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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

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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)

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Data on the performance of the Italian economy

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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.

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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

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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)

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THANK YOU FOR YOUR

ATTENTION

matteo.bugamelli@bancaditalia.it