Why is Italy doing so much worse these days?

Here is the graph from yesterday.  So why has Italy done so much worse?  During 1950-1990 or so it was a stellar growth performer, though some of this was catch-up growth from wartime destruction.  It does not satisfy me to cite Italy’s corrupt and dysfunctional political culture, since that has been the case for a long time, maybe forever.

A good introduction to the bright side of Italy’s economy is Michael Porter’s 1998 The Competitive Advantage of Nations; Porter portrays Italy as having some vital clusters of family-owned businesses, largely in the North.  Do you want your kitchen redone with some nice marble tile?  Italy can supply just the right stuff.  This neat graph shows just how much Italy has specialized in small business.

Perhaps therein lies the problem.  With the advent of modern communications and information technologies, arguably the return to “small family firms” has fallen.  The return to “largish projects consummated over large distances” has gone up.  For Europe, the big winners here are the Nordic countries, which have worked very effectively with information technology and which do not rely so much on family ties to get efficient, non-corrupt management.  The losers are Italy and Greece and Portugal too; read this superb paper on how Portugal is cursed by being stuck with all these small firms, inefficiently small for legal and regulatory reasons.  These countries seem to be locked out from some of the major sources of contemporary economic growth.

Here is a very important and insufficiently appreciated sentence from the Portugal paper: “…the largest part of the productivity gap between developed and developing countries can be attributed to the inefficient allocation of resources across firms in the latter countries.”  And alas Italy stands with one foot in the underdeveloped world; I am reminded of Yana’s excellent sentence, voiced upon visiting Sicily for the first time: “This reminds me of Mexico (pause) — except it’s not as nice!”  (Fear not people, she loved Sicily, as do I.)

And those are the countries with the biggest problems in the eurozone.  Ireland is closer to the Nordic model, as they do lots of software and hardware with MNCs, and you can see them recovering from this mess more quickly.  AD matters, but real shocks and competitiveness matter too.  Negative real shocks don’t have to involve “forgetting how make ice cubes.”  Ex ante, countries specialize in production methods and networks, and the subsequent evolution of technology does not always bear out their choices as wise.

Viewed in these terms, it is hard to see policy changes bringing a quick Italian recovery.  Italy remains good at what it long has been good at, and you can think of their superb restaurants as further and highly visible examples of small, family-run firms.  Sadly for them, those efficiencies are not worth quite as much these days.

Addendum: Here is one extensive look at Italy’s growth slowdown in the 1990s.