Fact # 5: International competitiveness of Italian firms is low because of bureaucracy and Unions block needed reforms. NOT TRUE. Labor productivity and international competitiveness are driven by investment. And Italian firms do not invest

If you have read ANY of the Facts #1 through #4 of the current series, you have already read the premise. Thus, you should skip it and proceed to read Fact #5 below]


On October 5, 2014  I decided I should embark on writing a series of short newspaper-like articles with the goal of attracting attention to explanations of the current situation of the Italian economy alternative to the ones offered by the (overwhelmingly neoclassical) austerity lovers. While I had not planned to publish both in Italian and in English, the ‘likes’ I got on the first three pieces in Italian convinced me that I should go the extra mile and publish them in English as well.

Of course, ‘likes’ on socials are not the only reason to publish in English. My preoccupation is that even many foreign colleagues of valor tend to adhere, along with the foreign general public, to judgments about the Italian economy that are not facts at all but, rather, judgments presented as facts. I thought it would be worthwhile to alert colleagues and public alike: when reading austerians, please take what you read cum grano salis, my friends!

And here is Fact # 5:

Fact # 5: International competitiveness of Italian firms is low because there is too much bureaucracy and Unions block much needed reforms. NOT TRUE. Labor productivity and international competitiveness are driven by investment. And Italian firms do not invest.

We have devoted the first three ‘Facts’ of the current series to rid the floor of the ill-conceived attempts by the majority (unfortunately not a silent one) of pundits, domestic and foreign, to cast on labor the blame for the current crisis. Then, with Fact # 4, we showed why Italian firms do not constitute a juicy target for foreign investors: the reason, we showed, is that most Italian firms specialize in the production of goods produced with unskilled labor-intensive technologies. International investors interested in participating such firms would obviously prefer to do so in low-labor cost countries –even though, let us not forget, labor cost in Italy is lower than in other high per capita income countries in Europe (cfr Fact # 2).  And, we added, we find particularly amusing that those who complain about the lack of FDI are exactly those who do not invest themselves. Today we prove the latter statement.

Since Germany, and especially the successes of its industry, is a common benchmark when discussing the features of the Italian industry at its shortcomings, we have chosen to compare in Figure 1 the 1991-2013 aggregate dynamics of gross fixed capital investment by firms in the two countries.

Figure 1. Gross Fixed Capital Investment, annual data, 1991 – 2013

2014 12 07 Fatto 5 - Figura 1

Source: Eurostat, October 2014


That the German line lie above the Italian one is no surprise: country and gdp sizes are the reason for that. (Still, this is not an act of nature; it is entirely conceivable that a smaller country invest more than a larger one). The interesting difference emerges when one looks at the way the two sets of firms, German and Italian, have reacted to the Great Recession, announced in 2007 and under way since 2008 (that is, focus on what is at the right of the vertical line above the date 2008): German firms have been investing more than before, the Italian ones less. Period. No further comment needed.

True enough, as a time-honored Italian say goes, one swallow in the sky does not imply that winter is over. In clear: that German firms did better that the Italian ones could, after all, be expected. But what about those located in other EU countries? Figure 2 reports on the dynamics of private sector net fixed capital formation at current prices, actual data 2000-2013 and forecasts 2014-2016. Italian firms? The red line

Figure 2. Net fixed capital formation at current prices: private sector (UINP)

2014 12 07 Fatto 5 - Figura 2

Source: Eurostat, October 2014. Data for 2014-2016 are forecasts

There is dramatically little to be said and commented upon. But it may be useful to attract attention to the following: it is my strong belief that the 2014 turning point in investment expenditures, and their growth in 2015 and 2016, will not happen, certainly not as far as private-sector investment is concerned. (The careful reader is invited to make a note of this statement, verify it at the end of each year, and write to me in case I should be proven wrong –which, believe me, I would like very much).

The responsibility of Italian firms in this recession is  overwhelming.

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