The Italian Economy: What Next?

197 Pages·1995·17.337 MB·English

by  Mario Baldassarri, Franco Modigliani (eds.)

THE ITALIAN ECONOMY: WHAT NEXT?
CENTRAL ISSUES IN CONTEMPORARY ECONOMIC THEORY
AND POLICY
General Editor: Mario Baldassarri, Professor of Economics, University
'La Sapienza', Rome, Italy
Published titles
Mario Baldassarri (editor)
INDUSTRIAL POLICY IN ITALY, 1945-90
Mario Baldassarri (editor)
KEYNES AND THE ECONOMIC POLICIES OF THE 1980s
Mario Baldassarri (editor)
OLIGOPOLY AND DYNAMIC COMPETITION
Mario Baldassarri (editor)
THE ITALIAN ECONOMY: HEAVEN OR HELL?
Mario Baldassarri and Paolo Annunziato (editors)
IS THE ECONOMIC CYCLE STILL ALIVE?: THEORY, EVIDENCE
AND POLICIES
Mario Baldassarri, Massimo Di Matteo and Robert Mundell (editors)
INTERNATIONAL PROBLEMS OF ECONOMIC INTERDEPENDENCE
Mario Baldassarri, John McCallum and Robert Mundell (editors)
DEBT, DEFICIT AND ECONOMIC PERFORMANCE
Mario Baldassarri, John McCallum and Robert Mundell (editors)
GLOBAL DISEQUILIBRIUM IN THE WORLD ECONOMY
Mario Baldassari and Franco Modigliani
THE ITALIAN ECONOMY: WHAT NEXT?
Mario Baldassarri and Robert Mundell (editors)
BUILDING THE NEW EUROPE
Volume 1: The Single Market and Monetary Unification
Volume 2: Eastern Europe's Transition to a Market Economy
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
INTERNATIONAL ECONOMIC INTERDEPENDENCE,
PATTERNS OF TRADE BALANCES AND ECONOMIC POLICY
COORDINATION
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
PRIVATIZATION PROCESSES IN EASTERN EUROPE: THEORETICAL
FOUNDATIONS AND EMPIRICAL RESULTS
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
WORLD SAVING, PROSPERITY AND GROWTH
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
INTERNATIONAL DIFFERENCES IN GROWTH RATES: Market
Globalization and Economic Areas
Mario Baldassarri and Paolo Roberti (editors)
FISCAL PROBLEMS IN THE SINGLE-MARKET EUROPE
The Italian Econonty:
What Next?
Edited by
Mario Baldassarri
Professor of Economics
University 'La Sapienza'
Rome, Italy
and
Franco Modigliani
Institute Professor Emeritus
Alfred P. Sloan School of Management
Massachusetts Institute of Technology
in association with
Palgrave Macmillan
First published in Great Britain 1995 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS
and London
Companies and representatives
throughout the world
A catalogue record for this book is available
from the British Library.
ISBN 978-1-349-13641-4 ISBN 978-1-349-13639-1 (eBook)
DOI 10.1007/978-1-349-13639-1
First published in the United States of America 1995 by
ST. MARTIN'S PRESS, INC.,
Scholarly and Reference Division,
175 Fifth Avenue,
New York, N.Y. 10010
ISBN 978-0-312-12475-5
Library of Congress Cataloging-in-Publication Data
Baldassarri, Mario, 1946--
The Italian economy: what next? 1 edited by Mario Baldassarri and
Franco Modigliani.
p. cm. - (Central issues in contemporary economic theory and
policy)
Includes bibliographical references and index.
ISBN 978-0-312-12475-5 (cloth)
1. Italy-Economic policy. I. Modigliani, Franco. II. Title.
III. Series.
HC305.B269 1995
338.94~c20 95-14922
CIP
© SIPI Servizio Italiano Pubblicazioni Internazionali Srl 1995
Softcover reprint of the hardcover 1st edition 1995 978-0-333-62811-9
All rights reserved. No reproduction, copy or transmission of
this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied or
transmitted save with written permission or in accordance with
the provisions of the Copyright, Designs and Patents Act 1988,
or under the terms of any licence permitting limited copying
issued by the Copyright Licensing Agency, 90 Tottenham Court
Road, London WIP 9HE.
Any person who does any unauthorised act in relation to this
publication may be liable to criminal prosecution and civil
claims for damages.
10 9 8 7 6 5 4 3 2 1
04 03 02 01 ()() 99 98 97 96 95
Contents
Preface
Mario Baldassarri and Franco Modigliani 3
PART I: THE CHANGING STRUCTURAL FRAMEWORK 7
Italy: an Ever-Lagging Economy?
Innocenzo Cipolletta 9
Transition, Evolution and/or Revolution in Italian Politics
Giuseppe Pittorino 23
Social Change: Reactivating the System
Nadio Delai 43
PART II: POLITICAL CONSENSUS AND ECONOMIC
PERFORMANCE: FROM THE CRISIS TO THE
GREAT OPPORTUNITY 77
Italy's Perverse Enveloping Growth Model Between Economic
Reform and Political Consensus: the 1992 Crisis and the
Opportunity of 1993
Mario Baldassarri 79
1993: The Year of the Great Opportunity?
Franco Modigliani 97
The European Environment and the Italian Policy Mix
or the Astuteness of History (A non-Treasury View)
Luigi Spaventa 113
Italy in the EMS. After Crisis, Salvation?
Stefano Micossi and Pier Carlo Padoan 131
v
Contents
Italy and the "Modigliani Model"
Rudiger Dornbusch 161
A Look at Italy
Paul A. Samuelson 169
A View from the Country Next Door: A Radical
Economic Reform For France
Olivier Blanchard 179
The European Monetary System Crisis: Causes and Agendas
Antonio Marzano 185
Index 195
Preface
Mario Baldassarri · Franco Modigliani
Univcrsita •La Sapienza», Roma MIT, Cambridge (Mass.)
Since the early 1970s and progressively during the 1980s the
Italian economy has been experimenting a subtle and perverse
"model" which has expressed itself in these early 1990s in the form
of the impending danger of an irreversible real and financial crisis.
The tenet of the model is that it is possible to deficit finance
public-sector current-account spending. This results in a systematic
"destruction" of savings which in turn distorts the allocation of
resources, shifting them from savings to consumption.
In the 1970s, the great inflationary wave, the lira devaluations
and above all the negative real interest rates enabled the "books to be
balanced" in one way or another, shifting the responsibility for the
costs incurred onto the then unaware and defenceless savers who
saw a consistent part of their financial wealth "destroyed". At the
start of the 1980s, however, the picture had radically changed:
throughout the world inflation had fallen rapidly and was closely
controlled, the exchange rate was reined back within strict margins
and used to combat inflation. As a result, real interest rates became
very positive, this trend was further encouraged by the need to place
on the market considerable quantities of government bonds to cover
the growing deficit. The public debt-interest spending-current deficit
public deficit vicious circle was therefore flanked (and worsened the
already disastrous conditions of the public finances) by the growing
imbalance between spending and current revenue, fuelled in the
1970s by "welfare" spending policies which it was thought did not
have to be financed by increased fiscal revenues.
However, a "welfare" policy which aims at safeguarding and
supporting employment levels when based on a current public deficit
4 Mario Baldassarri - Franco Modigliani
which destroys savings, actually leads to an overall reduction in the
number of jobs available. Recent estimates indicate that the con
tinuing current-account deficit has, over the past twenty years, led to
the loss of some 800,000 jobs, net of the increase in employment in
the public sector of circa one million persons.
This perverse model "within" the Italian economy was hit, in
late-1992 and early-1993, by a serious international economic crisis,
"fuelled" by the even more serious recession in Europe, which was
being slowly throttled by the high interest rates imposed by Ger
many. This difficult economic situation is further complicated by a
serious political-institutional crisis which has already induced some
commentators to talk f)f a "revolution Italian-style".
It may appear paradoxical, but the conditions engendered by the
present currency crisis and recession may also provide the basis for
an economic policy strategy and the consequent conduct of the social
parties which could make 1993 the year of the "great opportunity".
To construct this opportunity, the government, central bank and
social parties should formally recognise "three facts", unthinkable
only a few months ago, and their behaviour should be coherent with
said recognition:
1) there has been a strong devaluation of the lira which has not,
at least for the moment, coincided or triggered an irreparable public
debt financial crisis;
2) the inflationary dangers of the devaluation have been circum
scribed by a fall in domestic demand and zeroing of cost-of-living
indexation schemes;
3) there is significantly more room for manoeuvre than before
for tackling the public deficit and debt prchlem, now that the lira is
floating on the foreign-exchange markets.
All this means that the different economic-policy mix which has
been discussed for years is now within reach: this mix comprises a
restrictive and strict public-sector budget policy, which, after twenty
five years, will produce a current surplus, and a monetary policy
which is more flexible, precisely because it is "free" from the con
straints of the exchange-rate and the explosive course of public deficit
and debt. The objective of this policy mix is what has been preached
but never practised for years: reducing consumption in favour of
Preface 5
production investment, reducing domestic demand in favour of ex
ports so as to balance the balance of payments current account.
The government should therefore "finish its job" as regards the
public deficit and debt. The admittedly difficult conditions of crisis
regarding industry and employment should not be allowed to con
fuse matters, motivating an even momentary relaxation of the,
national budget adjustment mesures.
The Banca d'Italia could guide a three-point reduction in inter
est rates as early as the coming two-three months, without neces
sarily waiting for approval, but certainly requesting the definition
and assumption of political responsibility.
The social parties, companies and trade unions, constrained as
they are by the present recession, should realise that their big
opportunity is to aim at "quality" and not at "prices": companies by
taking advantage of the wider competitive margins created by the
devaluation, maintaining their existing price lists and increasing
market share, i.e., selling more at the same price, and the trade
unions by seriously defending employment and rapidly improving
prospects via coherent wage policy guidelines.
This mix of economic policy and behaviour would enable Italy
once again to surprise the international markets, and demonstrate a
quick capacity to recovery and above all initiate the virtuous circle
that will lift the growth rate to above 3% during 1994.
Hence a series of miraculously concurrent circumstances,
which rarely repeat themselves in any country's history, make it
possible for Italy to make the great leap forward, a second miracle
which will take it from the tail-end of the industrialised countries to
one of the leaders. This requires but a small sacrifice on the part of
those who are fortunate to have a job today, a sacrifice that will be
more than compensated by improvements for those that are cur
rently 'outside the system', the unemployed, in particular the unem
ployed youth.
This leap will not only bring the unemployed back into society
but should also cure what have been the chronic ills of the Italian
economy; high and variable inflation, imbalanced national accounts
and foreign account difficulties. It is no surprise that so many
pigeons can be killed with one stone as all these ills can be traced