuse to innovate? Because entrepreneurs have had the temptation to earn a rent. In other words, they have been tempted to create a firm as a kind of walled garden, a protected private reality by finding, creating a right, privilege or flow of cash by the state, by politicians or by a restrictive guild. Rent-seeking behavior of entrepreneurs also fostered corruption. Because bribing is a feature of rent seeking sectors, for where there is a rent to be granted there is an official or politician demanding a slice of that as a bribe. Companies failed to innovate because they were afflicted by what Emmott defines conventional burdens, namely: high prices for utilities, rigid labor law, near impossibility of dismissing permanent workers, outdated infrastructure, a more general form of tax that holds back many entrepreneurs is the unproductive and uncompetitive nature of service sector (logistics, transport, marketing, legal advice, ICT). In other countries modern, efficient, productive business services have supported the restructuring and growth of its exporting companies while in Italy that sector has acted like a tax, a burden. Low quality of universities needs to be held accountable for few level of innovation by Italian companies. Italian universities are essentially nowhere to be seen in any of the main league tables of the worlds top academic institutions. Professors performance is not measured by research output and financing has not historically depended on these either. Nor are the most students selected on merit. This is because university system has not been designed with excellence in mind but in a fairly egalitarian way. So, what to do in order to fix all these issues? The answer is contained in the last chapter, and it is a very long list of thing to do. 4

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Public finance: Budget cuts to repair public finances which can be made through privatizations, reduction in cost of public pensions, cuts to the cost of politics, drastic restructuring of ministries and other public agencies and the related amazing perk of official cars, elimination of the middle layer of local government (the provinces), which sit between municipal and regional governments and whose power overlap with both. A credible long term program to reduce the countrys public debts is needed along with investments in infrastructure of as many kinds as can be afforded, promotion of meritocracy, intensification of fight against tax evasion, corruption and organized crime. Labor market: It should be issued a reform that replaces the current dual labor market with widely differing contractual rights with a single set of contractual rights for all workers, full or part-time, with these rights increasing by stages. It is necessary to make it easier for employers to dismiss workers even when they have been at the company for many years, giving them adequate compensation for such dismissal and creating a more generous social safety net rather than a patchwork of safety net that exists now. Make it easier for companies to negotiate contract locally rather than adopting national agreement. Notably, labor reform has already partially been done by new Monti government but we need to wait until 2017 to value the after-effects. The reform is supposed to make it easier to fire worker and it implements a broader safety net as asked by Emmott. Justice: reform of the justice system to speed up trials has to be issued, separation between the role of judges and that of prosecutors, computerization of all countries judicial cases. Competition: give more power to the antitrust authority by granting the power to challenge regional laws in front of the Constitutional Court, liberalization of utilities. Research: make public university formally independent of state and with each governed governed by a board of directors which would appoint the rector, taking that power away from the faculty. Give to the universities the advance warning that their public grant would in future be reduced by a small percentage every year to encourage universities to build closer relationship with private companies as well as to seek foreign student to gain more income from tuition fees. Public money needs to be distributed solely according to their research quality and performance. Promote merging of small universities. Emmott reckons that this will be difficult to implement, because losers from every liberalizing action will feel pain and fight the action noisily and fiercely, while the winners from those actions will generally be too diffuse to really organize and fight in their favor. Will Good Italy prevail on Bad Italy? Who knows! The English journalist does not commit himself to an answer.