The Competitive Advantage Of Italy Economics Essay

Introduction

Italy is the eighth largest economy in the world with an estimated GDP of USD 2.198 trillion. The country has low levels of natural resources with close to 80% of its industrial raw materials being imported. The services sector contributes about 60% of the nation’s GDP which predominantly includes transportation, Banking and finance, Commerce. The manufacturing sector contributes close to 30% of the GDP consisting of various industries prominent among them being Textile, machinery, Pharmaceutical and transportation vehicles.

Its main strength on the industrial front lies in manufacturing and in processing of goods. Major industries in Italy are Fashion, Clothing and Footwear, Tourism, Motor vehicles and pharmaceuticals.

Italy early years:

The unification of Italy happened during the years 1861-70 and this unification broke down the feudal system that was in existence since the Middle Ages. Industrialisation started picking up in the early 1880’s in the northern and central part of the country resulting in the massive migration of labour to these areas between the years 1880-1914 which in turn resulted in a booming economy. World War I had a devastating impact on the country resulting in huge destruction and loss of life. The Fascist party came to power after the World War in 1922 under the leadership of Mussolini. Mussolini followed the lassiez faire policy in which he aggressively reduced the taxes, trade barriers and regulations resulting in high growth. In 1929 Italy faced a huge depression because of which he changed these policies in favour of government intervention and protectionism. Mussolini nationalized the major banks in the country and tweaked the economic policies so as to result in an economic model which was based on public private partnership and is widely known as corporatism.

Italy’s involvement in Second World War in 1943 eventually resulted in its collapse followed by Germany owning a part of the country and its allies owning the other. This led to complete havoc in the country and by the end of the war Italy’s per capita income was one of the lowest in the world.

Reform Years

Post the Second World War Italy rapidly started building back its economy thanks to aid it received from the USA under the Marshal plan between the years 1947 and 1951. In 1957 Italy became the founding member of the European common market which resulted in raising the level exports and provided investments that were much needed for its growth. These investments, combined with the cheap labour force available in the country resulted in spectacular growth till the year 1970 which was second only to that of Germany. The economy grew at an impressive rate of 5.8% between the years 1951-70.

The pattern thereafter got disturbed when there were massive strikes around the year 1969-70 which led to a political turmoil and social unrest in the country followed by the gulf oil crisis in 1973 resulting in a huge hike in oil prices which further aggravated the problem. By 1977 Italy had around one million unemployed youth below 24 years. The country was crippled by huge inflation and had a budget deficit averaging 10% of GDP every following year which pushed Italy into recession (Economy of Italy). Italian Lira fell constantly against US dollar which depreciated by over 100% between the years 1973 and 1982.

This trend continued till early 1980’s until a recovery plan was introduced which led to tighter government spending, reduced public costs and a focus on steady economic growth. This gradually led to an increased GDP growth, increased exports and industrial output. By 1983 Italy had come out of recession and GDP had started growing at a faster pace. Also the reduction in the price of Oil and increased availability of dollars due to foreign exchange liberalisation further fuelled the growth. Economy boomed after this period and in 1987 for a brief period it even surpassed the British economy, making Italy the fifth largest economy in the world. Moreover in the year 1991 Italy surpassed France so as to become the fourth largest economy of that period.

Italy Today

Italy is one of the most industrialized nations in the world. It is one of the largest exporters of manufactured goods. Italy enjoys a high standard of living, according to a survey conducted by the Economist it ranks eighth with respect to quality of life it offers to its citizens. Italy has third largest gold reserves in the world and has the lowest unemployment rate in the whole of Europe.

Despite all these achievements Italy today suffers from many problems. From a booming economic growth till the year 1990, the economic growth in the last two decades (that is from 1990) has been lower than the average growth rate for European nations. As explained earlier the stagnation in the economy in the early 1980’s forced the government to spend huge money to revive the economy which further resulted in accumulation of massive public debt. Another problem hampering growth was the divide between the northern and southern parts of the country. The northern part was highly industrialized while the southern part was relatively poor, plagued with lot of infrastructural and corruption problems. Although the government has tried to bridge this gap in the past, differences continue to persist even today.

Italy’s economy today is particularly affected by the lack of market reforms, lack of infrastructure development high GDP deficit and high corruption. Also the recent data shows that the Italy’s spending on R&D is only 1.1% of its GDP which is significantly lower when compared the European spending of 1.7%, this can have a significant impact on its future growth.

Italy Constitution and Government

Italy was declared as a republic in the year 1946. The parliament is a legislative body consisting of senates and the chamber of deputies. Members are elected by voting for a period of 5 years. The president of the republic is elected by the parliament for a term of 7 years. The president has unlimited authority but very limited political power. The government and the ministers elected hold the power and run the country on a daily basis. Italy is divided into 20 regions which are further divided into 112 provinces. Regional governments also have legislative power in certain areas including health, transportation and urban taxes.

Italy Foreign Relations

Italy is one of the major European countries and is a founding member of European Union. Its main allies are the NATO countries and other European Union members. Italy also maintains good relations with Russia and North African countries especially Libya which had been Italy’s colony because of its Oil reserves. Italy holds significant stake in the Oil companies in that country. Italy is an important member of NATO, OECD, and WTO. Italy strongly supports the institutional reforms to bring transparency and effectiveness in European Union.

In 2003 its former Prime Minister Berlusconi stood behind George Bush to disarm Saddam Husain by taking side of US and UK and went against the public opinion of anti-war stance of other neighbouring countries like Germany and France.

Italy primarily seeks the consensus of other European and NATO allies on various defence issues and strives to promote common defence and security policies for entire European Union. With the change in government last November the new foreign minister extended his support to NATO countries and aid to work towards the betterment.

Society and Culture

Italy has a total population of over 60 million with a population density of over 200/km2. However the distribution is highly skewed towards the north due to the industrial migration from south. The population is rapidly aging and one is five people has an age of above 65 years. Birth rates have also reduced drastically in the last two decades.

There is a huge disparity between the living standards of the people in the north and south of the country. The southern part of the country is still poor and underdeveloped plagued with huge problems like corruption, persistently high unemployment rates and widespread occurrence of organised crime. It is reported that close to 80% of businesses in the southern part of Italy still have to pay protection money to run while the market is estimated to be close to EUR 150 million.

Roman Catholism is the largest religion in the country with 92% of the people being Roman Catholics. In a recently conducted survey it came out interestingly that almost a third of the population don’t actually believe in god or consider god as a superficial thing created by people to generate fear. Immigration from different countries has brought other religions to the country. The country today has close to 1% population of Muslims. Italy is a developed nation with high literacy rates.

Business culture of Italians

People who start a business in this country are generally from business oriented families and usually start a business with family members.

The culture of the people is to hold the business in their grip to such a high extent that they are willing to compromise on growth rather than having an investor investing in their business. This is the main reason why many businesses in this country are small and usually rely on the debt taken from the banks for their growth.

People do not usually sell their company. They perceive selling business as a failure. So people run their businesses as their life long profession.

People usually believe in organic growth and are not comfortable dealing with Venture Capitalists. They strongly believe that the growth of the firm should come from the revenues generated by the company.

Companies are more focussed on operations and technology and lack in HR and legal aspects which are equally important in the success of the company.

Markets

Energy

 Italy has few natural resources to sustain. More than 80% of the country’s energy needs are imported. However in the recent years the company has started pushing aggressively for renewable energy sources and is now the largest producer of energy. Because Italy imports most of its energy, on an average every Italian pays 45% more for electricity when compared to European average.

Agriculture

Agriculture is mostly predominant in the north western part of the country. Major crops produced in the country are rice, soya beans, millets and fruits. Italy is one of the largest producers of wine in the world.

Exports:

Italy is the seventh largest exporter in the world, earning approximately 25-30% of its GDP through exports. Exports have taken a huge hit in the recent recession with exports falling down to 22% in 2009 from its peak level of 28.7% in the year 2008. The sectors which are most vulnerable are that of textile, footwear and furniture. After that exports have started picking up, with exports rising close to 26% of the GDP in the current year. China is posing a significant threat to Italian exports with Chinese products having a presence and being preferred in both emerging as well as high income countries.

Prices and interest rates

After joining the European Union, Italy has experienced stabilization in prices. The inflation has come down and is currently around 1%.

Employment environment

There is a shortage of skills in certain businesses and major unemployment in others. The level of unemployment also varies with the region with the southern part of the country having a significantly higher unemployment rate when compared to the northern part. Official statistics showed an average unemployment rate of around 8.5% as of 2010.

Italy Macro Economic Outlook:

Italy has a total GDP of USD 2.18 trillion of which 73.4% is generated from the services sector employing 65.1% of the workforce. Moreover 24.7% of GDP is contributed by the industrial sector employing 30.7% of workforce. Agriculture contributes a mere 2% of its GDP employing 4.2% of the workforce. Italy’s major industries are Fashion, Automobiles, machinery and pharmaceuticals.

Italy’s GDP per capita income has declined marginally by USD 20 in the year 2010. Inflation is low and hovers around 1-2% range.

The most talked factor about the economy is the unemployment which has been around 8.3% to 8.5% but is better than that of its neighbouring countries. However the rate is higher when compared to that of The United States. One of the major issues concerning labour is the lack of productivity. Low productivity combined with a rise in labour wages is increasing production costs when compared to that of its competitors.

As per the view of IMF the low productivity growth of labour can be attributed to the following factors.

Regulation rigidities exist and policies are not favourable and are limiting the competition

Poor quality of labour employed in various businesses.

Lack of investment in R&D and innovation in the country

The industry has a concentration of small firms which are unable to build up on economies of scale in terms of labour.

Fiscal policy

As a mandatory requirement to enter into The European Union, Italy had to cut down on its budget so as to reduce the deficit gap. Because of this the government brought down the spending from 10% of GDP to 2.8% of GDP. However with the occurrence of the financial crisis this figure again crept back to 5% of GDP. The government is actually trying hard to reduce the debt. The only way which looks feasible with all the SOPS given by government, is through raising taxes which obviously would, eventually have a negative impact on the finances of the government. As of today the debt to GDP ratio stands at 118% but is expected to remain flat or shrink in the coming years.

Micro economic conditions

On the industry front clothing, machinery and automobiles are the major ones. Many industries usually service their products for the foreign customers. These types of industries are mostly concentrated in the northern part of the country.

One of the major characteristics of the Italian economy is the role played by the small and medium sized enterprises operating in the country. More than 99% of these ventures have less than 50 employees in their firm. These businesses are basically family owned and have a dedicated and qualified work force. These businesses receive excellent support from the local government. These businesses are concentrated as in the form of groups where in the manufacturers involved in manufacturing of specific/particular products are concentrated in a particular region. Functioning in such a manner these industries can reduce costs by buying products on a large scale and use common distribution channels to market their products. This creates a massive relative advantage for the community.

The Small and Medium Enterprises (SME) contributed a total of 70% of the countries’ exports. Again the industry pattern is spread over the northern part of the country with majority of the industries being located in north, northwest part of the country.

Italy’s Government:

Due the recent euro zone crisis in 2011 Italy was greatly affected and its economy crashed with the GDP plummeting by 0.7% in the 2nd quarter. Moreover because of the deep impact of the recession, government severity measures continue to have an effect on everything from factory activity to consumer spending. Italy’s GDP continued falling down for the 4thquarter in a row, and as compared with the growth earlier the growth this year went down by 2.5%. Again the GDP fell by 0.8% in the 1st quarter when compared to the closing 3 months of 2011, as reported by the statistical agency. Even the factory output in June drooped to a low of 1.4% as compared to the figure in May and was 8.2% year on year. According to the Prime Minister the government is trying to put in place a lot of austerity measures which are worth 20bn Euros (£15.8bn) so as to deal with rising borrowing costs, driven by market worries over the widening euro zone debt crisis. The government and the investors are very much worried about Italy; they are concerned about the fact that Italy may be the next country in line to endure the same results which have hit other euro countries such as Greece, Portugal and Spain. According to the investors Italy’s government has the biggest credit encumber when compared to any of the other euro zone countries at around 123% of GDP, which is making the Italian government to actually sustain the earlier market confidence, however the government may find it difficult to pay of the huge debt as it is rising day by day. Italian business leaders lost confidence last year in their countries’ revival, as company chiefs are increasingly distrustful over the country’s economic situation and expect that the will not be able to recover from the impact of the recession, and is going to become worse in the coming months. But Mr. Monti’s government has been trying to persuade and ensure their country leaders and other European leaders to give Italy some more time to allow its economy to become stable and then enter into growth in the coming years, rather than sticking to tight fiscal targets that have been a result of the recession’s deepening effects.

According to the Italian government the countries’ financial situation has made decent progress when compared to the last year’s decline, and believing that the country will ultimately recover and emerge from the depressing economic crisis. Mr. Mario Monti, President of the council of ministers in one of the interviews described the condition of the Italian economy as “Depressing” in 2011, before he was actually appointed as the President of Italy, ushered in to bring changes walking down the rough path of severity while dealing with pension reforms and other issues. But Mr. Monti, after becoming the President of Italy in November did not waste any time in going round and round about the financial crisis that was forcing the Italian government to stay back, but instead confirmed that everything is going to be stable in few years. In one of the speeches to the politicians, labour and industry chiefs at the Adriatic resort town of Rimini, he said that presently Italy cannot be considered to be in a state of crisis. The Italian government has also declared that the moment of recovery of the economy is soon approaching and that Italy will be able to see it soon. Mr. Monti has also explained that by approaching “The Parliament procedures” which the politicians had been avoiding for the past few years (for instance reining in Italy’s liberal pension system), he has been able to bring the country in a much better position in many ways when compared to its state before he came to power. Mr. Monti the current President of council of ministers was appointed so as to replace media mogul Mr. Silvio Berlusconi. Mr. Berlusconi prepared to accept the resignation under strong market pressures, as Italy’s borrowing costs piled up against conditions of a high deficit, a slow-moving economy and obstinate unemployment. With elections knocking near the corner in spring, there was the risk that business giants and the politically privileged will surely resist Mr. Monti’s instruction for financial improvement, which so far has just been limited to the restoration of property taxes, high sales taxes, cutting spending and raising the age limit at which Italians can retire with liberal pensions. Mr. Monti has repeatedly stated that he won’t run for a new term. One of the few political leaders and parties supporting Mr. Berlusconi tried to oppose Mr. Monti’s government but have all failed as they were all involved in some or the other kind of scandals, and thus they lost the earlier respect that they had gained when their government was in power. Mr. Monti’s government received the backing of the widespread legislation which supported them in every possible way. Still, Mr. Monti has faced problems with the Parliament during his government’s tenure up till now, as the Parliament has been putting off various decisions for many years which were actually for the improvement of Italian Government. Mr. Monti has also talked about the much debated topic of labor market reforms, with the Italian youths having paid “very heavily” in terms of price for even a small job prospects, This was a result of the inaction some of the politicians who tried to avoid it for years and reverted back from taking any concrete or tough action. But the current Italian government under Mr. Monti has now gained respect, integrity and an impactful influence in Europe. As a highly esteemed and respectful economist not representing any particular political party, Mr. Monti is seen as an able representative who can bring Italy back in a sturdy position so as to confront and challenge the German Chancellor Ms. Angela Merkel if required, when it comes to forging of pan European decisions aimed at saving and stabilizing the euro. Presently the growing concern in the euro zone members is with regards to Greece which might have to drop out and exit the euro currency grouping, to defend itself Italian government said that it would be sad if the euro (due to their shortcomings) becomes a factor for the exit of Greece, and that to avoid this they are working very hard to revive Italy and its economy.

Business Environment

The environment is not so attractive to conduct business in Italy. With burdens of The Industrial Regulatory system, infrastructural issues, prices of energy being all relatively higher when compared to Europe’s average. Moreover the competition in the service sector is not up to the level as expected which further has an impact.

The government has been trying to aggressively focus on the promotion of its business activity and the projection of an environment which is conducive to conduct business by setting various special bodies dedicated to promote various businesses in the country.

According to the GCI Report in the year 2010 the most problematic areas that act as impediments to conducting business in the country are the Government’s bureaucracy, tax rates and access to financing.

Italy performs worst in terms of taxation where it ranks 134 and ranks 158 in enforcing contracts. An OECD report gives it a rank of 87, of the total countries in the world for doing business in Italy. Also Italy fails in providing the required energy needs where it ranks 109 in terms of getting an electricity connection in the country.

Labour

Productivity of labour is one of the major issues in the country. There are some industries where there is shortage of skilled labour while in others there is huge unemployment. The major issue that the country is facing today is that of productivity of people which is one of the lowest in Europe. Also the wages of the people have been rising at 3% which is over 10 times that of the European Average of 0.3%. Also with strong protection from the government it is not so easy to remove people. This is the major impediment to the conduct of free business of the country.

Corruption

Italy is plagued with high corruption especially in the southern part of the state where the corruption levels are very high. Due to high bureaucracy and complexity of the regulations it has further enhanced. The government has been trying hard to revamp the entire regulatory system by creating special bodies to promote new businesses in the country.

SWOT ANALYSIS:

Strengths:

Italy which is the seventh largest economy of the world has been a democratic nation for almost six decades. Italy along with Germany is considered to be one of the strongest and most active members in the European Union. Although the political scenario in the country has been in a state of turmoil for the past few years, there is hope for quick recovery given the resilient nature of the political environment. Italy is considered to be moderately inclined towards R&D and innovation but has a strong comparative advantage with respect to the garment, textiles and the fashion industries.

Weaknesses:

Looking at the political environment of the country in the recent past it can be observed that the system is plagued with corruption which seems to be deeply entrenched and is present at various levels in the system. Moreover belligerent relationship exists between the political class and the judicial system of the country. Continuous resistance from influential groups spread out across different economic segments from unions to the lobbyists in the corporate world has delayed the process of reforms in the country. From the economic perspective, the country is lagging in Industrialization. There is an urgent need to build capabilities in R&D, technology and services so as to deal with the intense competition from developing Asian economies. Heavy focus on manufacturing, widespread corruption, bureaucracy and improper allocation of resources are the major reasons that have led to inefficiency and the country’s poor performance. Foreign direct in the country is on a decline and have been low as compared to other countries, the level of FDI has come down from US$ 40 bn in 2007 to US$ 13.5 bn in 2009 to US$ 9 bn in 2011.

Opportunities:

Currently the country belongs to the industrialized nations Group of Eight or the G-8 group. Moreover it is member country of the European Union and the OECD. Italy can leverage its close relationship with the US. As of 2010 Italy was its 16th largest partner for trade with the total bilateral trade between the countries amounting to US$ 42.7 bn as of 2010. Thus it can gain cooperation and support from US while dealing with the economic issues and crises that it is facing under the euro zone.

Threats:

One of the major threats that the country faces is that of widespread unemployment. The unemployment levels across the country are skewed, with lower levels prevailing in the North and Higher levels prevailing in the Southern parts of the country. The unemployment rate as of 2010 was 8.5% and is on a rise. This can be attributed to a stagnating economy and low growth levels in the face of the global recession which has had a deep impact on western economies. A major portion of the economic activity is in the unorganized sector which is not accounted for under the GDP, the same needs to be recognized.

Recommendations

Rigidity in Labour markets:

Because of strict laws in terminating employment it is very difficult for companies to work there. The labour law needs to be reformed so that it can give the companies flexibility especially in technological companies so that the companies can attract foreign investments.

Reduce the government intervention and make the procedures simple

At present the process of setting a business is very messy involving a lot of beurocratic and administrative permissions. Also there are issues with the judiciary. Italian govt can set up a separated autonomous wing which make the process simple and can reduce a lot of time and cost for the company.

Control on fiscal deficit:

Government has been facing fiscal deficits for almost two decades. After studying the budget it is found that Italy needs to spend money on infrastructure, education and R&D. So they can think of reducing their budget on some other factors other than this. Productivity of labour is one of the major issue which needs to be addressed immediately

Promoting entrepreneurship

It should aggressively promote the VC and provide funding to startups to promote the innovation and should also spend a lot of R&D expenditure.

Foreign investment

Banking

Taxation

Business environment

Labor

Corruption

Obstacles to foreign investement

Russias international competitiveness

Competitiveness of nations

Companies competitive position

Capital resources, physical and information infrastructure,Natural resources

Demand conditions

Supporting industries

Exhibits

Exhibit 1

GDP trend of the country

Source: Google.com

Sectorial breakup of Italy’s manufacturing industry

International patenting output chart

Source: cnx.org

Comparitive economic performance