Made in Italy tested against reality

07.11.10 Publication:

The global economic crisis of 2007-09 has done us all a disservice in more ways than just the obvious ones of having caused rising unemployment, falling living standards and increasing feelings of insecurity. It has damaged the popular understanding of what is meant by an advanced, modern economy and of what are the best future sources of prosperity. This damage can be seen, I suggest, especially in the Italian debate. The clearest sign of this damage is the renewed fetishism for manufacturing, the worship of “Made in Italy”. This damage matters, because of the risk that it distorts public policy, and hence endangers our futures.

            The damage is not surprising. After all, this economic crisis was caused by banks, in both America and Europe, which expanded their lending far too recklessly, and which encouraged financial institutions to buy complex and risky securities by seeming to offer them high returns. The banking crisis has made it clear that financial services need tougher regulation, and that any economy that relies heavily on growth and profits from financial services is taking a serious gamble on its future stability and prosperity. The clearest victims of that gamble have been Iceland and Ireland, but Britain—where financial services provided 8-10% of GDP at their peak in 2006—has also suffered from having bet too heavily on finance. So naturally there is a backlash against finance.

            But why should that backlash affect other service industries, too? During the slump, they have been stabilising forces, sectors in which jobs, output and incomes were much more solid and reliable than in the two chief victims of the slump, namely finance and manufacturing. Finance caused the slump (though I would argue that bad macroeconomic policy, combined with weak regulation, in turn made finance´s wild behaviour possible), yet the biggest drops in demand and in jobs came in manufacturing.

            Despite that slump in manufacturing during the crisis, there now seems to be a widespread view that manufacturing is somehow more dependable, more “real” than the intangible world of services, and that the definition of a “strong” economy is an economy that has a lot of manufacturing. This view could have consequences: the danger is that a crisis in just one sort of service industry, banking, might blind politicians, intellectuals and the public to the importance and value of other service industries, leading them to introduce special measures solely directed at manufacturing.

            If so, this would be a big mistake—and a strange one, simply in arithmetical terms. In Britain, for example, 75% of the economy´s total GDP (more strictly, on the OECD´s definition, 75% of total “value added”, which is GDP minus some taxes) is provided by services. That means that at least 65% comes from services other than banking. If you focus on manufacturing—as the British government did recently when it decided to commission two aircraft-carriers for the Royal Navy that are not really needed and for which no suitable aircraft will be available for several years—then you are focusing on a minority and neglecting the majority of the economy.

            Yes, that is a British figure: but everyone knows that “Made in Britain” died years ago. So what is the figure for Italy, an economy that is so often said to focus on manufacturing? You might be surprised by the answer. It is 71%. Most of the Italian economy consists of services, provided both by private firms and by the public sector. Only 4% separates supposedly finance-dominated Britain and supposedly manufacturing-blessed Italy. Accordingly, just 27% of Italy´s value-added comes from industry (which includes quarrying, construction, electricity, gas and water as well as conventional factories), and just 23.6% in Britain (all these figures are for 2008, taken from the OECD Factbook 2010, a publication designed and conceived by Enrico Giovannini, now president of ISTAT in Rome, and previously in charge of statistics at the OECD in Paris).

            What, then, should Italy focus on, for the prosperity of current and future generations? The basic problem is familiar: as Mario Draghi, governor of the Bank of Italy, has said frequently in his speeches, Italy has experienced slower growth in productivity than other Eurozone countries, slower growth in overall GDP, and more depressed household incomes. The pace of the country´s recovery from the recession of 2008-09 has also been slow, by European standards. In the future, as everyone agrees, what is needed is faster growth in productivity, the creation of new, well-paid jobs, an increase in household incomes, and more innovation.

            That substandard record in productivity is one that is shared across both manufacturing and services, and across both public and private services. Low competitiveness in service industries is also reflected in the lack of big services companies that might be expected to employ a lot of people, and that could be competitive internationally. Where are the big Italian law firms, comparable to those in Britain and Germany? Where are the big Italian marketing and advertising firms, comparable to Omnicom of France or WPP of Britain? Where are the world-famous Italian architects, competing for contracts in China or India with Swiss, British and American firms? Where, in a different part of financial services, are the big Italian insurers or re-insurers? Where are the Italian software giants comparable to SAP of Germany or, of course, Oracle? Where are the Italian consultancy firms? Where are the big Italian luxury hotel chains?

            The point is, that this is a huge missed opportunity, in a country where creativity, design and engineering—all services—have played such a big part in its history. Furthermore, the uncompetitive, uncreative, high cost nature of services acts like a tax on the very “Made in Italy” sectors of which so many politicians and commentators are so fond. Economists at the Bank of Italy have tried to explain why Germany´s manufacturing industry has performed so much better in the past 10 years, in the face of new competition from China, India and Eastern Europe, than Italy´s. They found that a more competitive and innovative business services sector was an important explanation: this assisted the growth of Germany´s exports, which the lack of it hindered Italy´s.

            Let me be clear. I am an admirer of Italian manufacturing, especially of the high quality artisanal industries for which the country is justly famous. In my new book, “Forza, Italia: Come ripartire dopo Berlusconi” (Rizzoli), I count medium-sized, specialised manufacturers such as Brunello Cucinelli, Loccioni Group and Technogym among my prime examples of “la Buona Italia”. My concern, however, is about the future emphasis of government policy and of the energies of employers´ federations. That policy is influenced by researchers such as the Fondazione Edison, who celebrate Made in Italy.

            In a review of “Forza, Italia” recently in Economy, Marco Fortis, director of the Fondazione Edison, wrote that Italy should be pleased that it has the second biggest “real” economy in Europe, after Germany. But this is based on a primitive and outdated view of what is “real” in an economy: is 71% of the Italian economy truly “unreal”? Is his own profession (economist), or that of the Minister of the Economy, Giulio Tremonti (lawyer) not “real” or valuable? It also ignores the mediocre performance of the exports of “Made in Italy” in the past decade: in 1998-2008, Italy ranked 25th among the 30 OECD member countries in the annual growth of its exports and goods, and 28th in the annual growth of its exports of services. Real or not, the performance was substandard.

            So it is time to “get real”, as the Americans say. Promote both services and manufacturing; liberalise both; build infrastructure that will help both (such as super-fast broadband) rather than just one (bridges and motorways). Most of all, from a political point of view: celebrate both.