Italian slow-cooking: A tale of two tyrannies

Italian recipes are always popular so I thought it was be a great way to start my new economic/political cookbook. Buon appetito!

Ingredients

For your base, the ‘tyranny of the majority’:

·         An ageing demographic

·         Article 45 of the Treaty of the Functioning of the European Union (which allows for the free movement of people)

For the ‘tyranny of the minorities’:

·         Ineffective government

·         A culture of guilds and cartels

·         A widespread dislike competition (witness the platforms of the People of Freedom and the Northern League).

As Alexis De Tocqueville toured America, he remarked on the dangerous ‘tyranny of the majority’ that he believed would “render the law unstable”. However, the recent Euro debt crisis has shown us that it is not just the tyranny of the majority that is dangerous; it is when this majority combined with a ‘tyranny of the minorities‘. This set-up renders not only governments unstable (ciao Berlusconi!) but the country’s economy too.

The way the debt crisis has recently been reported in the media would leave one believing that the recipe behind the disaster has been a quick pan-to-plate job with a befuddling variety of ingredients; a global recession, a single currency, high sovereign debt, lax consideration of the growth and stability pact, etc. However, I believe an authentic Italian crisis requires a much longer cooking time and yet a simpler set of ingredients. Indeed, while the rapidity may surprise some, others have wondered how Italy has lasted so long without meeting financial difficulty. Its growth rate between 2000 and 2010 has averaged at 0.25% a year; a figure so low it was only surpassed by Haiti and Zimbabwe. Not ideal neighbours for the country of Caesar and Garibaldi. Furthermore, productivity only grew by 0.1% between 2001 and 2005 and actually shrank by 0.8% between 2006 and 2009.  

What do you need to create this kind of economic sclerosis? I would say the base of this recipe requires an ageing demographic. In Italy, the birth rate has fallen much faster than in other European countries, to 1.3 children per family. Thus while the number of those over the age of 65 has markedly increased, by 10.4%, the number of those up to the age of 14 has only grown by 1.9% (2001-2006) . With age often comes seniority and as in most countries, Italy’s businesses, large and small, are owned and run by the boomer generation. However, their hold has become entrenched and to the detriment of meritocracy in Italy. Often the younger generation find they are too young to be promoted or that their superiors will take the lion’s share of their success, financial or otherwise. As a result, large numbers of ambitious young Italians leave the country every year in search of greater opportunities. In fact, Italy is the only rich European country to be a net exporter of graduates.  The old rule the roost, and the potentially productive youth flee to other European countries to advance their careers. However, well-entrenched this age bias is in business, it is further fortified by the government. Italy spends 14% of its GDP on pensioners, more than any other European country. In 1994 Berlusconi came to power in Italy promising pension reform; 17 years on they have never happened.

To this base you need to mix in a variety of what I have termed ‘tyranny of the minorities’. This is really just a sprinkling of different cartels and entrenched business interests which stop Italy’s economy from working in a productive manner. In fact, almost every industry in Italy has their own lobby group and set of protections. An example of this, (highlighted in the Economist’s special report on Italy last summer) is taxi drivers. In Milan, it is near impossible to find a taxi. This is odd given that Milan is probably Italy’s most dynamic and wealthy city; surely demand is high enough? The reason is a classic constriction of supply; taxi drivers in Milan must pay a large amount of money for a taxi licence (€200,000 in 2003) which thus limits the number of cabs driving around.

In this way privileges are confined to the lucky few, at the expense of a taxed majority. However, it particularly hurts Italy’s youthful minority who suffer disproportionately high levels of unemployment. In November of 2011, Italian youth unemployment was at 30.1%, well above the 22% Euro zone average. The protectionist measures adopted by government which enshrine these hard-to-get/hard-to-lose jobs in guilds and cartels ensure that the young are kept out of various professions. Indeed almost the only way to get a job in Italy these days it through raccomandazioni, a series of family connections within the labour market.

There you have it, hopefully a rich but simple entrée; an Italian crisis. I’d be interest to hear if anyone has a recipe for the solution!