The ICT Revolution and Italy's Two Lost Decades∗
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The ICT Revolution and Italy's Two Lost Decades∗ Fabiano Schivardi Tom Schmitz LUISS University, EIEF and CEPR Bocconi University and IGIER May 19, 2017 PRELIMINARY AND INCOMPLETE - PLEASE DO NOT CIRCULATE OR CITE Abstract Since the middle of the 1990s, Italy's catching-up process with respect to other advanced economies has ended, and output per capita has started to diverge. One potential reason for this divergence is the failure of Italian rms to take up the ICT revolution. We provide micro-level evidence on low ICT adoption in Italy, and show how it is linked to inecient management practices and amplied by input- output linkages. We then build a general equilibrium model with heterogeneous rms, management and ICT adoption choices, and production networks, and use it to analyse the quantitative importance of the ICT revolution for Italy's divergence. We nd that the ICT revolution can account for approximately 25% of the divergence between Italy's and Germany's GDP per hour worked between 1995 and 2015, the largest part being due to inecient management lowering the adoption rate and the productivity of ICT technologies. While the best way for Italy to catch up would be to improve management practices, the fact that production networks create externalities which make ICT adoption ineciently low creates a role for subsidy policies to improve aggregate outcomes. Keywords: Italy, Productivity slowdown, Divergence, ICT, Technology adoption, Management. JEL Codes: L23, O33 ∗Schivardi: Department of Economics, LUISS University, Rome, Italy, [email protected]. Schmitz: Department of Eco- nomics, Bocconi University, Via Roentgen 1, 20136 Milan, Italy, [email protected]. 1 1 Introduction From the end of World War 2 to the middle of the 1990s, Italy had higher or equal GDP growth rates than the United States and Northern Europe. Since then, however, Italian growth has been dismal, driven by exceptionally low productivity growth. Between 1995 and 2015, real GDP per hour worked in Italy grew by just 6%, whereas it increased by 24% in the entire Eurozone, 28% in Germany and 40% in the United States (see Figure 1). The reasons for this twenty-year long divergence between Italy and other developed economies are still not fully understood.1 Figure 1: Growth and ICT adoption 1.4 5 4 1.3 3 1.2 2 1.1 1 GDP per hour worked, 1995 = 1 1 0 1995 2000 2005 2010 2015 ICT capital services per hour worked, Real Euros 1980 1985 1990 1995 2000 2005 Year Year USA Italy US ITA Germany GER GDP per hour worked ICT intensity Note: GDP per hour worked is taken from the OECD (available at http://stats.oecd.org, accessed on May 18, 2017). ICT intensity is measured by ICT capital services per hour worked from the EU KLEMS database. This series is only available up to 2007. Dollar values for the United States are converted into Euros by using the average exchange rate between 1999 and 2007. In this paper, we analyse and quantify one potentially important reason for divergence: the failure of Italian rms to take up and eciently use Information and Communication Technologies (ICT). Indeed, the ICT revolution has been an important driver of productivity growth in other developed countries since the mid- 1990s (Fernald (2014), Gordon (2016)).2 In Italy, however, it has made relatively little headway. In 2007, Italian rms' ICT capital per hour worked stood at roughly one third of the German and one fth of the US level (see Figure 1). In the European Commission's 2016 Digital Economy and Society Index, Italy ranks 15th out of 19 Eurozone countries for the integration of digital technology in rms.3 We argue that the low diusion of the ICT revolution and its comparatively small impact on productivity are due to the 1Italy's experience is similar to that of other Southern European countries. For instance, Spanish real GDP per hour worked also increased by only 16% between 1995 and 2015, and Spain's TFP growth was even lower than Italy's. 2In 1987, Robert Solow famously complained that you can see the computer age everywhere, except in the productivity statistics (Solow (1987)). However, Fernald (2014) and Gordon (2016) show that around ten years later, ICT caused productivity growth in the United States to accelerate substantially for about a decade (1994-2004). They also note that growth has slowed down since, and Gordon claims that it will remain low in the foreseeable future. Yet, even the lower growth rate of US productivity between 2005 and 2015 is substantially higher than the Italian one in that same time period. Also, others have been more optimistic about the future productivity-enhancing capacities of ICT (Brynjolfsson and McAfee (2014)). 3Luxembourg, Greece, Latvia and Estonia are ranked lower. See https://ec.europa.eu/digital-single-market/en/desi. 1 lower eciency of Italian rms' management practices. Building on the widespread empirical evidence on the complementarity between ICT and ecient management (Brynjolfsson and Hitt (2000), Garicano and Heaton (2010), Bloom et al. (2012)), we show that inecient management practices have lowered both ICT adoption and ICT productivity. Furthermore, they have skewed the Italian rm size distribution towards small rms, further depressing ICT adoption rates because of xed adoption costs and production network externalities. We argue that these factors can explain a sizeable share of Italy's divergence. Using micro-level data from the European Union's Community survey on ICT usage and e-commerce in enterprises, we rst provide evidence on ICT adoption rates in Italy and Germany (which we use throughout as a point of comparison). We show that Italian adoption rates are lower for a range of ICT technologies. This appears to be due to ICT demand rather than ICT supply factors, and in particular, to the inecient management practices of Italian rms. Finally, we show that production networks matter. Italian adoption rates are particularly lower than German ones for technologies which are useful to rms if others in their production network have adopted them as well, such as software for supply-chain management (SCM). Furthermore, the SCM adoption choice of rms is positively correlated with the presence of large rms in the same industry and region before the ICT revolution, suggesting that SCM adoption by (large) nal producers spills over to their (smaller) suppliers. We then build a general equilibrium model with heterogeneous rms, ICT and management adoption choices, and production networks, in order to quantify the importance of the ICT revolution for divergence and to do some counterfactual policy experiments. The basic features of our model are similar to a standard Melitz (2003)/Hopenhayn (1992) framework. A continuum of nal producers produce a set of dierentiated goods under monopolistic competition. To enter the market, rms pay a xed entry cost and take a productivity draw from an exogenous distribution. After learning the outcome of this draw, they decide whether to stay in the market and produce (in which case they need to pay another xed cost) or to exit. We enrich this standard setting by allowing rms to increase their productivity through management and ICT, and by introducing intermediate inputs. Management and ICT both increase nal producers' productivity, but have a xed adoption cost. Importantly, we assume that rms can only adopt ICT if they also adopt management, in line with the strong complementarity documented by the empirical literature. As adoption benets are proportional to productivity, but adoption costs are not, nal producers then sort into dierent categories according to their productivity draws: the rms with the highest draws adopt both management and ICT, rms with intermediate draws adopt only management, rms with lower draws do not adopt any of the two, and the rms with the lowest draws exit the market. Each nal producer uses labour and a set of rm-specic intermediate inputs, produced by suppliers. Suppliers are modelled analogously to nal producers, but we 2 assume for simplicity that they produce only with labour and cannot adopt management. However, they can adopt ICT, which helps them to reduce some iceberg coordination costs between themselves and their nal producer, if and only if the latter has also adopted ICT. This strong complementarity captures the network component of technologies such as SCM, and introduces an externality, as rms do not fully internalize the eects of their ICT adoption decision on their production network. We calibrate this model to the Italian and German economies. Precisely, we compare both countries' equilibria before the ICT revolution (when we assume that the ICT technology is not available) to their equilibria after the ICT revolution (when we assume that it is), assuming they dier in only two parameters, management and ICT productivity. These parameters capture the productivity increases due to the adoption of these two technologies. We calibrate them using microeconometric evidence from Bloom et al. (2012, 2016), and nd that both are lower in Italy, as inecient management both directly lowers productivity and reduces the eciency with which rms use ICT. We nd that the ICT revolution increases income dierences between Italy and Germany. Low ICT produc- tivity directly lowers aggregate productivity, as less Italian rms adopt ICT and the adopting rms increase their productivity by less. This direct eect is compounded by an indirect selection eect: as the most e- cient rms expand less, inecient rms can stay in the market. Low management productivity further lowers the benets of ICT adoption with respect to its costs. Furthermore, the ICT revolution eventually increases the share of rms using management, and therefore increases the diusion of an inecient technology in the Italian economy. Finally, production networks add a multiplier eect, as lower ICT adoption by nal producers spills over to suppliers.