Abstract
This document, the 4th Report of the Advisor for the Strategic Project <Italy in Europe> considers further areas where policy initiatives might help Italy solve its twin economic problems—its deficiencies in both the inclusion of the working-age population in the economy’s formal business sector and in the enterprise, or dynamism, shown by the business sector. These two deficiencies I call the inclusion problem and the enterprise problem. The decline in enterprise is reflected in a range of circumstantial evidence: a striking contraction of the business sector as measured by employment (rivaled only by Scandinavia and Portugal), a plunge in the growth rate of total factor productivity in the business sector from the fastest rate in Europe to an average rate,[1and a pattern of little inward direct foreign investment, a large outflow of saving into foreign investment and a weak exchange rate[2.There is more direct evidence too: meager expenditure on industrial research, a low rate of new company formation even by European standards, and a tangle of rules restricting competition.[3The decline in inclusion is reflected both by the large rise in unemployment rates of men and women to the second-highest levels in Western Europe and, even more strikingly, by the steady sinking since 1980 of the male participation rate from an already deficient level—leaving it markedly lower than that in France, Spain and Portugal and far below the rates else-where in Western Europe.
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References
ECD, Economic Outlook, June 1998, p. 284, and OECD, Implementing the OECD Jobs Strategy: Member Countries’ Experience, 1997, Figure 7, p. 37.
This pattern is generally found in those Western European economies operating under a pervasive “welfare state,” according one observer. See Melvyn Krauss, “Why the Euro is Sinking,” Wall Street Journal, June 9,1999, p. A14. (Each EMU member, while losing its nominal exchange rate, still has a real exchange rate, which is sensitive to its real hourly labor cost, hence its regulations and tax rates.)
See the just published Fostering Enterpreneurship in Europe: The Unice Benchmarking Report, Unice: Brussels, 1999.
Charts 1 and 2, 1st Semi-annual Report. The participation rate of men has fallen to 74 per cent!
On these two wealth hypotheses see the regression results reported in the research memorandum by Una Louise Bell in the Annex to the 1st Report.
Though the’90s have seen progress there is huge room left for more privatization. Figures for 1993 reported by Fabrizio Barca put the share of business employment in state-owned firms at 13.5 per cent in Italy—still about the same as France and far above Germany’s 8.3 per cent and 4.3 per cent in the U.K.
F. Barca and S. Trento, “La parabola delle partecipazioni statali: una missione tradita,” in Barca, ed., Storia del Capitalismo Italiano dal Dopoguerra a Oggi, Rome, Donzelli Editore, 1997.
Francesco Nucci, “Firms’ Performance by Type of Ownership: Some Evidence from Italy,” Research Memorandum of the Advisory Group, May 1998.
The thesis was later set out in detail in Edmund Phelps, “The Global Crisis of Corporatism,” Wall Street Journal, March 25,1999. This argument is that a corporatist system, the exemplar of which may be South Korea, is more prone to financial crisis than a true capitalist system, since the latter relies on a pluralism of ideas about the directions in which it is best to invest while the former suffers from dependence on centralized judgements and narrow choices.
A new examination of the size of the underground economy is in Maurizio Bovi and Laura Castellucci, “What Do We Know About the Size of the Underground Economy in Italy?” ms., February 1999. Their Table 2 shows that in the South “black” labor as a percentage of total labor (measured in ISTAT’s “equivalent units of labor”) fluctuated around 30 per cent over the period 1980–1985 and around 34 per cent in the period 1990–1995. In the Center-North the figure was a little more than half the Southern figure and rose proportionately less.
Luigi Bonatti, “The Impact of the Social Security Tax on the Size of the Informal Economy,” Research Memorandum of the Advisory Group, preliminary, October 1998. Bovi and Castellucci say the poor quality of public-sector monopolies also created an impetus to under- ground activity.
The standard reference on the economics of corruption is possibly Andrei Shleifer and Robert Vishny, “Corruption,” Quarterly Journal of Economics, vol. 109, month, 1995, 599–617.
Giuseppe Tullio and Stefano Quarella, “Economic convergence of Italian regions: the role of organized crime and of public expenditures, 1960–1993,” ms., Univ. Brescia, June 1998, p. 18.
Tullio and Quarella, op. cit., pp. 20–22. It is true that the homicide rate is an imperfect proxy for the strength of organized crime since if the local crime organization is all-powerful and feared accordingly it will not need to kill anyone. (It is reported that the homicide rate in Catania has fallen to quite a low level.) But if the proxy has sometimes malfunctioned this way that makes the good results obtained by the authors more impressive, not less.
Stefano Micossi and Giuseppe Tullio, “Squilibri di bilancio, distorsioni economiche e “performance” di lungo periodo dell’economia italiana,” Rivista di Politico Economica, 82, July 1992, 39–91
Edmund Phelps, Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest and Assets, Cambridge, Mass., Harvard, 1994, pp. 62–63 and passim.
Una-Louise Bell, “Determinants of the Dynamic Behavior of Italian Unemployment,” Research Memorandum to the 1st Semi-annual Report, 24 November 1997.
Tullio and Quarella, p. 28.
Shleifer and Vishny, op. cit.
Edward Banfield, The Moral Basis of a Backward Society, New York, Basic Books, ca. 1960s. A similar theme, also supported with Italian data, has been developed by Putnam in the 1990s.
This venerable formulation, which goes back at least to the modeling by Harvard’s John Dunlop in the 1940s, was suggested to me by Luigi Bonatti as a first cut at describing union objectives in Italy. Incidentally, this paragraph is based on an analysis I did with the quitting model in July 1998. These results are confirmed and extended in the Research Memorandum cited below.
A paper by Luigi Pellegrini, Banca d’Italia, surveys these restrictions in the retail services sector.
Phelps, Structural Slumps, Cambridge, MA., Harvard University Press, 1994. See also the recent estimates in Olivier Blanchard’s Baffi lectures, forthcoming 1999.
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Phelps, E.S. (2002). Some Impediments to Enterprise and Inclusion in the South: Organized Crime and Organized Labor. In: Enterprise and Inclusion in Italy. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-0901-1_4
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