Italian Industry, Decline or Transformation? A Framework

Abstract

Debates over Italian growth (or lack thereof) are often conducted without due regard for the facts and statistics on which they are based. For instance, those who see Italy as being in decline lament the static production, the lack of increase in productivity, the loss of share in international markets and the lack of sophistication in industrial goods compared with high-tech products. Some call for greater emphasis on services, others want manufacturing to be abandoned, while others see the future in artisanship. These issues are important, because flawed judgement of Italian performance could lead to deterioration in the results expected at the critical financial market phases, beyond what might be justified by the facts. The purpose of this article is to establish a micro- and macro-framework to interpret the problems correctly, given the inconsistency of statistical data currently used, and to offer some solutions for long-term growth. The latter, in particular, should be seen in the context of a transformation process, induced on the one hand by the crisis in large-scale enterprise, and on the other by the emergence of a new class of medium-sized businesses, dubbed the “fourth capitalism”, with high innovation capabilities. The transformation that the Italian industrial system is experiencing enables the country to maintain its share of global markets. The new production structure originates largely from local production systems, is family-owned and tends to borrow little, operate in networks and retain its local roots, which is precisely why it represents a new and efficient driver of Italian growth.

Acknowledgements

This article represents a revised version of a paper presented on 15 October 2011 at the 52nd Annual meeting of the Italian Society of Economists. Gabriele Barbaresco, Giorgio Basevi, Bruno Contini, Gabi Dei Ottati and Paolo Savona read a previous version of this paper and provided me with their invaluable observations. With Guido Rey, I discussed certain issues relating to the data in the input–output tables and the role of services. I also benefited from a discussion of statistical issues  with ISTAT representatives during a workshop organized by Enrico Giovannini and Roberto Monducci to whom I am indebted. Finally, I am grateful to two anonymous referees for their comments and useful suggestions. I would like to thank everyone, while clarifying that I am personally and exclusively responsible for this text. My thanks to colleagues Alex Bernard, Emilio Laurato, Nadia Portioli and Emanuela Salerno, who helped gather and verify statistics.

Notes

1. In 1955, Ernesto Rossi wrote: “small industries have always been a curse: They are created, grow and die beyond all control. They cannot be represented at meetings with ministries in Rome, they never agree on programmes”. Whereas large industries provide “solid material […] they participate in ministerial technical commissions with top class ‘experts’. They provide statistical reports prepared by research departments” (Rossi, 1955, p. 238).

2. Considering the new data, the increase in the manufacturing industry's value added at constant prices exceeds the previous increase by nearly 90%. Nevertheless, this adjustment is the equivalent of less than one average annual percentage point.

3. I brought up these issues at a conference in Milan on 11 March 2010, which led to a debate to which Marco Fortis and Enrico Giovannini later contributed. Reference should be made to the articles published in Il Sole 24 Ore on 19 and 22 May 2010 (see also Fortis, 2011, p. 151 and following pages). I have, on a number of occasions, discussed these issues with Marco Fortis, whom I would like to thank, although I do not attribute my personal viewpoints to him.

4. The same result is found using per capita GDP figures. In 1999, Italy came to 83% of the French–German average, while in 2007 it rose to 88%. The fact that these three countries belong to the same monetary union makes the use of equal purchasing power data useless in the comparisons. Indeed, a Eurozone resident can always exercise the purchasing power of his euro income in another country.

5. The contribution of non-market sectors to total value added is calculated as the sum of the remuneration of production factors, which are, substantially, employees (see ISTAT, ‘Estimation methodologies of domestic accounting aggregates at current prices’; Methods and rules no. 21, 2004).

6. This term is used to identify services measured without the existence of market prices. To simplify, they are assimilated to “Public administration and other public, social and personal services”.

7. According to Eurostat data, the production price index, available from 2005 to 2010, climbed 14% in Italy and 12% in France and Germany. Nevertheless, between 1999 and 2007, the consumer price index gained 21% in Italy, 17% in France and 14% in Germany. We should also note that the implicit deflator of German GDP is very low, with a change of only 6.8% from 1999 to 2007, while France's rose by 17.3% and Italy's by 22.2%. It is difficult here to not mention considerations contrasting those for the Italian data.

8. In 1992, the paper was published as Appunti sulla crescita economica, Research paper no. 26, Università degli Studi of Ancona, Economics Department. Il Mulino published it the following year.

9. The most appropriate indicator appears to be that per employee as, today, highly skilled workers spend much of their work time commuting and at home (see also Manasse & Stanca, 2006). Recording hours of labour is also highly problematic and often the data reported by companies are unreliable.

10. For instance, let us consider the new Lancia Y, launched in 2011 and offered – according to the manufacturer — in over 600 customized versions, arising from the different combinations of three different models, 16 “liveries”, six different interior finishes, three types of alloy rims and four different engines. This means that a car of this type sold in a given year can be different, possibly completely different, from a car of the same type sold the year before or the year after.

11. For information on these processes, reference should be made to De Nardis & Traù (2005), who saw a new development model in the nineties based on the consolidation of production lines already covered (and therefore similar to those in emerging countries) through the gradual upgrading of products to higher quality levels.

12. Also in the same period, the UK's market share slipped 1.7%, while Japan's fell 2.2% and the US dropped 4%. Between 1997 and 2010 (interim figures), Italy's and France's market shares decreased by slightly more than half a percentage point, while Germany's fell 1.1%. The BRIC nations gained another 2.2%.

13. The European Central Bank processes “harmonized competitiveness indicators”, the results of which appear to be contradictory. Those based on consumer price indices show Italian competitiveness unchanged from December 1998 to August 2011, versus improvements of 4.1% in France and 8.6% in Germany. Replacing consumer prices with Italian GDP deflators, we see a 2.5% slowdown in competiveness, compared with growth of 3.2% in France and 16% in Germany. A similar gap can be seen in indicators based on unit labour costs: Italy: −6.6%; France: −1.6%; Germany: +18.5% (the difference between Italy and Germany rose to over 25% here). However, unit labour costs are based on the ratio of remuneration per employee and productivity measured as GDP at constant prices divided by the total number of employed workers. As can be seen, these statistics “hold”, but the defect we have shown in the deflator leads one to see that not only are they not useful, but they are completely counterproductive.

14. Long-term estimates have highlighted an increase in the incidence of the shadow economy. In Germany, it rose from 2% in 1960 to 13% in 1995, in Switzerland from 1% to 6.7% and in the United States from 3.5% to 9.5%. The main reasons behind this lie in the increase in taxes and social welfare contributions, the greater governance of the official economy (the labour market especially), the mandatory reduction in work hours, unemployment and a decline in civic values and loyalty to public institutions, together with the deterioration of fiscal responsibility. There are many methodologies for calculating the shadow economy and none are unquestionable given the object of examination. The method used by Friedrich is based on the MIMIC model (Multiple Indicators Multiple Causes), including money indicators (quantities of money that do not transit through bank accounts), employment rates and changes in the workforce and the conditions of the official economy.

15. This is the so-called minimum hypothesis. In its most recent report, ISTAT also published the maximum possible estimate of the shadow economy, bringing it to 17.5% of GDP, but partly due to statistical discrepancies of unspecified origin.

16. The UK presents a similar phenomenon, with the London area accounting for 12.5% of the population and 21% of GDP.

17. Moreover, considering the different contribution of the shadow economy (11–12%, Table 3), Italy's level is completely in line with France and Germany, and this is confirmed by the figure for per capita financial wealth. Allianz researchers recently measured financial assets of €61 thousand per resident, compared to €64 thousand in France and €60 thousand in Germany. These levels are closely linked to per capita GDP (Multiple authors, 2011, pp. 32 and 91).

18. With this term, we mean to describe the industry that centres on medium and medium/large companies. For statistical purposes, the Mediobanca Research Department has set the threshold at 50 or more employees, with current turnover of between €15 million and €3000 million (www.mbres.it). According to our estimates, these companies, with their related activities, make up 40–50% of the Italian manufacturing value added.

19. The size of fourth capitalism is understated in these calculations. Indeed, certain goods are attributed to large companies even if they are more than marginally produced by medium-sized companies: means of transport (including yachts and motorcycles), chemicals and pharmaceuticals, metallurgy (with the importance of medium-sized manufacturers in the Brescia area).

20. Rey (2012) calculates a spread of 30% less in 2008. Nevertheless, it is true that the tertiary sector reduces the severity of weak stages in the economic cycles, which are highly driven by industry. For 2005, the same author calculates that advanced services account for 5% of total medium-sized companies' consumption in traditional manufacturing, 5.1% in the chemical industry, 7.3% in the metallurgy sector and 8.1% with respect to plant, machinery and means of transport. The corresponding percentages in Germany are, respectively, 13.4%, 14.4%, 9.2% and 11.7%, while they are 12.6%, 14%, 12.3% and 14.5% in France. With regard to these uses, it is noteworthy that Italian manufacturing companies spend more on IT services and research and development than their German and French counterparts.

21. German industry took an opposite approach, while the French strategy was more similar to Italy's (Deutsche Bundesbank, 2011, pp. 30–31).

22. We need only recall the inefficiency of so-called independent directors, the aforementioned manipulation of financial statements figures and their misleading presentation to the public, companies belonging to publicly held groups with directors related to the highest level manager and the conducting of business with entities in conflict of interest. This is all after the 1999 adoption of a Code of Conduct requiring that all directors show “independent judgement”, a principle no authority has ever bothered enforcing.

23. “We acted and made our decisions within the framework of political guidelines and opinions that made it a key national economic goal to invest in the South […]. We did so in accordance with the rules established by legislation, drawing on the means that the market largely provided […] those few industrial initiatives that were proposed to us, without excluding any that the honest, yet fallible, judgement of our directors found bankable”. Letter from Paolo Baffi (Governor of the Bank of Italy) to Giorgio Cappon (President of IMI); Zamagni, 2010. IMI was the main lender of the Sir Group, to which it granted loans without examining the consolidated financial statements showing approximately 200 companies with debt/turnover ratios of 216.7% (Coltorti, 2002, pp. 128 and 140).

24. “Value added per employee shows a clear tendency to grow as company size increases” (ISTAT, report of 27 October 2010 on “structure and competitiveness of industrial and service companies. 2008”). Furthermore, the problems of industry are often confused with those of the tertiary sector in general. For example, in the 2008 Report, in its chapter on “Il nodo della produttività” (“The knot of productivity”), the Bank of Italy referenced public services, non-productive income, infrastructures, schools universities, but did not cite manufacturing.

25. The origin of increases in productivity has been well known since the Classics, from the French encyclopaedists to Jacques Turgot, Cesare Beccaria and Adam Smith. It is market expansion that enables the division of labour and specialisation in individual stages. Alfred Marshall (Principles, 1920, Book IV, p. 266) clearly distinguished internal economies within individual companies from external economies generated by general industrial growth. Giacomo Becattini spent most of his life demonstrating how, in a world made up of goods to meet differentiated demand, the formidable plant of large companies would be on the losing end: “It reproduces, mutatis mutandis, the conditions of Renaissance-era handiwork […] which must constantly offer up new things to its ‘lord’ (the triumphans middle class) in order to remain in his favour” (Becattini, 2009, p. 109).

26. See Chandler (1962), Williamson (1987, p. 417 and following pages), Womack et al. (1990), Jensen (2003, p. 20 and following pages).

27. “Increased production […] is a result of the increase either of the elements themselves [Labour, Capital and Land], or of their productiveness” (Mill, 1848, I.10.4).

28. The factors examined by Denison include education, age-sex composition, the reallocation of resources (farming vs non-farming sectors), pollution abatement, health and safety in the workplace, labour disputes, weather in farming, dishonesty and crime.

29. ISTAT correctly refers to the entire context of productivity data, based on the American BLS model. In the aforementioned period from 1999 to 2007, the trend in TFP was negative both for public administration services (−1.7%, which explains the drop in total productivity in the sector) and construction (−1.1%) and farming (−0.4%), as well as in financial and business-to-business services (−0.2%).

30. Nevertheless, in a recent survey on innovation in Italian companies, ISTAT reported that in industry, strictly speaking, 40% of companies in the category of 10–49 employees innovated in the three-year period from 2006 to 2008. Over this size threshold, the percentage rose to roughly 70%.

31. It is well known, moreover, as noted by Baumol, that the great inventions have come from smaller companies, while large companies prefer to limit their risks, acquiring the innovations proposed by small companies and developing only those that are the most promising. Significant innovations of the twentieth century created by small American companies include air conditioning, the helicopter, the magnetophone, FM radio, the defibrillator, heart valves, human growth hormone, the integrated circuit, microprocessor, magnetic resonance, the pacemaker, the personal computer, the supercomputer, spreadsheet, prefabricated houses etc. (Baumol, 2010, p. 25 and following).

32. “Knowledge and creativity are embodied in the ideas of people rather than in technologically determined input output relationships”, Hart 2009, p. 92. See also Cooke and Asheim, 2011, pp. 265–268. According to Eurostat figures, Italy is the country that generates the highest number of new companies. In 2008, in the manufacturing sector alone, 24 thousand companies were established, twice than in France and over 70% more than in Germany, which has a much larger population. This occurs for one-man companies, but also for corporations where the number of new companies is lower only than that in the UK.

33. This calculation is for solely indicative purposes. It was performed on the basis of Eurostat statistics detailed for 60 branches.

34. Based on Eurostat aggregates at current prices. Beyond manufacturing, if we look at telecommunications, Italy's share rose from 35.2 to 46%, while its share of scientific research and development services has grown from 25.5 to 31.4% and that in advertising, market research and other professional, scientific and technical utilities from 46.2 to 47.5%.

35. The industrial progress made possible by the unparalleled professional and moral conduct of great men, like Giuseppe Colombo, Giovanni Battista Pirelli, Oscar Sinigaglia, Agostino Rocca, Alberto Beneduce, Angelo Costa and Vittorio Valletta, to name a small few, comes to mind. Modern rules of market governance lead us to believe it will be difficult for men of such stature to emerge in the midst of a general admiration of personal wealth and the widespread collusion that distinguish modern business management.

36. The desire to pull oneself out of poverty was the springboard for Italy's small and medium-sized businesses. One of its leading players said: “an enormous desire to do and a great willingness to emerge transformed many of us into frenetically active men. […] In no time at all, our country was able to overcome centuries of misery” (Ferrero, 1999). This business “explosion” was described by Giorgio Fuà (1965) as one of the specific factors behind Italy's take-off during the economic miracle.

37. While it is difficult to compare the results and efficiency of the public administration from one country to the next, in all comparisons attempted to date, Italy remains far behind France and Germany. See, for example, Afonso et al., 2003, pp. 12 and 17. The only context in which Italy emerges favourable is health, with a life expectancy at birth that ranks among the highest and per capita spending of less than 27% (OECD, 2011). But again in this case we know that geographical differences are enormous.

38. In 2010, according to SBD data, the balance of trade showed a surplus of €149 billion. Goods manufactured abroad (mainly in former Eastern European countries and China), imported and sold abroad accounted for €152 billion. In recent years, the share of goods that are re-exported by Germany ranged between 20% and 25% of total exports. On the other hand, intermediate goods and semi-finished products from abroad used in the production of made in Germany products that are then exported account for over 40% (Deutsche Bundesbank, 2011, p. 30).