BUGAMELLI, MATTEO April 0711

The Italian Productive System before, during and after the Crisis Matteo Bugamelli Bank of Italy

GIC Conference – Capital Markets in the Post-Crisis Environment Session III: Finance and Economic Recovery April 7, 2011 1

Outline of the presentation • Data on the performance of the Italian economy

• A possible interpretation of weak long-run growth • Inside the black box: • what do we learn from successful firms?

• what are the main structural weaknesses of the Italian productive system?

• Policy conclusions (tentative) 2

Data on the performance of the Italian economy

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Unsatisfactory GDP growth rate: before, during and after the crisis Euro area 2008Q1 2009Q2 -5,3 2,3

FR 2008Q1 2009Q1 -3,9 2,0

DE 2008Q1 2009Q1 -6,6 4,6

IT 2007Q3 2009Q2 -6,8 1,4

Average quarterly rate since the trough (1)

0,4

0,4

0,8

0,3

Recession 1992-93: average quarterly rate from the trough up to the next 5 quarters

0,5

0,7

0,7

0,8

Average growth in 2010

1,7

1,5

3,6

1,3

Average yearly growth during 2001-2007

1,9

1,8

1,2

1,1

2,2 2,0 2,1 (1) 2009Q1 for Germany and France; 2009Q2 for Italy and the euro area.

1,6

Peak Trough Cumulated loss Recovery up to Q4-2010

Average yearly growth during 1991-2000

4

Current recovery: slower in terms of GDP and exports 120

120 Italia

GDP

Area dell'euro

110

170

115

110

105

105

160

100

95

95 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

EXPORT 170

Germania

160

Area dell'euro

150

150

140

140

130

130

120 110

100

180 Italia

Germania

115

180

120 ITA = 26,8% GER = 43,8% AREA= 41,3%

110

100

100

90

90

80

80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

5

Labor productivity 140 GDP per hour w orked

135

130

France Germany Italy Japan United Kingdom United States

125

120

115

110

105

100 1993

1995

1997

1999

2001

2003

2005

2007

2009

6

Total Factor Productivity 125 Total Factor Productivity

120

France Germany Italy Japan United Kingdom United States

115

110

105

100

95 1993

1995

1997

1999

2001

2003

2005

2007

2009

7

One important caveat • Before recent recession, labor market performed quite well: increase in employment, decrease in unemployment…

• even with absorption of many immigrants: stock as of Jan 1, 2010: 4.2 ml in 2010; 1.3 in 2001

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A possible interpretation of weak long-run growth

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Our working hypothesis • Deep and predominant features of the Italian productive system (specializ., firm size, family owner, industrial districts) unchanged for decades…

• …changes must have occurred in the external environment (“shocks”): i) IT revolution; ii) globalization; iii) European integration • Common feature of shocks: abrupt increase in competition, but also new opportunities • Hypothesis: above features unfit to face stronger competitive pressures and take new opportunities

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Inside the black box: the successful stories‌

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An example: the reaction to the euro [1] (Bugamelli, Schivardi & Zizza (2009), The euro and firm restructuring, NBER WP no. 14454)

• Test whether firms reacted to the introduction of the euro, narrowly defined as the end of competitive devaluations (within EA; stronger currency) • Exploit differences across countries and sectors in reliance to competitive devaluations: • countries: national currencies devaluation wrt DM in 80-98 • sectors: more reliance on price than on product quality competition (low-tech vs high-tech) • Performance measured in terms of productivity growth: EA countries vs non-EA countries before and after the euro

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An example: the reaction to the euro [2] • Little evidence of reallocation across sectors • Within sector restructuring: stronger productivity growth after the euro in country-sectors that relied more on CD (structural break)

• Use Italian firm-level data to unveil nature of restructuring process: - case studies: successful firms shifted business focus away from production and toward upstream (R&D) and downstream activities (design, marketing, distribution) - matched by changes in workforce composition - deeper restructuring in low tech sectors

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An example: increased low-wage competition • Italy firms suffered: decrease in prices and margins (Bugamelli, Fabiani, Sette, 2010) and employment (Federico, 2010) but also…

• increase in aggregate productivity (reallocation effects from less to more efficient firms) (Bugamelli and Rosolia, 2006) and innovation (Buono, 2011)

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What do we learn from successful stories?

• A lot of heterogeneity across firms, within sectors (increase in dispersion in firms’ performance) • Restructured firms better performed before the crisis (2000-07), during the crisis (2008-09) and have better prospect for the post-crisis • Key factors for firms better able to properly react to exogenous shocks and better recovery from the crisis: innovation, product quality, intangibles investment, internationalization 15

Inside the black box: the structural problems

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Firm size • Average firm size in Italy is 4 employees per firm: exceptional figure wrt to other main advanced countries, not due to sectoral specialization  Small firm size: winning model in low tech sectors when currency devaluation were possible. Now bad for innovation (Pagano and Schivardi, 2003), internl.

(Barba Navaretti et al., 2010) and IT adoption (Rossi, 2003); smaller firms suffered more during the crisis (despite less exposed to trade shocks)  Small firm size means incapacity to grow (“all firms are born small but Italian ones do not grow”)

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Quality of management • Firm size is correlated to family ownership & management, old management practices  (Manufacturing) Almost 60% of Italian firms belongs to a family with all management from same family (25% in GER; 20% in FRA; 8% in UK)  Family manag.: worse managers & manag. practices (Italy has higher pct of firms with a very centralized decision process and lower pct using performancebased remuneration of manag.). Lack of innovation and intnl. capabilities; higher risk-aversion

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Competition • Evidence that greater competitive pressure accentuated difficulties of Italian firms, but also spurred efficiency through resource reallocation and firms’ reactions: both in manufacturing (papers above on increase competition from low wage countries) and retail (Viviano, 2008; Schivardi & Viviano, 2007)

• Still lack of competition in service sector (above all, professional services) damages buyers, that is consumers and (manufacturing) firms (Barone & Cingano, 2008)

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Which policies?

• Increase competition in protected sectors • Favour resource reallocation from inefficient to efficient firms: bankr. law and social security reform (U subsidies, empl. services); “cherry picking” by financial sector • Support firm growth: private equity? other public incentives? Taxation?

• Support innovation and internationalization: financial system (venture capital?) & intangible investments;

• Improve policy design (stability, transparency, accountability, monitoring, policy evaluation)

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THANK YOU FOR YOUR ATTENTION matteo.bugamelli@bancaditalia.it 21