Understanding the sclerosis of the Italian economy: let’s go back to the 5-year period between 1989 and 1994
December 27, 2017
The second meeting in a series of roundtables dedicated to the Italian economic, political and institutional affairs between 1989 and 1994 was held on November 23, and organized by the LUISS School of European Political Economy, LUISS School of Government and LUISS School of Law. Among the participants, alongside university professors, there were also a few representatives from the world of Italian politics as well as institutions, along with those managers from both public and private companies who held crucial roles in those same years: among them Giuliano Amato, Paolo Baratta, Piero Barucci, Franco Bernabè, Innocenzo Cipolletta, Alessandro Profumo (with Dario Di Vico moderating the roundtable). LUISS Open gathered the observations of Professor Marcello Messori, who introduced and concluded the meeting.
The system of state-owned holdings and the public shareholding structure in the Italian banking sector played a crucial role in the development of the country from the post-World War II period until the 1980s. So much so that the essential characteristics of our growth and evolution, up to that decade, have been determined by that layout in the economic system. Then, during the 1980s, for reasons tied to the crisis of the private sector of the 1970s, the system of state-owned holdings went on to show increasingly marked problems: from being the incubator of possible innovations that should have spread to the rest of the country, from being an element of support – even a financial one – to our economic growth, from being the unit to more space to those territorial systems belonging to small and medium-sized enterprises, state-owned holdings have increasingly become a collector of a perverse dynamic between politics and economy, it has turned into a place where annuity positions were rooted. Therefore, between the end of the 1980s and the beginning of the 1990s, the timeframe under examination in this cycle of seminars, the fact that there were breaking elements in state holdings was greeted with great anticipation and the transition to a new season of privatizations, the consolidation of the banking sector and the opening up of markets raised great expectations.
How the system of state holdings changed
We could be devoting a lot of time to the elements that triggered these changes. Certainly there have been regulatory factors, especially those introduced from the European Union. In this respect, a key role, and almost an obvious one, was played by the delayed transposal of the two banking directives which Italy completed between the end of the 1980s and the beginning of the 1990s. And let us not forget that at the beginning of the 1990s Italy adopted a competition authority, a sign of an increased opening to markets. There have also been other initiatives, both in the financial sector and in the production sector: for example, the law on banking foundations was enacted, which redefined the ownership structure of a wide range of public banks, leading to the formal privatization of many companies belonging to the system of state holdings. This transition, for better or for worse, has triggered the privatization of the productive sector, as well as the re-organization and consolidation of the banking sector. Those of us who lived through those years remember that privatization in Italy was one of the most important in Europe, which can only be compared with that of the United Kingdom (which took place roughly ten to twelve years earlier) and that the process of banking consolidation itself was one of the fastest among developed countries – within the European Union, it only came second to the much smaller Greek one.
The fact remains that, especially for those of us who at that time already had some issues in the analysis or intervention on the Italian economy, those prospects were the promise of a possible improvement in the country’s economy and society. In this respect, the hope was there for an institutional innovation, for the ability to define new social safeguards and more efficient labor market regulation mechanisms, for the possibility to enhance the market competitiveness of Italy’s companies by eliminating or reducing monopolistic positions, and for the achievement of a modern and efficient financial sector. One of the key questions is whether these hopes have been successful or not. I must say that, assessing those developments in retrospect, I would be led to say that surely there have been important advancements and institutional changes. But with respect to my expectations, perhaps the disappointment is greater than the successes achieved.
An unfinished institutional transformation
During this meeting, I was able to verify the complexity of the political-institutional and economic crisis during the transition from the 1980s to the 1990s. Italy was really in a stranglehold: on the one hand, there was the need for an adjustment of fundamental macroeconomic imbalances (primarily, the public debt); on the other hand, the radical changes in the world around Italy, due to or thanks to the process of evolution of the European area (which would then go on becoming the European Union and the Euro area) and to the new international constraints caused by a change in the functioning of world markets. Indeed, there has been a response to all this in Italy: reforms and changes in governance have been implemented. But reforms and changes in governance are never a static solution, rather they trigger a dynamic that, as such, is problematic: in the case of our country, what has been lacking is an institutional support. The end of a more organized system (albeit by now with perverse drifts, as state holdings were) was not supported by solutions that were able to cope with the complexities that arose as a result of the paradigm shift. State holdings, for example, were also an instrument for defining concessions and overcoming shortfalls in the state apparatus; their disappearance, at a very delicate time, caused a real difficulty in the management of the national economic system.
The limits in Italian-style privatizations
Privatizations could have been a great opportunity. And with this term, I am using a condensed formula to account for the complexity of the economic processes that were taking place at the time and that would have to be solved with the issues of devaluation, changes in the institutions for labor market and so on. Certainly, there has been an inability to transform the processes of privatization and consolidation of the Italian productive apparatus into an instrument to reach a new industrial policy. And the rich debate we just had has been particularly interesting, because it has highlighted how shortcomings have come from both the supply side of those companies that were to be privatized and the demand side, that is the private sector. This is quite well known, but it is striking to learn that our business structure did not want to be involved in the results of privatizations (as much as it is true that there were some macroeconomic elements that did not facilitate such an operation, because the rate of return expected from the subscription of shares did not cover the cost of capital due to interest rates – if just nominal ones – that were very high). In spite of everything, the inability to examine the economic situation and see its medium/long-term prospects remains astonishing (although somewhat obvious), as well as the resistance from state holdings, that is to say the difficulty in obtaining the listing and disposing of significant or majority shareholdings of the most important companies.
The issue of corruption
From this point of view, pervasive corruption, which becomes the result of an inability to react to change with a medium-long term strategy, is even more structural: to some extent corruption is almost a necessary consequence of the failure to respond to new rules and regulatory innovations. In this respect, the absence of institutional breakthroughs and microeconomic policies, which have led in turn to higher annuity positions, is worrying.
Companies competitiveness has not turned into a system
Of course, even in the most unfavourable economic times that followed that season, there has been a nucleus of companies – very often medium or small-sized – that have been able to be innovative and that remained competitive on the international market. However, it is important to underline an issue: an economic system is not characterized by those businesses that are at the frontier of international innovation, but by the ability of those same enterprises to team up, to grow “serious” as compared to the economic system they represent. This Italian deficiency, which we have been carrying around since that decade and which still characterizes our reality, coincides with the failure to disseminate innovation, with the inability to transmit the positive results of the winning strategies to the whole system. This seems to me to be one symbolic case of what it means to be suffocated by annuity positions.
Excess and errors in the banking sector
From this point of view, the banking sector has been a bit of an exception. I am convinced that the Italian banking sector, from 1989 to 2007 (i.e. until the international financial crisis broke), has made extraordinary changes and recovered efficiency. Today, however, it can be said that this sector (perhaps inevitably so) has not succeeded in effectively internalizing the negative externalities produced by the rest of the system (both by the private non-financial productive sector and by the State – in particular by public debt).
In this case, the main weakness was the lack of governance in the banking sector. I believe that the pervasive presence of banking foundations has imposed some governance constraints, not so much on bigger banking groups, but on medium-sized and medium-large banks, which in turn has led to an inefficient allocation of funding. Italian banks, between 1989 and 2007 granted too much credit to the Italian economy and wrongly so, as the relations between small and medium-sized banks and small businesses were insufficient. All this brings us to today’s problems, which we know only too well.