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C. Bastasin: A Short Reminder for the Next Italian Minister Of Economic Development

image-04/04/2016 - 14:25Italy's main problem is not fiscal. Or, more accurately, it would not be fiscal if the economy were able to grow beyond its mediocre medium-term prospects. In the last 25 years, Italy has grown slower than any other European country, and there is no clear sign that this pattern is about to change. The main reason for this sluggishness is low productivity, a problem that has been mostly neglected. The Maastricht framework for European economic governance has been mainly focused on rigorous fiscal discipline. Microeconomic effects were expected to result from structural reforms aimed at improving the functioning of markets rather than directly improving productivity. However, identifying policies to promote innovation and thereby increase productivity is critical at this juncture. It is high time Europe returns to a sensible strategy aimed at increasing productivity and overall economic activity.

The reason why Italy's productivity gaps, like its fiscal instability, should be a matter of concern for the other countries is easily explained. Innovation and the effectiveness of private and public expenditures in research and development play a major role in determining productivity. R&D efficiency is often dependent on the starting point of investors. Historical gaps tend to remain sticky, making the return on R&D vary significantly between countries. The private rate of return on business R&D—i.e., a firm’s extra income per dollar invested in R&D—is quite high, typically ranging between 20 and 30 percent. This return is higher than rates of return on physical capital, partly reflecting R&D’s higher risk premiums. Investors in countries mired in a low growth and high debt environment are understandably reluctant to embrace new risks. Often, foreign or non-national investments are required to break the bad equilibrium in which weaker countries are stuck. 

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