ABSTRACT
At the beginning of the 1990s the Italian economy incurred a very important structural and institutional change. Such a change was pushed by several factors which include both politics and economics. Italy experienced an important recession of GDP in 1992, which occurred during the same period of troubles and scandals well known as ‘Tangentopoli’, the corruption scandals which dominated most Italian political parties running the country since the post-Second World War. The recession came immediately after a period of marked financial turbulence (Miniaci and Weber, 1999) and in September of 1992, the Italian lira, strongly devaluated, was forced out of the European Exchange Rate Mechanism (ERM). A few months after, two important events occurred: most Italian politicians involved in the corruption scandals were condemned in the famous courts of ‘Mani pulite’ (clean hand) and, from an economic point of view, Italy signed the Maastricht Treaty which would have resulted in the country joining the Eurozone at the beginning of 2002. These are two important institutional changes which called for economic changes and new regulations and policies. We will focus on the economic aspects of this change, which can be characterized by the following five stylized facts or empirical evidences.
First, after the recession of 1992, Italy began a strong de-regulation process, with less involvement of the State in the economy. Corruption scandals, recalled above, convinced many people that State owned and controlled companies would favour corruption. Following this assumption, a minimumstate involvement in the economy was required and a process of liberalization and privatization started. Both processes however were carried out in a very unstable way which lacked efficiency, in particular the process of liberalization. As a result, the partial liberalization of the market coupled with the privatization process resulted in the creation of private monopolies (CNEL, 2007).
Inflation was considered a major problem. Moreover, the main contributor to inflation was considered to be the strong power of trade unions and the mechanism of wage collective bargaining. Hence, in July 1993, with a Tripartite agreement (Government–Business Organizations–Trade Unions), the Government limited the use of this mechanism and introduced a decentralized mechanism for wage bargaining which had a clear objective of wage moderation. At the same time, firms accepted, as an exchange, to increase investment in innovation in order to compensate for the possible increase of profit due to wage moderation. This ‘pact of exchange’ was never actually respected, and investments in innovation did not fully take place (Tronti, 2005) This had negative consequences on the productivity dynamics, as we will see.
The withdrawal of the State from the economy meant the starting of a strong privatization process. Many State owned (or controlled) companies were sold and assets were divided. This process caused a further squeeze of the Italian economy and in particular the reduction of the industrial sector, where large State owned companies were very active. The withdrawal of the State from the economy was not in fact substituted by private investments and by new private firms. The empty space left in the manufacturing sector has simply never recovered and this meant a further reduction of the Italian industrial share in Europe and globally. Large and important firms disappeared as testified by a key book in this field written by Gallino (2003).
The convergence towards the Maastricht criteria meant in particular the reduction of public expenditure in order to cut deficit and public debt. This had an immediate consequence of reducing what we can call the indirect wage. Public expenditure in social dimensions and welfare declined, such as education, health, subsidies, etc. which had a negative effect on the purchasing power of workers and the middle class in particular. In the end, one can say that the Tripartite agreement and the Maastricht criteria had conflicting interests and objectives. From one side the Tripartite agreement would require increasing the welfare state expenditure in order to let trade unions and workers accept the wage moderation: this was stated in the Agreement as part of an exchange between the three parts involved. On the other side, however, the Maastricht criteria required a reduction in public expenditure (Fitoussi, 2005).
The Tripartite agreement was the starting point of a much deeper reform of the labour market which took place between the end of the 1990s and the beginning of the 2000s with the introduction of labour flexibility, the massive creation of atypical forms of work, the surge of temporary work and the privatization of the job allocation service in the labour market (Tronti and Ceccato, 2005). This point will be explored more deeply in the following section.
To sum up, I will argue that there are a number of factors which make the Italian economy weaker. These factors represent both direct and indirect consequences of policies implemented mainly in the 1990s and the beginning of the 2000s, listed in the five points above. These policies, which tried mainly to introduce a very market-oriented economic model, following the so called Washington Consensus approach (Williamson, 1990; Rodrik, 2004), ended up producing negative consequences on economic performances and social problems such as (Levrero and Stirati, 2005; Rodrik, 2008): high income inequality, job precariousness, declining wage share over GDP, low wage and low consumption levels and a strong profit soar; along with low education and training on the job places, low competitiveness and low labour productivity, low innovation and low R&D. All of these consequences, coupled with the historical problems of the Italian economy, are the real causes of the Italian decline and the persistency of the current crisis, such as low labour force participation, labour segmentation, regional dualism, bad transition from schools to job markets, biased politics, inefficient institutions and bad governance.