Post-war Growth
The Italian model

The half-century since the fall of fascism can now be seen as a well-defined phase in Italy's economic history, for which aggregate long-run analyses are appropriate. In Discussion Paper No. 877, Nicola Rossi and Research Fellow Gianni Toniolo investigate the causes of Italy's growth during 1945-92. They estimate factor utilization, scale economies, market power, profitability and `true' productivity (net of scale economies and adjustment costs), which provides a broad indicator of overall efficiency. Their model relaxes the common assumptions concerning perfect competition, factor flexibility and constant returns to scale and identifies several key structural features: high long-run returns to capital and market power, long-run increasing returns to scale, a tendency to develop excess capacity and the persistent North<196>South productivity gap.

Rossi and Toniolo find that fully adjusted productivity peaked in 1968 and has fallen slightly since the late 1970s, which they ascribe to inefficiencies in the service sector and an increasing shortage of social overhead capital. While the 1950s and 1960s witnessed the creation of an advanced industrial structure and the achievement of full employment, this economic success masked the need for major changes in institutions, politics and public administration. The first oil shock therefore induced inflation and devaluation rather than unemployment, as weak governments used low-cost borrowing and strengthened wage indexation to buy social consensus. This postponed adjustment and further exacerbated the productivity slow-down.

Rossi and Toniolo's results are consistent with the common view that abnormal public sector inefficiency, lack of competition, powerful vested interests, outdated ideologies and corruption accounted for a non-trivial part of Italy's productivity slow-down. They apply these measurement techniques to the UK to show that Italy's growth could have been one percentage point per year above its actual level in the 1970s and 1980s if it had had a service sector with an equivalent level of efficiency (and corruption).

Italy's Economic Performance 1945-92
Nicola Rossi and Gianni Toniolo

Discussion Paper No. 877, December 1993 (HR)