20: Economia sommersa
Italy's unregulated small artisan sector
The problem: best at being oppressed
Italy holds the prize for being the Western European economy most over-burdened by excessive government regulation and licensing. For much of the post-war period it has suffered from abysmally inefficient public administration, lacklustre state-owned enterprises and widespread corruption.
The solution: small is enterprising
Despite all these handicaps, Italy has become one of the world's most productive economies - claiming to have surpassed the United Kingdom in the 1980s as the OECD's fifth most important economy. The explanation is Italy's private sector - entrepreneurial, export-orientated small and medium-sized enterprises (SMEs) -which is the powerhouse of the national economy.
The experience: a tale of two economies
Post-war Italy illustrates vividly the problems associated with excessive government intervention and supervision of the economy. Essentially, there are two economies: an inefficient, corrupt public sector and a remarkably efficient, innovative private sector comprising mainly small- to medium-sized enterprises.
By the 1980s, the public sector was riddled with serious sclerosis: the nationalized industries were hopelessly inefficient and corrupt; 8.1 million people were claiming invalidity benefit; and as many as 30 per cent of Italians had a second job - one often in the public sector with plenty of holidays and a generous pension; the second in the private sector and an important source of cash. Tax evasion was a national hobby. It was estimated that as many as 2.5 million people were working in the economia sommersa (submerged economy). Yet this black economy was highly efficient, generating as much as 30 per cent of national income.
Given the nation's parasitic dependence on the state it was no wonder that government spending grew substantially from 33 per cent of GDP in 1980 to 41.1 per cent in 1989. Similarly, the government's annual budget deficit doubled over this period to 10 per cent of GDP. By 1992, the national debt was equivalent to a world-beating 120 per cent of GDP! Drastic measures were called for; the IMF stepped in and demanded a rapid retrenchment. During this period the true extent of government corruption and kickbacks began to be revealed. A new nickname for Milan was coined, tangentopoli or `bribesville'. Thousands of people were arrested on bribe charges including many senior politicians. Bettino Craxi, the former Socialist prime minister, fled to Tangiers.
While the public sector descended into chaos, the private sector has flourished. The backbone of this economic transformation has been the thousands of small entrepreneurial firms that are characterized by their energy, flexibility and creativity. The small and medium sized firms of the North were particularly dynamic: by the late 1980s some provinces in the Veneto, Tuscany and the Marche boasted one small business for every twenty-five inhabitants. To take one specific example, Rossano Veneto in the Vicenza district of North East Italy has 7,000 inhabitants, yet it supports 900 businesses - one business for every two families. The proportion of Italians working in firms employing less than 50 people grew to 37.4 per cent by the 1990s.
Many small- to medium-sized businesses have developed in geographical clusters specialising in certain sectors. Thus, the Lumezzane valley in Brescia, Northern Italy is renowned for its sophisticated engineering and machine tool businesses. As Patrizia Messina of Padua University points out, the Veneto region of Italy is one of the most industrialized areas in the world - the locals call it 'Italian Japan'.
Assessment: less is more
Italy is an extreme example that illustrates the dangers of excessive government planning, intervention and regulation of the economy. Left to themselves, Italians have demonstrated that they can build one of the world's most productive economies. The country's problems hinge around its indecisive central government, and its state-owned enterprises and regional aid schemes, particularly those which have dispensed huge sums to the disadvantaged South.
Italian local administration is better than its central government. It has often been highly supportive of small- and medium-sized business. In recent years politicians appear to have learnt the lessons of experience. In this regard Guiliano Amato, a distinguished law professor who became prime minister, merits special praise: he launched the country's privatization programme, as well as a concerted move to break up dominant monopolies and reform cartels. He summarized his guiding philosophy as "the market whenever possible, the state wherever necessary".
For further information:
For obvious reasons it is difficult to come across much detailed information on the extent of the Economia Sommersa. Good recent histories on Italy include :
- Clarke, Martin (1995) Modern Italy 1871 - 1995: Longman.
- Duggan, Christopher (1994) A Concise History of Italy: Cambridge University Press.
- For more recent political background, consult::
- Messina, Patrizia `Opposition in Italy in the 1990s: Local Political Cultures and the Northern League', Government & Opposition, vol 33, no 4, 1998.
- See also www.bancaditalia.it.
Copyright 2002: Adam Smith Institute
Created and Maintained by: Cyberpoint Limited