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The Italian Productive System before, during and after the Crisis
Matteo BugamelliBank of Italy
GIC Conference – Capital Markets in the Post-Crisis Environment
Session III: Finance and Economic Recovery
April 7, 2011
2
Outline of the presentation
• Data on the performance of the Italian economy
• A possible interpretation of weak long-run growth
• Inside the black box:
• what do we learn from successful firms?
• what are the main structural weaknesses of
the Italian productive system?
• Policy conclusions (tentative)
3
Data on the performance of the Italian economy
4
Unsatisfactory GDP growth rate: before,
during and after the crisis
Euro area FR DE IT
Peak 2008Q1 2008Q1 2008Q1 2007Q3
Trough 2009Q2 2009Q1 2009Q1 2009Q2
Cumulated loss -5,3 -3,9 -6,6 -6,8
Recovery up to Q4-2010 2,3 2,0 4,6 1,4
Average quarterly rate since the trough (1) 0,4 0,4 0,8 0,3
Recession 1992-93: average quarterly rate
from the trough up to the next 5 quarters0,5 0,7 0,7 0,8
Average growth in 2010 1,7 1,5 3,6 1,3
Average yearly growth during 2001-2007 1,9 1,8 1,2 1,1
Average yearly growth during 1991-2000 2,2 2,0 2,1 1,6
(1) 2009Q1 for Germany and France; 2009Q2 for Italy and the euro area.
5
Current recovery: slower in terms of GDP
and exports
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
95
100
105
110
115
120
95
100
105
110
115
120Italia
Germania
Area dell'euro
GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
80
90
100
110
120
130
140
150
160
170
180
80
90
100
110
120
130
140
150
160
170
180Italia
Germania
Area dell'euro
EXPORT
ITA = 26,8%
GER = 43,8%
AREA= 41,3%
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Labor productivity
100
105
110
115
120
125
130
135
140
1993 1995 1997 1999 2001 2003 2005 2007 2009
France
Germany
Italy
Japan
United Kingdom
United States
GDP per hour w orked
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Total Factor Productivity
95
100
105
110
115
120
125
1993 1995 1997 1999 2001 2003 2005 2007 2009
France
Germany
Italy
Japan
United Kingdom
United States
Total Factor Productivity
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One important caveat
• Before recent recession, labor market performed
quite well: increase in employment, decrease in
unemployment…
• even with absorption of many immigrants: stock as
of Jan 1, 2010: 4.2 ml in 2010; 1.3 in 2001
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A possible interpretation of weak long-run growth
10
Our working hypothesis
• Deep and predominant features of the Italian
productive system (specializ., firm size, family
owner, industrial districts) unchanged for decades…
• …changes must have occurred in the external
environment (“shocks”): i) IT revolution; ii)
globalization; iii) European integration
• Common feature of shocks: abrupt increase in
competition, but also new opportunities
• Hypothesis: above features unfit to face stronger competitive
pressures and take new opportunities
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Inside the black box: the successful stories…
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An example: the reaction to the euro [1](Bugamelli, Schivardi & Zizza (2009), The euro and firm restructuring, NBER WP no. 14454)
• Test whether firms reacted to the introduction of the
euro, narrowly defined as the end of competitive
devaluations (within EA; stronger currency)
• Exploit differences across countries and sectors in
reliance to competitive devaluations:
• countries: national currencies devaluation wrt
DM in 80-98
• sectors: more reliance on price than on product
quality competition (low-tech vs high-tech)
• Performance measured in terms of productivity
growth: EA countries vs non-EA countries before and
after the euro
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An example: the reaction to the euro [2]
• Little evidence of reallocation across sectors
• Within sector restructuring: stronger productivity
growth after the euro in country-sectors that relied
more on CD (structural break)
• Use Italian firm-level data to unveil nature of
restructuring process:
- case studies: successful firms shifted business focus
away from production and toward upstream (R&D) and
downstream activities (design, marketing, distribution)
- matched by changes in workforce composition
- deeper restructuring in low tech sectors
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An example: increased low-wage competition
• Italy firms suffered: decrease in prices and margins
(Bugamelli, Fabiani, Sette, 2010) and employment
(Federico, 2010) but also…
• increase in aggregate productivity (reallocation
effects from less to more efficient firms) (Bugamelli
and Rosolia, 2006) and innovation (Buono, 2011)
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What do we learn from successful stories?
• A lot of heterogeneity across firms, within sectors
(increase in dispersion in firms’ performance)
• Restructured firms better performed before the
crisis (2000-07), during the crisis (2008-09) and have
better prospect for the post-crisis
• Key factors for firms better able to properly react to
exogenous shocks and better recovery from the
crisis: innovation, product quality, intangibles investment,
internationalization
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Inside the black box: the structural problems
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Firm size
• Average firm size in Italy is 4 employees per firm:
exceptional figure wrt to other main advanced
countries, not due to sectoral specialization
Small firm size: winning model in low tech sectors
when currency devaluation were possible. Now bad
for innovation (Pagano and Schivardi, 2003), internl.
(Barba Navaretti et al., 2010) and IT adoption
(Rossi, 2003); smaller firms suffered more during
the crisis (despite less exposed to trade shocks)
Small firm size means incapacity to grow (“all firms
are born small but Italian ones do not grow”)
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Quality of management
• Firm size is correlated to family ownership &
management, old management practices
(Manufacturing) Almost 60% of Italian firms
belongs to a family with all management from same
family (25% in GER; 20% in FRA; 8% in UK)
Family manag.: worse managers & manag. practices
(Italy has higher pct of firms with a very centralized
decision process and lower pct using performance-
based remuneration of manag.). Lack of innovation
and intnl. capabilities; higher risk-aversion
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Competition
• Evidence that greater competitive pressure
accentuated difficulties of Italian firms, but also
spurred efficiency through resource reallocation and
firms’ reactions: both in manufacturing (papers
above on increase competition from low wage
countries) and retail (Viviano, 2008; Schivardi &
Viviano, 2007)
• Still lack of competition in service sector (above all,
professional services) damages buyers, that is
consumers and (manufacturing) firms (Barone &
Cingano, 2008)
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Which policies?• Increase competition in protected sectors
• Favour resource reallocation from inefficient to
efficient firms: bankr. law and social security reform
(U subsidies, empl. services); “cherry picking” by
financial sector
• Support firm growth: private equity? other public
incentives? Taxation?
• Support innovation and internationalization: financial
system (venture capital?) & intangible investments;
• Improve policy design (stability, transparency,
accountability, monitoring, policy evaluation)