Printer Friendly

Chapter 3: Supporting regulatory reform.

Even prior to the recent financial turmoil, Italy was being left behind by economic growth in many other countries. Low productivity growth has a number of causes, some of which have their origin in poor or excessive regulation, public services and administration, and the legal system, which an ISAE report refers to as the "non-material" infrastructure. As the OECD Regulatory Reform Review of Italy to be published this year describes, progress has been made in improving regulation, although the results have yet to show themselves in productivity growth. Continued reforms are needed, and must be supported by a more efficient public administration and more purposeful use of Regulatory Impact Assessment and exercises such as the Spending Reviews by the Technical Committee on Public Finance, in parallel with efforts through the Taglia Legge and Taglia Oneri programmes.

**********

The first Regulatory Reform Review of Italy, published in 2001, applauded the progress that had been made during the 1990s, while urging action in a wide range of areas to allow competition and more market-friendly regulation to promote stronger growth. Since then the trend to increased deregulation has continued, partly as a result of incorporation of EU directives into national legislation, and partly following two important laws adopted in 2006 and 2007. Despite this continuous improvement in regulatory indicators, overall productivity performance has improved very little. Some potential explanations for weak performance can be found in the structure of the economy.

This chapter reviews a number of possible structural explanations, especially their links with competitive conditions and regulatory policy. Using a model developed to assess the links between OECD indicators of product market reform and growth, it presents a quantitative assessment of the impact that further reform might have. There are sometimes gaps between the intentions of policymakers, the letter of the law and actual regulatory practice or performance of public services; the chapter suggests that improved functioning of parts of the legal system and public administration could help to close these gaps.

Low growth and the structure of the economy

Although, in common with a number of other European countries, Italy's GDP per capita was no longer "catching up" with the United States by the late 1980s, it did maintain its relative position throughout the 1990s. But while the other large European economies continued broadly to maintain their relative position into the new century, Italy began to fall back quite abruptly after 2000 (Figure 3.1, Panel A). That this phenomenon reflects productivity growth differentials is clear from the relative decline in output per person employed after 2000 (Figure 3.1, Panel C), less visible in terms of output relative to the population of working age (Figure 3.1, Panel B).

Low labour market participation

In recent years, per capita GDP has been affected by the level of labour force participation. The employment rate in Italy is well below average for OECD countries. Measured on the population aged 15-64, only 59% of Italians are employed compared with an EU average of 67% and an OECD average of 69%. For males aged 25-54 the employment rate is similar to the EU and OECD averages. But all other age-gender groups show relatively low employment, including prime-age females, although the difference there is actually somewhat lower than for both older females and the 15-24 age group (Figure 3.2). The gap between female and male employment has been falling faster in Italy than in most other countries, but it still remains relatively high by OECD standards, even for prime age groups (OECD, 2008). For the other groups identified in Figure 3.2, Italy is one of the 3 or 4 countries with the lowest employment rates in the OECD.

The relaxation in restrictions on temporary employment has encouraged employment growth, but has also accentuated the duality in the Italian labour market, because it has been very difficult to change any of the employment protection legislation (EPL) for workers on permanent contracts. Notably, the labour code establishes the basic rules that make dismissals in large companies relatively difficult; its implementation is a source of rigidity in that part of the labour market, even if a relatively small proportion of the labour force, perhaps one quarter, is directly protected by it. (1) Opinion on the impact of EPL has evolved in recent years; while early studies claimed that it increased overall unemployment, this is not now thought to be the case for prime age workers. But EPL can reduce demand for workers from groups at the margins of the labour market, and this may well be a contributory factor to the low employment rates for some of the groups mentioned above.

[FIGURE 3.1 OMITTED]

[FIGURE 3.2 OMITTED]

Despite the attention it receives, employment protection does not seem to be outstandingly strict by comparison with other OECD countries (Figure 3.3). The fact that temporary contracts have been an important factor behind employment growth in recent years, despite the apparently relatively strict conditions attached to such contracts, does suggest that regular EPL is quite constraining because at least at the margin many employers seem to prefer such temporary contracts; less rigid pay structures and, in certain cases, lower social security contributions may also make them more attractive. A survey of workers suggested that most workers would prefer a labour market where it was difficult to get a job but where protection was strong to one where protection was weak but jobs were easy to find (Boeri, 2002). The main reason why the indicator for regular employment in Italy is relatively high is the provisions on collective redundancies, whereas other aspects of employment protection related to required notice and individual severance pay are among the least stringent of all countries.

For the older age groups, (2) low activity rates are associated with a pension system which gives strong incentives to retire at an early age. Major reforms have resulted in a new system which is being progressively introduced and participation rates of older workers seem to have begun to respond, but the phasing in of the new arrangements is slow so that the incentives are still skewed against continued employment for older workers. For younger people, as in most countries, low activity is strongly associated with the level of education, but also with mobility; some parts of northern Italy have consistently maintained high employment rates with shortages even of unskilled labour, but migration of young people from areas of high unemployment has not helped to fill the gap. This is in contrast to the strong mobility shown in the period after the Second World War--admittedly in response to much higher income gaps--and contrasts with current immigrants, who appear more ready to move to areas with jobs. In part the reluctance to move may be related to aspects of regional policy where efforts to stimulate the economy of the south and the islands have tended to have the effect of generating higher levels of public sector employment in those areas. However, it has proved impossible to negotiate regionally differentiated wages in the public sector, even though both the cost of living and wages in the private sector are much lower in the south than in the north. As a result, for an unemployed person in the south the prospect of eventually getting a well-paid public sector job may outweigh the incentive to move to a private sector job in another region.

[FIGURE 3.3 OMITTED]

Female employment rates and average wages are both relatively low, while the level of education of younger females measured in terms of years spent in full time education is, for the new generations, somewhat higher than that of males. While low educational attainments may explain activity rates among women over 45-50, low female participation rates even among the youngest cohorts may have several other causes. Low provision of formal child care services means that the opportunity cost of work for mothers with young children is higher than in many other countries; this is also likely to be an important factor behind relatively low female participation (see for instance Jaumotte, 2003, D'Addio and Mira d'Ercole, 2006, OECD 2007). Implicit discrimination might be another possibility for low activity rates among Italian women, though there is no solid evidence supporting this explanation. OECD (2008) shows that effective legal protection against discrimination may be significantly weaker in Italy than in most countries: while the basic legal provisions are similar, there is little provision for protection of a person who actually makes a complaint, or of witnesses, and this may explain why complaints are rather few. While reinstatement is a right in the case of unfair dismissal, rights to any additional monetary compensation are unclear so the incentive to complain is probably low.

Competitive conditions on product markets can also affect employment: lack of competition allows producers to exploit market power to gain economic rents, which may be shared with workers (Ichino, 2008). This of course benefits the employed but may tend to raise wages and therefore reduce employment. Cross-country empirical evidence supports this view (Conway et al., 2006), and there is corroborating evidence for Italy. For example, Viviano and Schivardi (2007) study regional variations in entry restrictions to retail trade and find that entry barriers have a negative and sizeable impact on employment growth.

Explanations for slow productivity growth

The growth in relative unit labour costs mentioned earlier, combined with low labour supply, might have been expected to encourage entrepreneurs to switch towards relatively capital intensive production. This would have the effect of raising recorded labour productivity, though it might not increase efficiency in the sense of total factor productivity. In practice, labour productivity growth has been low and total factor productivity appears actually to have fallen.

Potential explanations for low productivity growth in Italy since 2000 are easy to find but hard to evaluate empirically. Some data issues are important. A significant amount of activity takes place in the informal sector, so much so that the national statistical office corrects the official national accounts for this factor. However, it is much harder to estimate either the level or the growth rate of productivity when estimates of significant components of both employment and output are based on highly indirect methods.

Besides data and measurement issues, the following explanations can be considered:

* The industrial and export structure.

* The nature of the Italian family firm.

* Low educational attainment and inadequacies in tertiary education.

* The lack of innovation and R&D activity.

* The integration of large numbers of immigrants, and

* Regulatory barriers to growth.

This section briefly discusses each of these in turn, as background to the discussion of regulatory public administration reform in the rest of the chapter. One of the difficulties in understanding low productivity growth is the fact that the divergence between Italy and the other major EU countries appears to have been quite sudden, whereas most of the potential explanations listed above are phenomena that do not change very rapidly. An exception to this might be immigration; although immigration flows are spread over a number of years, the change from being a country of emigration to being a country of immigration was quite important, and in the late 1990s and early 2000s inflows of labour were so substantial compared with earlier periods that they qualify as a supply shock on the labour market.

The industrial and export structure

The slowdown in productivity seems to be quite generalised across economic sectors, so it is hard to attribute it to the experience of particular industries (Table 3.1). (Revisions to productivity data since Table 3.1 was compiled show that productivity growth, while weak, was somewhat stronger than shown by earlier data.) The Italian economy has traditionally been quite export-oriented, which in turn exposes the economy to international competition, generally thought to be an element in stimulating productivity gains in the longer run. The share of exports in GDP is comparable to that in the United Kingdom and France (Figure 3.4). In the short run, specific aspects of the export structure, either in terms of the goods and services involved, or the geographical composition of exports, may have an impact on demand that swamps the potentially stimulating effect of competition. Even in the longer run, a positive reaction can only be expected if the framework conditions for growth, discussed in subsequent sections, are appropriate.

[FIGURE 3.4 OMITTED]

On some measures, Italian export performance has in fact been weakening. When compared with the volume of demand growth in the markets it typically supplies, export volumes have been growing more slowly for some time (see Figure 1.2). With the rise of some large non-OECD exporters, such as China, most OECD countries have lost market share to some extent. On the other hand Italian exports have, on average, been rising in price relative to those of their OECD competitors so that their share of total OECD exports, though it did tend to decline during the 1990s, has been more stable since 2000 (Figure 3.4).

This phenomenon of rising relative export prices and falling relative volumes can be interpreted in different ways, aside from possible statistical artefacts (see Codogno, 2008, for an extensive discussion). (3) It may represent an active move by Italian entrepreneurs into more profitable product lines with higher value added, or it may be purely defensive as firms can no longer sell into certain markets. This adaptation of the Italian economy to the challenges of globalisation may reflect the strength of the made in Italy brand, which is not fully accounted for in statistics for patents and innovation. Another part of the process is likely to be Italian entrepreneurs moving production abroad: they have been particularly active in Romania, for example. Significant numbers of Romanians moved to north-eastern Italy to work in manufacturing industry, probably helping some companies to remain in low value-added production longer than otherwise, but the links between the countries now seem to have partially reversed as Italian entrepreneurs invest in Romania itself, moving some of the low value-added production out of Italy. While the magnitude of such "off-shoring" of capacity is not clear, it is at least one demonstration of an active entrepreneurial spirit in Italy.

The role of Foreign Direct Investment

However, results in terms of the attractiveness of the Italian economy in terms of Foreign Direct Investment (FDI) are less satisfactory. The total amount of FDI in Italy is small compared with that in other similarly sized countries. This is true not only in comparison with historically relatively liberal countries such as the United Kingdom, but also with France, for example (Figure 3.5). This has two implications. First it is a likely culprit for low productivity growth, since foreign investment is certainly one of the ways that new ideas spread internationally; secondly, it is at least suggestive of an environment that is difficult for foreign investors.

[FIGURE 3.5 OMITTED]

Besides the regulatory environment, discussed below, other factors such as tax policy, public administration and infrastructure, and the financial and corporate governance systems may also contribute to lower FDI inflows. Ichino (2008) presents a persuasive argument that, at least in a number of specific examples, FDI appears to be inhibited by just such a combination of interests, often including workers themselves (or, at least, their union and bargaining representatives), that combine to keep foreign investors out, and that the result is that potential efficiency gains are missed. (4) He attributes this in large part to the Italian industrial relations model, noting that this model is successful only "in a relatively closed and static national productive fabric". The 2008 cut in the standard rate of corporate tax from 33% to 27.5% may improve the attractiveness of Italy to FDI somewhat.

Entrepreneurship, dynamics of new firms and firm size

Another aspect of the industrial structure that is often highlighted in Italy is the high proportion of employment in small firms. Often these have been family firms. If small firms (or a sufficient number of them) nevertheless grew fast, their high numbers might be an advantage, but this does not appear to be the case. In practice, it is hard to separate discussion of why small firms are predominant from why this might affect overall growth.

One set of reasons put forward for the importance of small firms concerns explicit threshold effects in regulation, notably in labour law; others are related to some combination of corporate governance arrangements and the role of the state; and more "cultural" explanations are often advanced too. The cultural explanation--that Italian entrepreneurs themselves prefer their companies to stay small--is difficult to refute, but requires explanation itself. One possibility is that with a poorly functioning commercial legal system, growing beyond a certain point, where family and close personal connections can no longer serve to enforce contracts, requires a considerable increase in risk and costs of control In addition, bankruptcy until recently exposed entrepreneurs to risky criminal proceedings, often putting personal wealth at risk due to the low proportion of external equity in most Italian companies. This may have generated significant disincentives to expansion for risk-averse entrepreneurs. The 2006 bankruptcy reform and attempts to expand the role of external equity finance may help to reduce these disincentives in the future. Nevertheless, it will probably be some time before diffuse equity (where most large quoted companies are owned by large numbers of shareholders with few really dominant ones) becomes very important in Italy; the stock market is still dominated by established firms, where cross shareholdings limit the effective rights of minority shareholders, and a few newly-privatised companies (see Micossi, 2006, 2008). Giacomelli and Trento (2005) suggest that the basic ownership structure in Italian firms changed rather little between 2993 and 2003; family control is still prevalent, financial institutions rarely own or play a role in controlling nonfinancial firms, though cross-holdings among non-financial firms are still common. There has been some increase in foreign ownership however and, while the share of ownership accounted for by non-financial companies has fallen, that of holding companies has risen (Bianchi et al., 2005, Bianchi and Bianco, 2009).

In parallel to the relatively underused equity markets as a source of finance, venture capital has also been slower to develop in Italy than elsewhere, perhaps partly because of the traditional importance of personal or family control, perhaps also because of the perceived difficulties for foreign financial investors (Figure 3.6). Venture capital is nevertheless of growing importance.

[FIGURE 3.6 OMITTED]

As for the importance of corporate governance, the unusual nature of the ownership structure in Italian capitalism has been analysed in previous OECD reports (OECD 2005). (5) Holding structures tend to obscure beneficial ownership and to give some insiders a degree of control that significantly exceeds their share in ownership. For a long time, public policy did little to discourage this relatively closed ownership structure but since the late 1990s, as rules of transparency and investor protection have been increasingly brought into line with European standards, the situation has improved. For example, the use of pyramidal and cross-ownership structures has diminished, while the importance of coalitions of shareholders has risen. As OECD (2005) noted, however, it is taking time for actual outcomes to be brought fully into line with best practice, for example compliance with codes of corporate governance is sometimes more formal than substantial. Opposition to foreign control was in the past particularly clear in the banking sector, but this had become more relaxed even before the transfer in 2005 of responsibility for competition issues in the banking sector from the Bank of Italy to the Competition Authority, and foreign stakes have become quite significant (see Chapter 2).

At various times, the high proportion of small firms in the Italian economy has been thought of as either a strength or a weakness in the industrial fabric. Small firms producing in a highly flexible (perhaps because partially informal) environment, notably in industries such as textiles, leather and small scale engineering, were successful in supplying both domestic and export markets. But increased international competition has significantly reduced the advantage that Italy once had in low-cost production. One response has been the movement by some medium-sized Italian companies of all or part of their production to other countries. Another has been to concentrate more on lower volume niche markets. Either response can be highly successful for the companies concerned, but for the economy as a whole the labour and capital thereby released need to find new, efficient uses.

Such reallocation involves many mechanisms; two key ones are the creation of new firms and the rapid expansion of successful existing ones. (6) Steps to significantly reduce formal barriers to firm creation have been taken, though there is always uncertainty as to how quickly they may take effect; for example "one stop shops" have been developed to support the aim of reducing the time required to create a new business from the 23 days estimated for 2003 to 7 in 2007. These figures may not always be fully representative of the benefits of reform. The theoretical time that it should take was already down to 7 days in 2003 and the actual time taken had fallen to only 13 days by 2006 (ISAE, 2007) and the decline in cost was also smaller than the text of the regulations might suggest--but there has been significant progress, nonetheless. The 2006 reform of the bankruptcy legislation should make firm exits easier, too. In terms of actual demographics of firm creation and exit, in recent years Italy exhibits creation rates which were lower than Portugal, Spain and the UK for both Services and Industry, though higher than France and Sweden for Industry (Figure 3.7). If reforms could boost firm creation, the environment would clearly become much more dynamic, though the direct impact on overall growth in the economy is uncertain, as this has to do more with the prospects for expansion of firms than simply their rate of creation.

[FIGURE 3.7 OMITTED]

Specific threshold effects due to labour regulation do exist, but in practice they are relevant only for very small firms--those with fewer than 16 employees. Such firms are subject to less costly penalties for certain kinds of dismissal than larger firms. However, although some studies have shown that this does act to reduce average firm size, the effect is very small, barely noticeable, in fact (Schivardi and Torrini, 2004). (7) Even if this effect might be significant for some very small companies and for start-ups, it is probably not very relevant for the large majority of SMEs.

Some recent work nevertheless confirms the importance of avoiding constraints on the growth of high-performing firms. Arnold et al. (2008) present evidence that the association between the degree of regulation and overall productivity growth passes partly through the variation of firms' growth rates within a country; faster growing countries appear to have a narrower distribution of growth rates across firms, but with a significant "tail" in the distribution of high growth performers. In turn, the number of firms in this "tail" is linked to the degree of regulation and the importance of information and communication technology (ICT) in different industries. Regression analysis shows that poor performance of ICT-using sectors is, in turn, particularly strongly associated with high levels of regulation. As it happens, the introduction of ICT-related innovation in Italy has been particularly slow, and Italy is among the countries with a relatively wide distribution of growth rates and only a small high-growth tail. This corroborates the hypothesis of Arnold et al. (2008), and also suggests that recent trends in deregulation could have quite a significant impact in stimulating productivity growth.

Research and development

The slow introduction of ICT may also be linked to the research and development effort, another area where growth-related indicators are not favourable to Italy. The examples of Ireland and catch-up countries in central Europe show that low R&D need not prevent strong productivity growth. But in a high income country such as Italy, especially where foreign direct investment is not currently playing the role in transmitting new ideas that it plays in those countries, technical progress is likely to be quite dependent on domestic R&D efforts. Expenditure on R&D in Italy is low: slightly above 1% of GDP, compared with the OECD average of 2.3% (Figure 3.8, Panel A); this is true for both private and public sector research activity, with industry financing 40% and performing 50% of it. Italy is also among the OECD countries with the smallest number of total researchers--with fewer than 4 in every I 000 employees, less than half the OECD average (Figure 3.8, Panel B). Under-recording of R&D activity in small and medium sized enterprises, where it is often performed informally, may bias these figures down somewhat.

Measuring actual innovation is not straightforward and different indicators may sometimes paint a different picture (see OECD, 2006). The input indicators just mentioned unambiguously suggest a significant shortfall; one important direct output indicator (apart from lower overall productivity growth) corroborates this: 1.25 patent families are produced per million population, compared with an OECD average of almost 50, some forty times greater. Many studies have shown the strong impact of innovation on economic growth (see for instance OECD, 2003, for a comprehensive review). Del Monte and Papagni (2003) showed more specifically on Italian data that R&D activity is associated with faster growth, because it leads firms to successfully compete and thrive in product markets. Bronzini and Piselli (2006) also established a strong long-run relationship between regional total factor productivity, R&D, human capital and public infrastructure. Though human capital turns out to be the main driver, R&D activities produce significant regional productivity spill-over for neighbouring regions.

[FIGURE 3.8 OMITTED]

Research suggests a number of reasons why R&D activity in Italy is low and why innovation is slow. One explanation is the small size of Italian firms and the consequent difficulty of meeting the up-front cost of R&D with only limited access to external capital. Ughetto (2008) for instance finds that Italian firms use very little debt to finance R&D, even though debt is the main source of external finance for Italian firms, in the absence of significant external equity. Innovation therefore has to be financed mainly through internal cash flow. Ughetto (2008) finds that small innovative firms are indeed subject to significant financing constraints, while larger companies investing in R&D have easier access to external financing.

In most countries, a significant amount of R&D effort occurs in universities or research institutions that are part of the tertiary education sector. In Italy this sector is underdeveloped; indeed, it has been a concern for some time that Italy suffers a net loss of young graduates through emigration and that few foreign researchers appear interested in working in Italy In 2005, a decree authorised the Ministry of Higher Education to subsidise universities who wished to recruit researchers or professors from abroad, either foreign citizens or Italians who had worked abroad as researchers or in university education for several years; this programme has now ended, and it is not clear whether it had any permanent effect. Foreigners can also sometimes face obstacles in coming to work in Italy: for example the procedure for recognising foreign university qualifications can be cumbersome.

The role of education

Apart from the specific effect of low levels of research and development activity, low overall educational attainment in Italy is also likely to affect economic performance (see Sianesi and Van Reenen, 2003, for a comprehensive review; see also Chapter 4 of this Survey). Among the main established results, human capital, measured by years of education, has been found to increase productivity. A one-year increase in average education is associated with an increase in the level of output per capita of between 3 and 6%; some models interpret the effect in growth rates, with an extra year of education leading to an increase in growth of more than I percentage point. Increasing tertiary education seems to be more important for growth in OECD countries than lower levels.

The initial qualification and skills of founders of new technology-based firms (NTBFs) have been shown to be critical for the rapid growth of young firms specialising in "edge-segments" of the market (Colombo and Grilli, 2005). The role of human capital is both direct (providing the right managerial and technical competences for running a business) and indirect (facilitating the firm's access to external financing, which is usually more complicated for small firms). Bertoni et el. (2008) show, analysing a panel of Italian firms, that access to venture capital financing increases with the education of NTBF's founders, and that firms financed through venture capital grow the most. (8) This is particularly significant given that venture capital is still relatively underdeveloped in Italy (see Figure 3.6), perhaps itself due to a vicious circle linking low educational attainment and inflexible financial markets. More generally, cross-country evidence, on a sample that includes Italian firms, finds that management practices matter substantially for firms' productivity growth and a number of other business outcomes and education of managers plays a key role in efficient management (Bloom and Van Reenen 2007; Bloom et al., 2007).

The importance of these results is all the greater in view of the fact that the average level of educational attainment in Italy is among the lowest in the OECD area. Simple quantitative indicators of education show that only slightly more than 10% of the working age population has a tertiary degree compared with the OECD average of 26%; similarly, less than one person in three holds an upper-secondary degree versus the OECD average of two in five. The recent trend is more encouraging, nevertheless: Italian graduation rates in tertiary-A programmes (i.e. theoretically based) almost doubled between 2000 and 2005, making Italy one of the fastest human capital accumulating countries (OECD 2007a). Even if progress has been made, completion of tertiary studies remains insufficient: in 2006 the drop out was as high as 20% (stable from previous years). Duration of tertiary studies also continues to be extremely long, with 66% of graduates taking at least one year longer than the theoretical duration of the study programme (Istat, 2008). Both the drop-out rate and the duration of studies are significantly higher than in the OECD average.

At tertiary level, available indicators cannot easily compare actual educational achievements across countries. For example, the hypothesis that Italian students may take longer than those in other countries to complete their degree-level studies but actually learn more as well cannot be directly tested. Indirect tests such as calculations of rates of return to education and/or wage premia suggest the opposite--the returns to higher education in Italy are rather low, so spending a long time in it is particularly inefficient (Boarini and Strauss, 2007). At compulsory school level, however, a number of indicators are available, notably the OECD's PISA (Programme for International Student Assessment) survey which shows that average educational achievement among 15-year olds leaves much room for improvement. Another feature of Italian education is the wide regional variation in student performance. As both a cause and a consequence of long-standing regional imbalances in the labour market, schools and universities do not seem to produce the same results in the North and in the South of the country. Chapter 4 of this Survey discusses education in detail.

Immigration

A development related quite closely to the measurement difficulties mentioned above is the integration of large numbers of immigrants into the workforce. In practice this has been something of a success story for the Italian labour market and economy (OECD, 2005). Up to the early 1980s very few immigrants were present as Italy was historically very much a country of emigration. But this situation changed in the mid-1980s. Between 1995 and 2002, OECD (2005) estimated that the non-EU population rose by over one million, nearly doubling, with immigration accelerating particularly after 1998 when large illegal flows of Albanians and then Romanians were added to the "traditional" inflows from North Africa. The non-EU population has probably risen by another million since then. (9) Without this immigration, the total population would have been stagnant or falling. By and large, non-EU immigrants were relatively unskilled: many of them were certainly absorbed initially into unskilled jobs and very frequently into the informal economy (OECD, 2005). This was often for reasons of language and/or because they were resident illegally, even though they may often came from among the more highly qualified in their home countries.

The successful absorption of large number of immigrants into unskilled work probably reduced average productivity. The fact that Spain, whose experience with immigration was similar in many ways, also shows a similar pause in GDP per employed person is suggestive of the link between immigration and recorded average productivity. In both countries, immigration also appears to have been responsible for at least part of the considerable increase in average participation rates, as employment rose faster than the working age population, so that GDP relative to that population barely slowed in Italy and grew quite respectably in Spain.

However, the sectors where immigrants are the most concentrated (agriculture, construction, certain manufactures such as textiles, hotels and restaurants, and personal home services) do not systematically show a larger slowdown in productivity than in other sectors (see Table 3.1). There is no correlation between the growth rates, or changes in growth rates, in Italy and those in Spain, despite some similarity in their migration experience; this casts further doubt on the strength of a simple link between migration and productivity growth.

Progress in regulatory reform, 1998-2008

According to OECD indicators of product market regulation (PMR) there has been a significant movement in the direction of less restrictive regulation in Italy since 1998 (Figure 3.9). A large part of this improvement has been due to a decline in the importance of public ownership. Government ownership in electricity and gas companies has fallen substantially, and in other sectors the number of publicly-owned companies has fallen. The decline in indicators related to barriers to entrepreneurship is partly the result of implementing EU directives in national legislation, as opposed to "indigenous" initiatives. Since 2003, EU directives implemented in Italy have concerned: retail trade; transport; consumer protection; professional qualifications; electricity and gas; procurement procedures in water, energy, transport and postal services; treatment of foreign parties; and professional services. Having traditionally been rather a laggard in implementing EU legislation, Italy has caught up significantly since 2006. Indeed, in some areas (air transport, telecoms, electricity and rail) Italy has implemented directives faster than other countries.

[FIGURE 3.9 OMITTED]

The main relevant national legislation came in 2006 in decrees (known as "Bersani" decrees, after the then minister for economic development) reducing the level of regulation for a number of professional services and retail distribution (which had also been tackled in the first Bersani liberalisation decree in 1998). Important changes in professional services (which also serve to illustrate the degree of regulation in some areas) include the abolition of minimum fees for professions such as lawyers (maximum fees remain, although their effectiveness in promoting clients' interests is unclear), relaxation of restrictions on advertising, removal of some restrictions on how professionals can form corporations, and the end of the ban on forming multidisciplinary firms. Other potentially important legislation includes the setting up of the Legislative Simplification Unit in 2006, whose activities in identifying and removing redundant legislation and administrative bodies, and in finding ways to improve the quality of existing legislation and regulation, will however be felt through time rather than immediately. The government estimates that regulatory simplification in 2008 reduced the administrative burden for firms by 5 billion [euro].

Nearly all OECD countries have been liberalising regulation and therefore seen significant declines in their PMR score too, so that Italy still belongs to a group of countries with relatively restrictive legislation, but the difference between this group and the least restrictive group has shrunk considerably, on this measure, over the past decade. Improvements in one country can have spillover effects on other countries so that Italy should be benefiting from the decline in restrictiveness elsewhere as well as from that at home (Conway et al., 2006).

The PMR indicators cover a wide range of regulation. Italy scores least well in areas related to regulation of the professions but scores among the least restrictive countries when it comes to barriers to entrepreneurship, notably those related to transparency of administrative procedures. In some cases the low scores may be misleading when they refer to official targets rather than to actual experience, as the example of the time needed to register a public limited company, mentioned earlier, shows.

One reason for the difference between official targets and actual experience is that the "one-stop shop" system, intended as one of the tools for speeding up administrative procedures, is not working as well as had been intended. Formez (2006a) notes that an important justification for developing one-stop shops, whether for personal or business issues, is to offset what was seen as an increasing tendency for bureaucratic systems to generate new "complications" that can offset efforts towards simplification. But the same report notes that some users feel that in practice the one-stop shops have not affected the underlying administrative logic, so that instead of simplifying procedures it actually makes things more complicated, creating yet another level of bureaucracy; furthermore, although by the end of 2007 over 70% of municipalities had established one stop shops, less than 60% of these were operational. ISAE (2007a) recognises that moves towards simplification have made considerable progress, including through the operation of one-stop-shops, but notes that persistent problems--in the context of business activity--include excessive regional variation in regulations, the still incomplete one-stop-shop reform, inefficient co-ordination between different public agencies and the still excessive number of authorisations required. Aware of these shortcomings, the authorities have taken steps to further simplify procedures and a "second generation" of one-stop shops is intended to become the single public access point for administrative matters related to economic activity.

Another area where there may be a gap between the PMR indicator and actual practice is transparency. These indicators are partly based on questions such as "Are there systematic procedures for making regulations known and accessible to affected parties?" or "Is there an explicit programme to reduce the administrative burdens imposed by government on enterprises and/or citizens?" These are both true in Italy, contributing to the low score, but the fact that programmes are in place does not mean they are working well. As far as accessibility is concerned, more and more information is now available online, and many administrative procedures can be started on the internet, although Italy's slow introduction of IT generally means that practice (in both public and private sectors) still lags somewhat behind other countries. It is important to ensure that administrative practice adapts to take full advantage of the new technology. Measures that have been taken to improve public access to information through the internet, such as the programme to develop a public database of all existing legislation and programmes to improve access to information through the one-stop shops, need to take account of the practical obstacles to implementation, as well as the need to ensure that the parts of the public administration charged with implementation have the fight skills and incentives themselves.

As ISAE (2007a) signals, the increasing amount of rule-making responsibility that has been devolved to the regions can also act to impede simplification, at least in a transitional phase. OECD (2009) provides further information in a chapter devoted to the problems of "multi-level governance", and suggests that in some sectors at least, decentralisation is multiplying the number of bodies issuing regulations.

Quantifying the effects of liberalisation

This section looks at the potential economic benefit from reducing regulations. (10) Inappropriate regulations can affect the productivity performance of an economy in many ways, discussed in a voluminous literature including Conway et al. (2006) and Arnold et al. (2008). This research provides empirical evidence for a negative relationship between product market regulation and productivity growth in OECD countries. Applying these findings to the new vintage of OECD product market indicators provides illustrative, model-based, calculations of the impact of regulatory reforms on economic performance in Italy. (11)

A modelling approach

This section presents the results of four simulations of a model developed in the OECD (Box 3.1):

* The first assesses the impact of changes in product market regulation in Italy in the recent past on productivity.

* The second estimates the potential effect of adopting "best practice" regulation (12) in all non-manufacturing sectors of the economy on future labour productivity.

* The third is similar to the second except that it adopts a less ambitious benchmark, setting Italian policy to that of the 75% percentile among EU countries in 2007.

* Finally, a fourth set of simulations illustrates the benefits from the adoption of best-practice regulation professional services, electricity and gas, and retail.

Overall, the results show that product market regulation to date should have had some impact on labour productivity in Italy, and that gains from feasible future reforms are much greater. The rest of this section presents some detail from the simulations.

Evaluating the impact of past reforms

The reforms adopted between 1998 and 2007 are estimated in the first simulation to have increased labour productivity by 2 per cent, of which 0.36 per cent is accounted for by policy changes between 1998 and 2003, 1.6 per cent for the period 2003 to 2007. This compares with current national accounts estimates of essentially zero productivity growth over this period. These gains are rather small, considering the relatively large falls in the aggregate PMR indicator over this period.

Aligning the regulatory framework in non-manufacturing sectors to international best practice

According to the model, aligning Italian regulatory standards on current OECD best-practice in all non-manufacturing sectors (13), the model predicts that Italy could expect an additional increase in productivity of 14% over the next decade (Table 3.2). Table 3.2 also compares results for a number of other countries, showing that the potential benefits for Italy are relatively high. Cross-country differences in the potential benefit of a reform can be due to differences along three dimensions: how far a country is away from international best practice in regulation on average, in which sectors regulation is particularly behind and the industry structure of the economy.

It is asking a lot for a country to adopt best practice in all sectors. An illustrative simulation of a more realistic reform considers a scenario in which Italy catches up to the 75th percentile of all EU countries in 2007. Surprisingly, the expected productivity increase turns out to be essentially the same as in the previous exercise, for two reasons. First, countries near best practice in particular sector indicators are somewhat bunched in the actual level of regulation. The 75th percentile is thus not always very far from best practice, even though it maybe some way down the ranking. On the one hand this means that the absolute effort required for Italy to get the 75th percentile may not after all be much less than that to reach best practice; on the other hand, it shows that a significant number of countries have managed to get close to best practice, so that it may not be so difficult for Italy after all. The other reason is more directly related to the model. Since it is a model based on catch-up, and the tendency to catch up is stronger the further a country is from best practice, the marginal gain from liberalisation declines the nearer the country is to the "leader".
Box 3.1. The model used for the simulations

The set of quantitative simulations presented here evaluates the
labour productivity impact of hypothetical regulatory reform in
non-manufacturing sectors, using an empirical model of labour
productivity based on the work of Aghion and Howitt (2006) and
Conway et al. (2006). The model was estimated on industry-level
panel data for 20 sectors in 20 OECD countries, over the period
1981 to 2003. Given the dynamic nature of the model so that there
is a gradual adjustment of productivity to policy changes, the
impact is calculated over a 10-year period after the change.
Because the model is based on "catch-up" behaviour, a baseline
estimate of what productivity growth in each country would be in
the absence of policy changes is required; for Italy this baseline
assumes that labour productivity in Italy would rise by around 5.9
per cent over the next decade.

The simulations proceed in two steps. First, the simulated policy
changes are defined at the level of sector-specific regulation
indicators for each non-manufacturing sector. These changes in
service sector regulation are translated into corresponding
indicators for each sector of the economy, including manufacturing
sectors, on the basis of input-output relationships. This captures
the idea that a sector that relies relatively heavily on inputs
from a given non-manufacturing sector is likely to be affected
relatively strongly by regulatory changes in that non-manufacturing
sector. These are the indicators referred to as regulation impact
indicators in Conway et al. (2006). Unfortunately, the specific
legal or regulatory changes that are behind movements in the
indicators cannot easily be identified.

In the second step, the impact of this reform on labour
productivity growth is simulated for each sector of the economy
using a dynamic empirical model. In the empirical model, labour
productivity growth in a given sector and country depends on its
ability to keep pace with the growth of the same sector in the
country with the highest sector-specific level of labour
productivity (the productivity leader) by either innovating or
taking advantage of technology transfers. Aghion and Griffith
(2005) stress the role played by institutions that promote (or
hinder) firm rivalry and/or entry of new firms in raising (or
curbing) incentives to enhance productivity. In the model presented
here these institutions are proxied by the OECD indicators of
anti-competitive regulations described earlier.

There is growing evidence on the particular role for productivity
growth of industries that are intensive in the use of information
and communication technologies (ICT), and to some extent the recent
disparities in productivity growth across OECD countries reflect
differing degrees of adaptability across countries to recent ICT
shocks (Triplett and Bosworth, 2004, OECD, 2003b, van Ark et al.,
2002). To allow for this particular role of ICT-intensive sectors,
the model distinguishes between the effect of regulation on
ICT-intensive and non-ICT intensive sectors. The empirical findings
obtained in the estimations suggest that there is a stronger effect
of regulation in ICT-intensive sectors.

The labour productivity effects of the simulated regulatory reform
are calculated for each sector separately, and then aggregated to a
weighted average at the economy-wide level. The estimation equation
used in the empirical model is the following:

[DELTA]ln[LP.sub.ijt] = [delta] ([DELTA]ln[LP.sub.ijt.sup.leader]) +
[sigma] [prodgap.sub.ijt-1] + [Y.sub.1] [PMR.sub.ijt.sup.ict] +
[Y.sub.2] [PMR.sub.ijt.sup.non-ict] + [alpha]
([PMR.sub.ijt-1.sup.*] [prodgap.sub.ijt-1]) + country/industry
dummies + time dummies + [[epsilon].sub.ijt] with [epsilon] ~ N(0,
[SIGMA]).

In this equation, the indices i, j and t denote countries,
industries and years, respectively; LP denotes labour productivity;
prodgap is the "productivity gap"--which is measured as the (log)
ratio of the level of productivity in each country or sector
relative to that of the productivity leader--and PMR is the
regulation impact indicator of anti-competitive product market
regulation. Country, industry, and country-industry fixed effects
are included as appropriate so as to account for unobserved
time-invariant factors affecting productivity growth in a
particular sector or country (e.g., natural endowments or
location). Time dummies are also included to control for global
productivity shocks in any given year.


Table 3.2 also reports simulations undertaken to evaluate the impact of moving to best practice in individual non-manufacturing sectors taken on their own. (14) This exercise may be helpful to establish reform priorities based on where reform may have the largest impact. Focusing on professional services, the electricity and gas sector, and retail distribution, the simulations show that thorough reform of professional services is likely to give larger gains in Italy than in most countries and also that in Italy it would give the most significant effects of the three sectors considered. This result reflects the poor regulatory policy currently in effect for professional services in Italy compared with that in other countries. Aligning regulation in this sector to international best practice or to the EU 75% percentile, without any reform in other sectors, would increase overall labour productivity by just over 7% over the next 10 years. In other sectors, aligning on international best practice gives smaller but significant gains: 2 1/2 per cent over 10 years for electricity and gas, nearly 5% for retail distribution.

The OECD Review of Regulatory Reform

In line with the indicators of reform described earlier, the latest OECD Review of Regulatory Reform (OECD, 2009) reports that there have been significant improvements in the regulatory situation in Italy since 2001. In particular many of the recommendations from the 2001 review on competition policy have been implemented and the Competition

Authority has shown itself to be independent and effective. The policy areas highlighted for attention in the Review include, among others:

* Strengthening capacity for reform, through investment and staffing, both in ministries and agencies.

* Making better use of tools such as consultation, regulatory impact assessment, and administrative simplification.

* Improving the efficiency of the system of civil justice.

* Strengthening competition in the context of the more complicated "multilevel" regulatory system that regional decentralisation has created. This includes strengthening competition policy as a key tool for the development of an efficient national market.

* Introducing productivity-enhancing liberalisation in key service sectors such as retailing, transport and professional services.

One of the important conclusions of the Review is that Regulatory Impact Assessment (RIA) needs to be developed much more widely and strongly in Italy than at present, in parallel with the Taglia Leggi law (15) which is beginning to reduce the actual number of laws that regulate the economy; some political impetus may have been given to the process by the designation of a specific Minister for "Normative" (i.e. in the sense of administrative rules and regulations) Simplification. RIA is supposed to be a regular part of legislative design, having been largely experimental until legislation in 2005. But despite the experimental period, the technical capacity for carrying it out is very weak, and in practice it seems very rarely to affect the choice of regulatory approach. For example, an important aspect of RIA is to ask whether the intended aim of a regulation could be better achieved with some other approach. European Union Council (2004) reports that the rules governing use of RIA in Italy do require early investigation of alternative options. But in practice RIA in Italy is most often carried out at the end of the process of developing a law so that this important part of it is largely irrelevant. The same report notes that the frequency of use of RIA is relatively low. It seems that the guidelines in place in Italy for use of RIA reflect good practice to a large extent, but that its use in reality falls well short of what the guidelines recommend.

A parliamentary Committee for Simplification of Legislation was established in 2005 (succeeding an earlier Committee on Improving Public Administration, with similar aims, set up in 1997) to promote better quality legislation. Promoting wider and more sophisticated use of RIA should also be part of this body's aims. A frequent practice in developing legislation has been for laws to be first published in the form of "decree laws" which are later converted into normal laws, a process that seems to squeeze out the requirement for RIA. This was the case for the main measures of the 2009 finance laws, published as decree laws in June/July 2008, so that measures such as exempting overtime from income tax were not subject to RIA. Simplified guidelines for RIA were issued in late 2008 to try to increase their use, with some danger that the result would be less useful analysis than if the rather good, but largely ignored, existing guidelines were followed more systematically. Better planning of legislation and strengthening of the analytical capacity for carrying out RIA in public administration are needed as well.

On the other hand, the idea of formalised analysis for some purposes is gaining ground in various ways--as an example, most regions now require large stores who wish to open a new outlet to evaluate such things as the effect on the existing commercial network, transport infrastructure, or the environment. But use of RIA by the regions to evaluate their own, regulatory, actions appears in most cases still to be largely a formal "box-ticking" exercise, at best.

The role of public administration

Efficient regulation depends on efficient public administration--in the design of laws and regulation and in their implementation. In general these two aspects involve different parts of the administration and, with the growth of responsibilities at the regional and local level, the opportunities for introducing inefficiency may have increased. The existence of the Unit and Committee for Simplification and the earlier committee to improve public administration testifies to the recognition by successive governments that both aspects of public administration need improving. While anecdotal evidence of inefficiency is easy to find, a global assessment is much more difficult. This section briefly discusses four areas that illustrate problems or possible solutions: the judicial system; aspects of local government; the status of government employees and agencies; and the Public Expenditure Review.

The judicial system

The administration of civil justice (this section does not address criminal justice) is an area where subjective views and some objective data concur. Courts are very slow, with average duration of cases at the lowest level of courts being 223 days (in courts before a justice of the peace) or 494 days (before a tribunal) in 2004, compared with 246 days in France and between 200 and 350 days in Germany (Bianco et al., 2007). Italy also scores poorly on a number of other measures (Table 3.3). (16) Of course, improving judicial efficiency--speed--in the judicial system has to be done with due regard for the basic objective of the system, of giving fair and consistent interpretations of the law. The time it takes to decide any individual case is not a clear indicator of whether it was handled efficiently. But there is sufficient evidence in international comparisons on the one hand, and in variability within Italy on the other, to show that there must be room for considerable improvement without jeopardising justice itself. There is huge regional variation, even at the lowest level of courts where the nature of the cases is likely to be quite homogeneous across the country; in 2006 the slowest district averaged 1 599 days, against 555 for the quickest (Istat data, quoted in Bianco et al., 2007).

As in many countries, judges have no explicit incentives to increase their "throughput". But research shows large variations in the speed with which judges in the same court (who have no control over which cases they hear and thus presumably have, on average, equally "difficult" workloads) complete their cases (Contini et al., 2007). If judges could be made aware of and induced to adopt the methods of faster colleagues, processing speeds could no doubt be substantially increased. Incentives faced by lawyers also tend to encourage longer trials: they are required to be paid for each judicial act they undertake, such as an interview or production of a document, and cannot be paid a fixed sum per trial, although as from 2006 contingency fees have been permitted. They thus have a strong incentive to multiply the number of acts they perform, increasing both the time taken and the size of court files. Modifying the fee system for lawyers to reduce these perverse incentives is one important step; fees could be fixed ex ante according to criteria related to the nature of the case.

A more technical reform could allow specialisation by judges. Currently, judges in the lower courts receive cases at random, a useful procedure for avoiding corruption; but if there were some specialisation, many cases could proceed faster. In some geographical areas, specialisation would be difficult because there are not enough judges in each court to allow random allocation within each type of case, so some merging of local courts may be a pre-requisite to improved efficiency. The Spending Review by the Technical Committee on Public Finance (Ministry of Finance, 2008) recommends reform of the fee system and specialisation by judges with some mergers of the smallest courts, along with a number of other recommendations based on an assessment of which incentives and procedures currently favour inefficiency.

Uncertainty over the outcome and the length of time court cases take has led to a dichotomy between small and large cases. The lower courts are overwhelmed by a large number of cases covering small claims. But larger commercial claims, generally involving larger companies, are very frequently settled through arbitration clauses, which may be written into many contracts partly, or even specifically, to avoid the problem of slow procedures in the courts. Such "privatisation" of civil justice is in one sense an efficient response to slowness in public courts, but may add to private contract costs. For example, it could be a barrier to the expansion of small firms if this expansion involves taking on outside partners, because this might mean that the firm is now so big that social networks cannot be expected to regulate behaviour--more formal contract enforcement through the courts would be required and that might be felt to be too onerous.

Local government and local services (17)

As in many countries, services such as refuse collection and treatment, public transport, waste-water treatment and sometimes water supply, electricity and gas, have in the past been provided directly by local government, responsible only to itself. Gas and electricity supply have now been largely reformed, with a national regulator, but the other services are not generally subject to effective competition and are regulated at the local level.

In most cases, services are now provided by incorporated companies rather than local governments themselves, providing greater accounting transparency at least. But these companies are frequently the former municipal departments transformed into wholly-municipally-owned companies. Their employees may have the same de facto job protection as when they were civil servants. Local governments thus still face conflicts of interest, having to act variously as a regulator, employer of sub-contractors, service manager and shareholder, and the companies themselves are also likely to have limited flexibility in adjusting their workforce. Despite strong recommendations from national government, few public services have been subject to competitive tenders. This should soon become compulsory (a law to this effect has been passed, but implementing regulations have yet to be issued), but according to the Competition Authority, of the 20% of contracts so far opened to tender in the period prior to tenders being compulsory, 9 out of 10 were awarded to the incumbent operator.

Full privatisation of these companies (or at least a separation from local authorities sufficient to ensure the absence of any conflict of interest) thus seems to be a pre-requisite to using competition to improve productivity. Just as at national level, this would require some attention to underlying structure to take account of possible elements of natural monopoly and to separate ownership of network infrastructure from that of service operators. Hence, while local road transport could benefit from having several competing operators, water and refuse disposal services could be awarded through competitive tender to a single operator, for a specified period. Finally, to monitor these services effectively strong independent regulators are necessary. National regulators, such as for electricity and gas supply, would be best placed to ensure efficient regulation, both by gaining economies of scale in regulation and to minimise the likelihood of local regulatory capture (See Bianco and Sestito, 2008).

Managing public employment and public agencies

Improving public sector efficiency is a difficult challenge everywhere. There seems to be more room for improvement in Italy than in many OECD countries, however. But measures that change incentives can work; a recant pilot project (Operazione fannulloni--"Operation do-nothings") was able to reduce absenteeism significantly in a number of ministries when it was made clear that effective disciplinary action would be taken where abuses were found.

The terms under which civil servants are now employed have indeed been changed. The standard contract is now a fixed term of S to 7 years, and performance pay is now permitted. Such reforms are likely to need some time to change mentalities, and need to be pursued consistently both by ministers and by civil service managers. Former minister for public administration Bassinini reported that resistance to some aspects of the changes still comas from the trade unions, even though they agreed with and even actively supported the principle of introducing aspects of private sector employment to the public sector (Bassanini, 2008). Furthermore, the intended system of performance related incentives has not been very effectively implemented: little effort has been put into designing appropriate objectives and performance pay has been highly diluted, so that the discipline that it could exert on managers is absent.

One success story has been the conversion of the tax collection system into a semi-independent agency, the Agenzia delle Entrate, with its own budget that management can use flexibly to achieve targets and the ability to recruit some managers from outside. The result has been improved performance in tasks such as checking tax declarations. Revenue performance was also surprisingly strong in 2006-08 as the government introduced a tighter policy on reducing tax avoidance, though it is hard to say whether the reorganisation of the Agenzia played a significant part in this. This example is in some ways a special case because tax collection has some fairly obvious quantitative measures of performance (though simple quantity of revenue is not sufficient, accuracy and fairness matter as well, for example). But while the Agenzia may not be a model that all administrations can follow, it does show that where objectives are specified and performance is evaluated, outcomes do improve.

The Ministry for Public Administration is enthusiastically promoting renewal of reforms which were in many cases started in the late 1990s but not fully followed through. Its objectives range from increased transparency (18) to continuing to push for objective-setting and performance management in ministries. There is a degree of bipartisan support for this kind of reform; for example, one parliamentary proposal is for an independent commission to be set up to monitor the progress of reform of the public administration. More important, however, is full commitment by successive governments to the development and implementation of reform. For example, in France, the development and implementation of the framework law on finance laws was spread over 6 or more years, started under a left-leaning government but continued and implemented more or less unchanged under a right-leaning government.

The public expenditure review

The first report of the Technical Committee on Public Finance, published in June 2008, covered the judicial system (as described earlier) and the Ministries of Education, of the Interior and of Infrastructure and Transport. It focuses particularly on identifying ways to reduce costs without compromising basic objectives; this may be through budget reform or improved information systems, better co-ordination between different public bodies, personnel recruitment and career management, or through use of evaluation tools. Often, in parallel with the message of the previous section, it suggests ways to introduce incentives to improve performance of the public administrations involved and, in some cases, for individuals or for teams. This is particularly important in the context of the need to contain and reduce overall public spending given the high level of public debt. With effective guidance as to which kinds of spending are more effective than others, necessary spending restraint, or even reduction, can be accompanied by improvements in efficiency.

There are signs that this approach has at best been only partially taken on board. For example the review of education expenditure and the 2007 white paper on education both correctly observe that the teacher/pupil ratio in Italy is much higher than in other OECD countries and that other countries get better results with relatively fewer teachers. The budget plans for 2009-11 therefore include significant cuts in teacher numbers, but whether the legislative provisions will be sufficient for successful implementation and provide the right incentives has yet to be seen. As for performance incentives, the white paper and the spending review contained many suggestions and the Education Minister does seem to be in favour of introducing such incentives. Chapter 4 of this Survey takes up this point, among others.

In the longer term, public expenditure planning should use the results of exercises like the spending review to improve efficiency. It was intended that the Technical Committee should produce further reports on other spending ministries. The tasks related to spending review work have now been transferred to the General State Accounting Office within the Ministry of the Economy and Finance; work is now focusing on issues that cut across all administrations, such as budget management and spending procedures, identifying bottlenecks and improving flexibility, and identifying performance indicators. It is to be hoped that such work will be reinforced, with adequate resources, and continue to focus on identifying ways to increase cost efficiency, including further detailed studies of specific programmes. It should be able to complement the implementation of the public administration reforms, since both processes need to identify measures of performance and incentives that lead to their improvement. The new approach to planning public spending over a three year period, which includes giving spending managers some more flexibility in allocating resources, will also benefit from having a dispassionate review of where resources are most needed. The review of the judicial system found that two different sets of accounts, the Bilancio dello Stato and the Conto Annuale, are inconsistent. This is apparently a problem which also affects most other parts of the public administration and it must clearly be a priority to eliminate such apparent inconsistencies.
Box 3.2. Key recommendations on growth-promoting regulatory reform

Implement recommendations from the Regulatory Reform Review,
notably by following up and completing the Bersani reforms in areas
such as the liberal professions, from lawyers to taxis, and in
transport, retail and commercial distribution.

Maintain and strengthen the basic rule that competition policy's
key yardstick must be the interests of customers, not of producers,
employees or the state.

Improve efficiency in the administration of civil justice by
permitting fee structures and procedures that encourage
simplification of documentation and accelerated handling of cases.

Pursue reform of public administration to increase the focus on
improving output-based measures of performance.

Reinforce the use of auditing mechanisms, whether ex ante such as
Regulatory Impact Assessment or ex post such as Public Expenditure
Reviews.


Notes

Bibliography

Aghion, P. and R. Griffith (2005), Competition and Growth, the MIT Press, Cambridge, Massachusetts.

Aghion, P. and P. Howitt (2006), "Appropriate Growth Policy: A Unifying Framework", Journal of the European Economic Association 4, No. 2-3, pp. 269-314.

AGCM (2008), "Considerazioni e proposte per una regolazione proconcorrenziale dei mercati a sostegno della crescita economica", Autorita Garante della Concorrenza e del Mercato, Rome.

Ark, B. van, J. Melka, N. Mulder, M.P. Timmer and G. Ypma (2002), "ICT Investments and Growth Accounts for the European Union 1980-2000", Research Memorandum GD-56, Groningen Growth and Development Centre, September (downloadable from www.eco.rug.nl/ggdc/pub/).

Arnold, J., G. Nicoletti and S. Scarpetta (2008), "Regulation, Allocative Efficiency and Productivity in OECD Countries: Industry and Firm-Level Evidence", OECD Economics Working Papers, No. 616, OECD, Paris.

Bartelsman, EJ., J. Haltiwanger and S. Scarpetta (2007), "Cross-Country Differences in Productivity: The Role of Allocative Efficiency", mimeo.

Bassanini, R (2008), "Dieci anni dopo la legge 59 del 1997: un bilancio delle riforme amministrative degli anni novanta", www.astrid-online.it/rassegna/13-10-2008/ Bassanini--Tavola-rotonda-Roma-TreTER-_3_-_2_.pdf.

Bertoni, F., M. Colombo and L. Grilli (2008), "Venture Capital Financing and the Growth of New Technology-Based Firms", available at SSRN: http://ssrn.com/abstract=1102233.

Bianchi, M., M. Bianco, S. Giacomelli, A. Pacces and S. Trento (2005), Proprieta e controllo delle imprese in Italia, il Mulino, Bologna.

Bianchi, M. and M. Bianco (2009), "Le riforme nella corporate governance negii ultimi 15 anni: quali effetti?", in Rondi L. and F. Silva (eds.), "Prove di Cambiamento nel Sistema Produttivo Italiano", Il Mulino.

Bianco, M., S. Giacomelli, C. Giorgiantino, G. Palumbo and B. Szego (2007), "La durata (eccessiva) des procedimenti civili in Italia: offerta, domanda o rito?", Rivista di Politica Economica, September-October.

Bianco, M. and P. Sestito (2008), "La riforma delia regolamentazione dei servizi pubblici locali in Italia: linee generali e insegnamenti per il futuro", Bank of Italy, Questioni di economia e finanza, No. 18.

Bloom, N. and J. Van Reenen (2007), "Measuring and Explaining Management Practices across Firms and Nations", Quarterly Journal of Economics, 122 (4).

Bloom, N., Sadun R. and J. Van Reenen (2007), "Il gap managerial del vecchio continente", La Voce, www.lavoce.info/articoli/pagina2872.html.

Boarini, R. and H. Strauss (2007), "The private internal rates of return to tertiary education: new estimatesfor 21 OECD countries", OECD Economics Department Working Paper, No. 591.

Boeri, T. (2002) "The political economy of flexicurity", mimeo, Universita Bocconi, Milan.

Bronzini, R. and P. Piselli (2006), "Determinants of long-run regional productivity: the role of R&D, human capital and public infrastructure", Bank of Italy Economic Research Paper, No. 597.

Colombo, M. and L. Grilli (2005), "Founders' human capital and the growth of new technology-based firms: A competence-based view", Research Policy, Vol. 34, No. 6, August.

Codogno, L. (2009), "Two Italian Puzzles: Are Productivity Growth and Competitiveness Really so Depressed?", in M. Buti (ed.), Italy in EMU, Palgrave Macmillan.

Contini, F., D. Coviello and A. Ichino (2007), "Duration of Trials and the Individual Productivity of Judges", mimeo, Universita di Bologna, www2.dse.unibo.it/ichino/lpj_catt_3.pdf.

Conway, P., D. de Rosa, G. Nicoletti and F. Steiner (2006), "Product Market Regulation and Convergence", OECD Economic Studies No. 43, 2006/2, OECD, Paris.

D'Addio, A. and M. Mira d'Ercole (2005), "Trends and Determinants of Fertility Rates: The Role of Policies," OECD Social, Employment and Migration Working Papers, No. 27.

Del Monte, A. and E. Papagui (2003), "R&D and the growth of firms: empirical analysis of a panel of Italian firms", Research Policy, Vol. 32(6), June.

European Union Council (2004), "A comparative analysis of regulatory impact assessment in ten EU countries", Dublin, May, www.betterregulation.ie/attached_files/Pdfs/Report%20on%20RIA%20 in%20the%20EUa.pdf.

Formez (2006a), "L'amministrazione per sportelli", Quaderni Formez No. 38, Ministry of Public Administration, Rome.

Foster, L., J. Haltiwanger and C.J. Krizan (2006), Market Selection, reallocation and restructuring in the US retail trade sector in the 1990s. The Review of Economics and Statistics, 88(4), 748-758.

Giacomelli, S. and S. Trento (2005), "Ownership, control and transfers of Italian firms. What changed in the ten years 1993-20037", Bank of Italy Discussion Papers, No. 550.

Griliches, Z. and H. Regev (1995), "Firm Productivity in Israeli Industry: 1979-1988", Journal of Econometrics, 65:1 (January), pp. 175-203.

Ichino, P. (2008), "What prevents workers from choosing their employer: new labour policies frontiers in the globalization era", mimeo.

ISAE (2007), "Priorita nazionali. Ambiente normativo, imprese, competitivita: I vincoli amministrativi allo start-up", Istituto di Studi e Analisi Economica, Rome, June.

ISAE (2008), "Priorita nazionali. Infrastruttura materiali e immateriali", Istituto di Studi e Analisi Economica, Rome, June.

Istat (2008), "Universita e Lavoro", Istituto nazionale di statistica, www.istat.it/lavoro/unilav/.

Jaumotte, F. (2003), "Female labour force participation: past trends and main determinants in OECD countries," OECD Economics Department Working Paper, No. 30.

Marchesi, D. (2008), "Giustizia civile, buoni obiettivi e occasioni mancate", in M.C. Guerra and A. Zanardi (editors), Rapporto sulla Finanza Pubblica, il Mulino.

Micossi, S. (2006), "L'impresa tra dirigismo e mercato", Rivista di Politica Economica, July-August.

Micossi, S. (2008), "The decline of the Italian economy: weak entrepreneurs or bad policies?", Scuolasuperiore della pubblica amministrazione, Reggia di Caserta, mimeo.

Ministry of Finance (2008), "La revisione della spesa pubblica, Rapporto 2008", Ministero dell'economia e delle finanze, Commissione tecnica per la finanza pubblica, Rome.

OECD (2001), OECD Reviews of Regulatory Reform: Regulatory Reform in Italy.

OECD (2003), "ICT and Economic Growth: Evidence from OECD countries, Industries and Firms", OECD, Paris.

OECD (2004), Ageing and policy challenges: Italy.

OECD (2005), Economic Survey of Italy.

OECD (2006), Going for Growth, OECD Publishing, Paris.

OECD (2007), Babies and Bosses--Reconciling Work and Family Life: A Synthesis of Findings for OECD Countries, OECD Publishing, Paris.

OECD (2008), Employment Outlook.

OECD (2009), Regulatory Reform in Italy: Better Regulation to Strengthen Market Dynamics, forthcoming.

Schivardi, F. and R. Torrini (2004), "Firm size distribution and employment protection legislation in Italy", Economic Working Papers, No. 504, Bank of Italy.

Sianesi, B. and J. Van Reenen (2003), "The Returns to Education: a Review of the Empirical Macro-Economic Literature", Journal of Economic Surveys, 17(2).

Triplett, J.E. and B.P. Bosworth (2004), Services Productivity in the United States: New Sources of Economic Growth. Brookings Institution Press, Washington DC.

Ughetto, E. (2008), "Does internal finance matter for R&D? New evidence from a panel of Italian firms", Cambridge Journal of Economics, Vol. 32, No. 6.

Viviano, E. and F. Schivardi (2007), "Entry Barriers in Italian Retail Trade", Bank of Italy Economic Research Paper, No. 616.

(1.) Workers in the public sector have similar protection in practice.

(2.) For a discussion of the challenges of raising employment rates for older workers in Italy, see OECD (2004).

(3.) A recent revision to the method for deriving export prices and volumes made a big difference. Relative prices are now seen to have risen much less than earlier thought, undermining arguments based on this data.

(4.) Ichino (2008) mentions a number of example, including an unsuccessful attempt by the Swiss-Italian rail company Ti-Lo (Treni regionali Ticino-Lombardia) to introduce working conditions--and pay--for its Italian workers similar to those for its Swiss employees, the opposition to a foreign takeover of Alitalia, and other examples in which choices that were at least potentially Pareto-improving for Italian workers could not even be offered to them.

(5.) OECD (2005) devoted a chapter to corporate governance issues. See Micossi (2008) for one perspective, also P. Ichino (2008).

(6.) See e.g. Foster et al. (2006), Griliches and Regev (1995), Bartelsman et al. (2007).

(7.) Schivardi and Torroni (2004), in a study using a longitudinal database of firms between 1986 and 1998 estimate that removing the threshold effect would increase average firm size by only I%.

(8.) However, the authors find that venture capital financing has a positive impact on firms' success which is not due to founders' education, but has most likely to do with the true added-value in terms of networks, resources and skills of venture capitalists.

(9.) A number of important origin countries (notably Romania, also Poland) are now EU members. Changes in official population numbers are complicated by regularisation of illegal immigrants, when sharp rises in the official population do not necessarily imply such large true increases.

(10.) Regulation is necessary to correct market failure, for example. Not all regulations are well-designed however, and an estimate of the output foregone is useful to judge whether regulations have costs that exceed their expected benefits.

(11.) The model takes into account certain specific conditions in Italy--notably the distance between levels of productivity in different industries and that in the corresponding industry leader country; but the small sample size obliges the econometric model to assume that the reaction to policy changes, conditional on these specific country characteristics, is the same in all countries. The simulations thus show the expected reaction of an "average" OECD country, if its economic structure were similar to Italy's.

(12.) Note that "best practice" is interpreted here in terms of the numerical value of the relevant PMR indicators, not the specific underlying policies; different sets of policies can result in the same level of the indicator.

(13.) Note that there is currently no country that has the least restrictive regulatory policy in every single sector, whereas this simulation would imply bringing Italy to the forefront of regulatory practices of all OECD countries.

(14.) Note that the effects reforming single non-manufacturing sectors are not simply additive in the simulation model. In fact, the sum of the impact of the single-sector reforms is larger than the expected impact of a thorough reform of all services sectors, due to the non-linearities and the catch-up process built into the empirical model.

(15.) The "law for cutting laws". This provides for a systematic assessment of existing legislation to establish whether laws still in force have not in fact been superseded by subsequent legislation and, where they have, to abolish them. Under the Tag|ia Leggi process, the budget legislation in autumn 2008 (decree-Law 112) abolished 3 500 obsolete laws and a later decree-law abolished a further 29 000. But with the second phase of the programme, intended to improve legislation still in force, still under preparation, its contribution to simplification in practice is hard to assess so far. The legislation also instituted a search for administrative "entities" (the Taglia-enti) that could be cut. In one example of how good intentions are not always fulfilled, nine "entities" were identified for closure in the first phase of this process, but none of them were in fact closed, owing to the number of exceptions and special cases allowed for in the law (Il Sole 24 Ore 15/12/08.).

(16.) See Marchesi (2008) for more information and more detailed presentation of possible measures.

(17.) This section draws substantially on AGCM (2008).

(18.) In mid-2008 it launched a campaign to oblige each ministry to publish the curricula vitarum and salaries of all senior officials on the ministerial Website. By December 2008 about half of the ministries had done so.
Table 3.1. Productivity (1) growth by sector, period annual averages

                                    1990-95   1995-2000   2000-06

Total                                   2.1         0.8       0.1
Agriculture, hunting,
  forestry and fishing                  7.4         5.0       0.4
Industry including energy               3.8         0.9       0.0
  Mining and quarrying                  7.7         3.0      -2.1
  Manufacturing                         3.9         0.9      -0.2
    Food products,
      beverages and tobacco             1.5         1.5      -1.1
    Textiles, textile products,
      leather and footwear              5.4         1.0      -1.8
    Wood and products
      of wood and cork                  2.8         4.3      -0.2
    Pulp, paper, paper products,
      printing and publishing           2.8         1.9      -0.5
    Chemical, rubber, plastics
      and fuel products                 5.2        -1.5       0.3
    Other non-metallic
      mineral products                  3.4         3.1       0.7
    Basic metals and fabricated
      metal products                    5.7         0.3      -0.2
    Machinery and equipment             3.7         0.0       0.3
    Transport equipment                 0.3         2.0       0.0
    Other manufacturing;
      recycling                         3.1         1.4       0.4
  Electricity gas
    and water supply                    3.6         1.9       3.9
Construction                           -1.7        -0.5       0.3
Total services                          1.3         0.5       0.1
  Wholesale and retail trade;
    restaurants and hotels              3.0         1.3       0.2
  Transport storage
    and communications                  4.4         2.8       2.0
  Finance insurance real estate
    and business services               0.4        -2.9      -2.0
  Community social and
    personal services                  -0.7         0.2       0.4

(1.) Value added (volume, chained prices) per hour worked.

Source: DECD STAN database.

Table 3.2. The potential effects of improving
regulation in the future Percentage increase
in productivity over 10 years

                             Sectors simulated:

                    All sectors       Electricity and gas

                                                   Degree
                                                 of reform
              To 2007      To EU      To 2007      To EU
                best        75th        best        75th
              practice   percentile   practice   percentile

Italy           14.1        13.7        2.8         2.5
Belgium         15.8        15.6        3.5         3.5
Canada          14.4        14.1        5.6         5.5
Denmark            8         7.3        2.6         2.3
Finland          6.8           6        2.1         1.8
France          10.3          10        1.4         1.3
Netherlands      8.3         7.4        3.2         2.8
Portugal        12.2        11.8        3.8         3.6
Spain           13.9        13.8        4.5         4.5
Sweden           1.6         7.7          0           0
Total           11.4        10.9        2.6         2.6

                            Sectors simulated:

                     Retail          Professional services

              To 2007      To EU      To 2007      To EU
                best        75th        best        75th
              practice   percentile   practice   percentile

Italy           4.9         4.8         7.4         7.3
Belgium        11.9        11.7         4.4         4.3
Canada          7.8         7.6         8.5         8.3
Denmark         5.4         5.1           3         2.6
Finland         4.2         3.9         1.8         1.3
France          7.4         7.2         1.9         1.8
Netherlands     4.8         4.3         4.9         4.2
Portugal        7.2         6.9         4.3         4.1
Spain          10.9        10.8         5.1         5.1
Sweden            0           0           0         1.2
Total           6.9         6.4         4.2         3.7

Source: OECD calculations.

Table 3.3. Indicators of legal system efficiency

                 Court and      Trial       "Honorary"
                   trial      judges per      judges
                  expenses      10 000       (Giudici
                 per capita   residents       Onoran)

                    2004         2004          2004

Austria             62.4         2.1           n.a.
Denmark             28.7         0.7           n.a.
Finland             46.7         1.7            7.2
France              46.7         1.0            3.6
Germany             96.3         2.5            4.3
Ireland             31.3         0.3            0.0
Italy               67.0         1.0            1.0
Netherlands         67.4         1.1            0.6
Portugal            49.8         1.5            0.7
United Kingdom      22.6         0.4            5.5
Spain               55.5         1.0            0.3
Sweden              61.2         1.9            8.5

                     Completed proceedings
                          per euro (1)

                       Penal        Civil

                       2001         2001

Austria                 0.8          2.9
Denmark                 3.8          3.6
Finland                 1.5          2.3
France                  2.2          2.2
Germany                 0.7          4.0
Ireland
Italy                   1.4          1.4
Netherlands             1.0
Portugal
United Kingdom          2.1          4.1
Spain
Sweden                  0.9          0.9

                              Average duration
                              of cases (days)

                                                 Contractual
                                                   dispute
                    Divorce    Dismissal        (adempimento)

                       2004         2004            2005

Austria                                              342
Denmark                 100                          190
Finland                 240          264             228
France                  423          342             331
Germany                 302                          394
Ireland                                              217
Italy                   582          696           1 210
Netherlands             117           19             408
Portugal                308          244             495
United Kingdom                                       229
Spain                   251           80             515
Sweden                                               208

(1.) Calculated using PPP, with Netherlands as numeraire.

Source: ISAE (2008) Table 1, p. 5, quoting: European
Council--Commission for the efficiency of justice; RGS;
Netherlands Council for the Judiciary; World Bank.
COPYRIGHT 2009 OECD Publications and Information Centre
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2009 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:OECD Economic Surveys - Italy
Geographic Code:4EUIT
Date:Jun 1, 2009
Words:13800
Previous Article:Chapter 2: Weathering the storm: the financial system in Italy.
Next Article:Chapter 4: Towards better schools and more equal opportunities for learning.
Topics:

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters