Policy Brief - Understanding the Italian Economy’s Growth Crisis

Executive Summary 

• In the 25 years after the end of World War Two the Italian economy expanded by over 5 per cent per year, raising among the rich countries in the world, with a dramatic improvement in economic and social conditions of its population.  

• As in other European countries, the golden years of exceptional growth (the “economic miracle”, as the period was often referred to) came to an end in the late 1960s. From that moment onwards, growth continued but at a subdued pace, always lower than in its European partners. And yet the process of convergence towards the income levels of other advanced countries slowed down but did not subside until the mid-Nineties. However, in the ensuing two decades, Italy has lost ground dramatically also in relative income levels. 

• Two separate questions arise regarding this unsatisfactory performance. The first one concerns the determinants of low growth, which apparently became a permanent feature of the Italian economy; the second one concerns the dramatic deterioration of its performance since the mid-Nineties. This paper argues that both phenomena have at their roots the transformation of Italy’s industrial structure that followed, and indeed in my view was determined by, the acute strains in industrial relations in the 1970s, starting with the “autunno caldo” (Hot Autumn) of 1969.  

• My thesis is that those acute industrial conflicts were at the root of the demise of large companies in the Italian economy, setting in motion a trend of reduction in company size that continued over the ensuing decades; and, in addition, that the acute conflict and deeply rooted social hostility to the market economy – which was a lasting heritage of those turbulent years – fostered a closed ownership structure of family companies, in which the role of professional management remained marginal in the design of company strategies. 

• One important consequence of these developments was that, despite considerable improvements in profitability in the 1980s and 1990s, industrial companies did not change their prevailing specialization in traditional industries and maintained a backward management structure reluctant to engage in emerging technologies, notably information technology (IT). The prevailing small size and weak technology of much of the industrial sector became more relevant after the middle 1990s, when the IT revolution fundamentally changed the ingredients for success in industry – leading to the observed collapse in productivity. 

• My arguments aren’t based on new empirical evidence, but rather on a fresh reading of events and the existing literature. The paramount role played by developments in labour markets and industrial relations in breaking the post-WWII growth momentum was there for all to see but its deep consequences were overlooked, or diluted into an undistinguished panoply of causes, that in my view led to misreading the roots of dismal growth since the 1970s.