Virtuous and vicious circles: lessons for current european policies from Italian post-war development.

• Author: Garofoli, Gioacchino
• Position: Report

1. Introduction

   Italy entered, after the end of WW2, a period of unprecedented economic and employment growth, high productivity and real income increases meriting claims for an "economic miracle". In 1957 it joined the European Economic Community as an equal partner and the third largest economy among the original six EEC member states. In the early and later 1970s, like much of the rest of the West, it was hit by the OPEC oil prices of 1973 and 1979. Its competitiveness then was qualified by entry into the European Monetary System before being hit by the European financial crisis at the beginning of 1990s and again by the deflationary reaction to the financial crisis of 20072008. Since when the optimism of the post-war miracle period has given rise to increased pessimism concerning the 'European Project'.

   So what went right, what has gone wrong and how can European policy makers "learn up"?

   In seeking to inform such issues, the paper starts with analysis of key factors in the post-war Italian economy. It then outlines similarities and differences with other European and advanced global economies, of which one is the degree to which the thirty years of post-war Italian growth was enabled in large part by investment recovery. The industrial recovery in the first decades occurred mainly in the "First" Italy of the then deemed "Industrial Triangle" of Milan, Turin and Genoa, being enabled by labour outflow from the "Second Italy" of the Italian South, and only later in the "Third Italy" of Veneto, Emilia Romagna, Tuscany, Marche and Umbria.

   Thus, in Italy, real incomes grew with large investment from 1953 until 1963 and productivity exceeded wage increases, and encouraged Keynes's "animal spirits" among Italian entrepreneurs.

   Such "virtuous circle" effects (Myrdal, 1957) were matched by others including dynamic industrial districts.

   None of which, with only some exceptions, now is the case. Since the debt and deficit conditions of Maastricht (and then of the Stability and Growth Pact) have depressed the "animal spirits" of private sector entrepreneurs in Italy, while the state holding companies, which also were drivers of the initial post-war Italian economic recovery, stopped to be crucial actors in economic development, rather a "vicious circle" syndrome has occurred.

   The paper, in the first part, analyses the economic dynamics in the different phases of Italian development and underlines the role of selected crucial variables for long-term economic transformation.

   Then it introduces a comparative analysis with other European and great Western countries to identify similarities and differences in structural terms, especially to evaluate the outcomes and the consistency of economic policies in Europe in the last decades.

   Special emphasis is put on the performance divide between monetary and financial variables and real economic variables, which could explain the lasting of some structural differences among European economies. This should clarify the issue of short-term and long-term objectives in economic policies, helping the discussion and the evaluation of choices of economic goals to be pursued by introducing consistent and alternative economic policies in Europe.

2. Italian Economic Development since the Post-War Period

   2.1. The Phases of Economic Development

   Great transformations occurred in the Italian economic structure in the last 60 years after the post-war economic recovery. Throughout this long period of time, different phases of economic development unfolded, underpinned by different production organisation models and with different paces of change.

   There is clearly a major difference between the first period, till the beginning of 1970s, with a high growth rate and "virtuous circle" effects and the last 30 years with low growth rates and an even weaker economic transformation change. As for the other advanced economies, the OPEC oil price increases of 1973 and 1979 represented a major shock and in Italy's case marked a great divide between these two long periods. The first was linked to an expansion of demand and an increased role of the welfare state in the context of the "glorious thirties years" of the Italian economic "miracle", paralleling the French "les trente glorieuses". The second started with great disequilibria in the balance of payments which were not offset by the introduction of flexible exchange rates. The introduction of the rules of the European Monetary System and, later, of the Maastricht agreement changed the position of the Italian economy but without the emerging of a vision for long-term transformation, especially due to the prevailing of short term economic policies.

   In the first period, the role of external constraints (due to fixed exchange rates) obliged policy makers and firms to take a virtuous conduct, controlling monetary stability and pushing investments (public and private) towards medium- and long-term goals. A vision of the future among key policymakers and the capacity to realize necessary changes and investments were at the basis of a deep structural transformation, implying both an increase in the employment and an upgrade of social wellbeing.

   The first period of the Italian economic development went through two different stages: a golden age (1953-1963) with an extensive development phase, with an increase in total employment and an intensive phase of development (1963-1971) with a reduction of total employment coupled with a remarkable growth in labour productivity (Secchi, 1974; Garofoli, 2014).

   The "Italian economic miracle" was aided by an increasing openness to international markets, with a notable surge in the industrialisation of the country, major improvement in investments and labour productivity (Graziani, 1972 and 2000; Garofoli 2014) (1). The outcome was the fulfilment of three often incompatible goals of economic policies: monetary stability, equilibrium in the international balance of payments and high investments aimed at achieving a strong economic transformation (Graziani, 2000). The international economic trend for liberalisation of trade pushed increase in exports and industrial production, employment and wages increased and profits grew: economic expectations were good and firms invested heavily. A general social consensus prevailed in that period.

   The succeeding phase--from 1964 to 1970-1971--saw very high growth rates both in labour productivity and income (the average income growth rate was roughly 6% per year in that period), which, however, were coupled with a decrease in the total employment and a fall in investments (the so-called "investment strike", Salvati, 1975). This explains why this phase has been deemed as an intensive phase of development (Secchi, 1974; Garofoli, 2014). This intensive phase has been characterized by the lack of domestic aggregate demand, even for the lack of some welfare reforms (the "missed opportunities": see Salvati, 2000), which not only caused the fall of investments as well but the necessity to force exports (Ciocca, Filosa, Rey, 1973) by price dumping strategies. All this explains why this phase has been considered as a period of high growth without development (Garofoli, 2014).

   During this period, spanning from the 1950s till the beginning of the 1970s, the Italian economy was mainly organized on large firms (2) and on emerging young medium-large firms, which were gaining space in the international markets, through product imitation and reducing labour costs per unit of production. Firms were looking for scale economies to reduce production costs to maintain price competitiveness and increase market shares (Graziani, 1972, 2000; Garofoli, 2014). The result was an increasing average size of industrial firms, which were reducing structural differences with other European countries (3).

   During the 1970s, the Italian economy suffered for the great increase of the oil price and for the reversal of relative prices of raw materials and energy goods in relation to manufacturing goods. The breakdown of the Bretton Woods framework in 1973 and the introduction of flexible exchange rates did not facilitate the dynamics of the Italian economy. The continuous devaluation of the lira could did not compensate either for the squeeze of international demand (especially in Western countries) or for the increase in the costs of imports. The outcome was an incipient vicious circle of currency devaluation, with imported inflation and internal inflation (through the existing automatic mechanisms of transmission of imported inflation into increase of wages and prices of public services under administrative control)--increase in production costs--and further currency devaluation to regain international competitiveness. The strategy of currency devaluation could not favor the firms' orientation to investment (especially for large firms working on international markets) and this caused a lack of attention to medium- and long-term problems.

   Thereafter, in the next phase from 1979 competitive devaluation was blocked by the introduction of the European Monetary System. Paradoxically, the introduction of this new external constraint (with quasi-fixed exchange rates among key European currencies) moved firms towards more virtuous conduct. The constraint of the EMS's fluctuation band and the exchange parity mechanism among currencies caused some small nominal devaluations of Italian currency, but an effective revaluation of the lira in real terms due the higher inflation differential between Italy and Germany. The higher inflation increased production costs of Italian companies and obliged them to invest more, both in process and product innovation, to regain European and wider international competitiveness.

   In the meantime, the Italian economy entered in a new economic model which involved the entrepreneurial culture and social and territorial organisation, changing dramatically the international position of...