La lezione del ministro Visco alla Columbia University
Columbia University, New York
Department of International Affairs
Mr. Vincenzo Visco
Minister of Treasury
October 26, 2000
Four years ago, in the month of June, the Prodi government presented its first economic and financial planning document since the electoral victory of the center-left coalition in April 1996.
It contained the guidelines for the budget consolidation strategy that the country was to follow and stated that "the possibility of expediting the timelines for meeting the Maastricht convergence criteria" would be considered by the government in the following fall in the light of the current economic and financial developments.
Amid the general skepticism as to the possibility for Italy to apply for admission to the single currency with the first group of countries, that sentence, which the then Minister of Treasury Mr. Ciampi had deliberately included, went practically unnoticed. However, in the space of a few months and as a result of changes in the political situation, it allowed to pass the measures that proved to be crucial for Italy's subsequent participation in the monetary Union.
Four years later - with just a few months to go before the next general election - Italy looks very different from the country pitilessly depicted in that document.
This year, the public deficit will be 1.3 per cent of GDP, the lowest in over 35 years; in 1995, the deficit was 7.6 per cent of GDP ; in 1990 it was 11 per cent .
At the end of this year, the public debt will be about 112 per cent of the gross product ; in 1995 it exceeded 123 per cent of GDP, with an increase of more than 20 points as compared to 1990 and of 65 points as compared to 1980.
The long-term interest rates differential between Italian securities and German ones is currently around 35 basis points. In 1995, the differential was of 530 basis points on average; in 1990 it was of 480 basis points. Over the past few months, consumer prices have registered a rate of increase near to 2.6 per cent; it is higher as compared to last year, mainly on account of the prices of energy products, but is half compared to 1995 (when the inflation rate was at 5.2 per cent) and more than half as compared to 1990 (when it was at 6.5 per cent).
Italy's gross domestic product is expected to grow around 3 per cent this year and in the next four-year period: a rate that is more than double as compared to last year and almost three times higher than the average registered in the nineties.
In April 1996, the number of employed workers was 20,101,000. In July 2000, there were 21,095,000 employed workers, with an increase of 994 thousand workers (230 thousand of which in the south of the country ).
Between April 1996 and July 2000, the unemployment rate has dropped from 11.7 per cent to 10.5 per cent.
In 1999, the gross operational margin of businesses was around 35 per cent of the value added as against 31 per cent in 1992.
No doubt, some of this figures may still be regarded as unsatisfactory when seen, for example, from the U.S. point of view and in the light of remarkable economic achievement of the Clinton administration. However, when we look at these figures from the Italian perspective, we are undoubtedly forced to conclude that the process of fiscal consolidation undertaken since 1992 represents the most important structural reform implemented over the past few years. It will change and is already changing profoundly the way in which the Italian economy works and, in a context of monetary stability such as the one that is entailed in the single European currency, it is sure to change the behaviors, habits, expectations and prospects of the Italian people.
The budget consolidation has put an end to more than 20 years of financial disorder that strongly influenced the Italian economy and political life, which almost reached the point of collapsing on at least two occasions. One should not forget that at the treasury bonds auction held at the end of August 1992, securities amounting to 3,300 billion lira had remained unsold and that in the following weeks rumors of extraordinary measures triggered a wave of cash withdrawals while, on the foreign exchange market, the lira reached and exceeded 920 lire to the Deutschemark as against 750 lire to the Deutschemark registered in May. Nor we should forget that at the end of March 1995, the exchange rate of the Deutschemark had reached 1,237 lire and the yield of ten-year government securities had come close to 14 per cent.
This has been a process of macroeconomic adjustment that also has never lost sight of the need to defend the most exposed positions and the rights of the weaker classes. Between 1996 and 2000, gross real wages should grow by 4.5 per cent, slightly more than labor productivity. This has allowed for a recovery, if partial, of the purchasing power of employees income and has started a recovery of the dynamic of the households disposable income. Between 1996 and 2000, the latter is expected to grow by about 3,0 per cent, due - among other things - to social and fiscal policy choices which have supported significantly the living conditions of large households, low income households and elderly people, thus helping to curb social and economic marginality and income inequality.
By choosing a tight fiscal stance, the country has made, first and foremost, a choice in terms of intergenerational equity. Until the end of 1990, the instability of Italy's public finance was such that the increase in taxes levied on all generations - current and future - which was necessary in order to restore equilibrium, exceeded 60 per cent. Today, intergenerational equity has been almost entirely reinstated.
The macroeconomic conditions in which Italy is currently operating are the same as the ones that characterized the phase of major growth that the country experienced in the wake of the second world war : a fixed exchange rate, a stable price level, a nearly balanced budget, low interest rates, within an economic framework characterized by far-reaching and widespread innovation processes.
These conditions, which are conducive to the accumulation of physical and human capital and to long-term economic choices, along with the further development of structural reforms, can guarantee a phase of sustainable and steady growth, leaving behind the troubles of the nineties.
The fiscal consolidation process and structural reforms
Unlike what many feared and believed, the consolidation of public finances appears to be sound and structural. In terms of percentage of the potential product, the European Union expects the structural public deficit of the countries of the Euro zone to go from -0.9 per cent in 2000 to -1.3 per cent in 2001, while as regards Italy, the structural deficit is expected to stay put at a lower level (around -0.7 per cent) in 2000 and 2001.
Therefore, if no mistakes are made and the budgets are kept under control at the central and peripheral levels, the time of adjustment measures can be considered finally over.
The country has obtained these results by pursuing consistently a clear economic policy. Unlike other European countries, in the seventies and especially in the eighties, Italy had accumulated huge structural lags. The risk of an economic slump in the nineties further slowed down the country's necessary process of modernization. The "missed opportunities" thus alternated with delays and deferments.
During the past four years, the Administration has tried to make up for this lost time, at least in part. A series of important structural reforms have been introduced, they have started to yield results and will continue to do so in the years to come.
The fiscal system has been radically changed, extending the taxable bases, reducing the formal tax rates, simplifying measures and procedures, introducing leading edge information technology and electronic systems, with a percentage of telematic transmissions of the fiscal declarations higher than here in the United States (over 80%), reorganizing the state bureaucracy and bringing about a substantial reversal of trend in the behavior of the tax payers.
Fiscal federalism mechanisms have been introduced. They are consistent with the ones in force in the leading Federal States (such as the United States and Germany) and can be easily adapted to the possible changes in the direction of extending additional tasks and functions to the decentralized bodies. In the meantime the process of devolution of functions, personnel and resources in favor of Regions and public bodies is under way, within the limits set by the italian Constitution in force.
At any rate, the budgetary constraints, which are the necessary corollary of the assignment of functions and resources, must be effective, operative and binding, in line with the principles of responsibility typical of a federal structure.
The reform of the Public Administration has taken off and is starting to show the first visible results in terms of an improvement in the efficiency and quality of services. School and University autonomy has paved the way for the modernization of our education-training system, which had reached a very critical level. The health care reform was built confirming the fundamental right of every citizen to his health and the ethical commitment of the health operators and industry.
An organic family policy has gotten under way, and it has allowed, among other actions, to increase fivefold allowances for dependent children. Significant investments have been made with a view to enhance our cultural heritage and to make cultural resources more accessible and more exploitable for non-profit and for-profit organizations.
Important liberalization and privatization processes have gotten under way, freeing strategic sectors of the economy from the direct control of the State, increasing the opportunities for investments of the private sector and creating new employment occasions. This process will continue to produce further results in the months and years to come.
The development of financial markets and the transparency of corporate management have been stepped up. The public banks reform has been completed, also favoring the birth of important players in the non-profit sector.
By bringing the public sector back to its fundamental tasks, favoring the competitiveness of businesses, and protecting minority shareholders, space has been cleared for small and medium-sized enterprises and entrepreneurs.
By decentralizing powers and resources, the Regions have been driven to combine freedom and responsibility.
By liberalizing services, opening them up to private capital and drastically changing their management, a figure unknown to Italian politics - the consumer - has gained a central position and real wages have been defended.
By steering the Italian production system towards rapid transformation, the possibility of slipping back to the closed capitalism that characterized the recent decades has been ruled out and the road has been paved for a more open and competitive capitalism.
By reforming the labor market, new opportunities have been offered first of all to those who had none and to women in particular.
By changing assistance, supporting families, reforming the welfare state, the weakest have been defended.
The positive consequences of the recovery are evident in the current trends of the Italian economy. Growth has picked up at a fast pace and Italy is recovering the cyclic lags with respect to the other European countries (a similar process is under way in Germany, a country which in the nineties had experienced significant structural traumas, also if for completely different reasons).
The growth of the gross domestic product in the first and second quarters of the current year averaged to 2.8 per cent on an annual basis, very much in line with official estimates for the year 2000 and slightly below official projections for the years 2001 to 2003.
This year, the growth rate differential between Italy and the countries of the European Union will be 0.6 per cent, that is half as compared to the 1996 figures. It will drop to 0.2 points in 2001 and will be zeroed in 2002.
Italian inflation diverges only slightly from the average of the Euro area : the differential, which was of 0.9 percentage points in 1999 (0,5% with respect to the EU), is expected to be nearly zero in 2001. Anyway, just in last September, the differential was inverted with Italy at a 2,6% and the Euro zone at 2,8%. Finally, in October, Italian inflation has diminished again reaching 2,5%.
Admittedly, during the past ten years, the growth rate of the gross domestic product has remained below the average of European countries (with a gap of half a percentage point as compared to the European union) while the inflation rate and the unemployment rate exceeded the corresponding annual average of the European Union (in both cases by roughly one percentage point). Many have attributed this effect to the consolidation policies pursued.
Budgetary policies aimed to achieve macroeconomic convergence cannot fail to entail restrictive effects ; nevertheless, they are a necessary condition for an adequate and sustainable development. Furthermore, a country that in the space of a few years has risked a financial crash several times, has experienced two subsequent devaluation's which have led it to almost halve the value of its unit of account and is consequently considered hardly reliable and credible by the international community, which has accomplished an overall adjustment between 1992 and 1997 equivalent to 7 points of the gross product, cannot reasonably hope to achieve brilliant results in terms of growth. And wondering what would have happened if the country had not gone through all this is not only scientifically questionable but also and especially pointless.
Therefore, it is not by chance that the difficulties of the Italian economy came into view ever since the early nineties and it is not by chance that they finally appear to be overcome. Rather, what is surprising is the fact that over the past four years growth has remained positive despite the effort made. This is mostly due to the demand-side measures introduced by the government to support purchases of consumers durables in 1997, real estate restructuring (as of 1998) and fixed investment in equipment and machinery. All of these measures have had considerable effects, avoiding the risk of a serious recession which otherwise might have occurred.
Employment and incomes policy
Even more remarkable is the fact that in such a dire situation, employment has grown : as was previously stated, in the period between April 1996 and July 2000, about a million jobs were created (which will presumably rise to over 1.1 million by the next general election in the Spring 2001). The roughly 550 thousand jobs shed between October 1992 and the first months of 1996 have thus been more than recovered. The employment rate has gone from 50.8 per cent in April 1996 to 54.1 per cent in July 2000 (and that of women has grown significantly more than the national average). In many Regions of central and northern Italy, conditions of full employment basically prevail (and the South has finally recovered the employment levels of the second half of 1992).
The measures aimed to increase the flexibility of the labor market introduced during the last four years have therefore produced important effects, paving the way, in many cases, for full-time permanent employment. The measures aimed to bring down labor costs have also had a positive effect. Moreover, the black economy is starting to emerge and also if such a process is still limited it is destined to grow in the forthcoming years.
In the past few years, businesses have amply recovered their profit margins. As we have seen, today their operating profitability is much higher than that one registered in the early nineties. This has surely been favored by the drop in inflation, interest rates and labor costs as well as by the tax reform.
A two-tier system for corporate taxation has been introduced in which income gains attributable to increases in own capital are subject to a lower tax rate of 19 per cent, while the ordinary 37 per cent corporate tax (to be reduced to 35 per cent by 2002) continues to apply to residual profits. Special temporary concessions have been granted to companies admitted to the stock exchange. The response of businesses in terms of greater investments has been positive. However, it will have to increase, become more marked and diversify (investing in the fields of research and training) in order to guarantee a recovery in productivity and competitiveness that is adequate with respect to the system of restraints imposed by the monetary union.
Incomes policy has contributed significantly to the recovery of the nineties and to the inflation drop. The contribution of trade union organizations to these developments has been significant, and indeed decisive. An adequate understanding of the further steps to be collectively taken in order to tackle the outstanding issues on the road to the complete modernization of the country is nevertheless necessary.
The development of the South of the country
A strong economic and social differential continues to exist between the regions of Central and Northern Italy and those of the South and the islands. Just to synthesize, the unemployment rate in the South is still three times higher than the one in Central and Northern Italy. This has always represented a challenge as well as an opportunity.
It is not by chance that the growth scenario for the next years features a concentration of growth in the Southern regions where the output gap is greater and the chances of inflation drives are therefore lower. This year, in the South the GDP is likely to register an increase of more than 2 per cent, and in the following years, there are good reasons to expect the Southern economy to progressively draw near the European average development rate, reach it in 2002 and subsequently attain values not lower than 4 per cent. Such scenarios are quite reasonable. Tourist flows and exports in the South have been growing steadily since the early nineties and, after a downturn, there has been a recovery both in fixed gross investment and in direct investments from abroad.
Finally, available information suggest that , already in 1997, the GDP gap per inhabitant of the South as compared to that of Central and Northern Italy was significantly reduced, reverting a decade-old trend.
A crucial element of this virtuous trend is the actual implementation of the program envisaging the expansion and advancement of public investments which represents an extraordinary opportunity in terms of reforming the behavior of the central administration, the relations between government levels and which will benefit the entire country. Such a program, which is currently supported by the European Community Support Framework 2000-2006, will help to reach in 2002 a volume of public investments in the South equivalent to 46 per cent of the total of capital spending and on account of which in the past two years the capital spending growth rate in the South has been higher than that registered for the entire country: roughly 15 per cent in 1998 and roughly 20 per cent in 1999. In the seven year period 2000-2006 the South will thus be able to rely on funds amounting to some 98 trillion lire - inclusive of national co-financing - of which some 14 trillion just for 2000. The Regions are entrusted with the management of 70 per cent of these funds.
The way ahead
Summarizing, all the above demonstrates that the change that took place in Italy during the past four years has deeply modified the structural pillars of our country. Thanks to this modification we can now finally see a possible solution for the tasks and goals still to be reached, such as the definitive removal of fiscal, administrative and financial obstacles, of the barriers to access to the labor, professions and services markets, of the impediments to the forming of human capital and to the production and dissemination of knowledge.
In the past, clumsy attempts were made to cover up such disorders by means of an off-hand foreign exchange policy and irresponsible choices in the area of public finance. We built a system that prevents this to happen again.
Among our next priorities is to strengthen Italian competitiveness (understood as the competitiveness of the whole system). In a world of fixed exchange rates, businesses can no longer expect the periodic and beneficial contribution of devaluation, nor can they hope to regain price competitiveness just by controlling labor costs and demanding tax cuts. To begin with, they have to invest more not only in equipment and machinery but especially in research and training. They have to know how to grow, and use the tools that modern finance offers, internationalize, compete. In this prospective we expect the Italian trade unions to be a partner of the administration in the building of the necessary conditions to reach this strategic goals, among which is a new model of flexibility of the employment market.
The Government will continue to be engaged in the creation of all necessary conditions for businesses and for the market to operate at their best: by continuing the liberalization processes and accelerating the privatization programs.
It will also be necessary to lay down some few rules of the "new economy" and build up the human capital and infrastructure required in order for it to develop.
In this framework the administration will proceed in the evaluation of the issues pertaining to social security spending. With special reference to the pensions this issue will be confronted following the guidelines set in the reform carried out in 1995 that will be actualized with careful attention to developing demographic parameters and with specific measures that will encourage the development of pension funds.
In the next years the labor market in Italy will have to be able to meet with greater fluency the specific needs of enterprises and guarantee an extensive labor supply especially - if not exclusively - in the south of the country. But we are not starting from scratch : employment figures provide a sufficiently clear picture of what has already been achieved. It is necessary to continue to move in this direction, combining flexibility and rights, as has been done thus far.
Finally, the weight of the public debt. Over the past five years, the debt has dropped by roughly 10 percentage points vis à vis the GDP; however, it still accounts for 112 per cent of the product, which is about double as compared to other European countries. This continues to create a burden in terms of debt servicing which is almost double that of the other countries that Italy has to compete with; in 1999 it was 7 per cent of GDP as compared to an average of European countries of 4.1 per cent.
It means that every year the Italian economy is deprived of 60-70 trillion lira more than our European partners. When we will dispose of such resources freely, a goal that we plan to reach in few years, we could bring our fiscal and contributory burden (which today is equivalent to 43.7 per cent of the gross product and below the average of the Euro area, namely 43.9 per cent) to lower levels close to those prevailing, for instance, in the United Kingdom (38.4 per cent) or in Portugal (38.4 per cent) or, in alternative, we could bridge the gap that currently separates us from the average of the Euro area in terms of ratio between primary spending (preferably for investment in broad terms) and gross product (currently at 38 per cent in Italy against 40.6 per cent in the average of the Euro area).
To reach this fundamental goal it is a matter of knowing how to set the priorities well and obtaining the adhesion and consensus that come from awareness. Looking for shortcuts, miraculous or amazing solutions, as sometimes I hear in our electoral campaign, is useless or unrealistic : the objective figures inexorably reveal that we are forced to come to terms with our past, that is to say with the debts accumulated in the eighties. It is pointless to talk about the blames and responsibilities of this situation, which however still casts its shadow over the present and part of our near future.
However, we have reason to be confident because just seven years ago the weight of debt servicing was twice what it is today. This has been one of the main results of the consolidation process. All we can do now is continue to tread the road that has been paved, certain that it is the only one possible, the only right one, the only one that can lead us to full employment in 7-10 years.
This objective can be reached again, forty years after the "italian economic miracle".