The Italian Sports Car Cluster (Pdf)
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The Italian Sports Car Cluster Aaron Bigbee - Francisco Irarrazaval - Felipe Raddatz - Adam Ross - Aparna Sarma The Microeconomics of Competitiveness May 5, 2006 I. Country Analysis Historical Background Although Italy’s territory has been in the center of historical events for over three thousand years, the modern country of Italy has only existed since the late 19th century. The modern country began with the defeat of Napoleon in 1815 and it ended after the Franco Prussian war in 1871. The parliamentary government that was then established came to an end in the early 1920s, when Benito Mussolini established a fascist dictatorship. He later made an alliance with Nazi Germany that led to Italy's defeat in World War II. In the year 1946, a democratic republic was set up, and Italy experienced a sustained period of strong economic growth. After WWII, Italy became a charter member of NATO and was involved from the outset in the creation of the European Community. Italy joined the European Monetary Union in 1999. Located in southern Europe, extending from the Alps to the central Mediterranean Sea, the country enjoys a privileged location at the center of Europe. This location has influenced and enriched Italy’s culture, while helping create a long and diverse legacy of art. Among its population are small groups of German and French natives, and smaller groups of Slovene- Italians in the north and Albanian-Italians and Greek-Italians in the south. The predominant religion is Roman Catholic with mature Protestant and Jewish communities and a growing Muslim immigrant community. This diversity further enriches Italy’s artistic legacy. Political and Judicial Background The 1948 Constitution established a bicameral parliament, and a complete separation of the nation’s three powers: executive branch, legislative and judiciary. Parliament members are elected for five-year periods directly by Italian citizens. The minimum voting age is 18 for the lower camera and 25 for the senate. Italian Presidents are elected for seven years by members of the parliament. The president nominates the prime minister, who proposes the other ministers; both officials require the support of both cameras. “The President of the Republic represents the unity of the nation and has many of the duties previously given to the king of Italy. The president serves as a point of connection between the 1 three branches of power: he is elected by the lawmakers, he appoints the executive, and is the president of the judiciary. The president is also the commander in chief of armed forces”1 Members of Parliament used to be elected by proportional representation (PR) in multi member electoral districts. This system produced a highly fragmented legislature and high rates of government turnover. From 1945 to 1993, there were a total of fifty-two governments, which on average lasted less than a year in office. In August 1993, after a period of political turmoil, a new electoral system was adopted. 75% of the representatives would be elected using a single member representative by district, while the remaining 25% would be elected by PR. After the adoption of the new electoral system, things seem to have improved, but not as much as expected. “Italy has had eight governments over the course of the past eleven years, which on average have lasted a little more than a year in office.”2 In 1999 and 2000 there were two referendums attempting to eliminate the 25% of the chamber seats being filled through PR, but both were not approved due to low voter turnout. Nevertheless, polls indicate that there is an increasing frustration among the Italian citizens with the instability of their political system, so an eventual reform is likely to happen. The Italian constitution grants total independence to the judges. Nevertheless, reality seems to have been radically different: “In 1992, a number of public prosecutors, succeeded in breaking down the wall of silence and complicity that had concealed widespread corruption perpetrated for years by Italian politicians, civil servants and entrepreneurs to finance political parties. Well- known businessmen, top-ranking political leaders and ministers had to face the shame of imprisonment; even a former prime minister avoided imprisonment only by leaving the country and living abroad. This was dubbed by journalists the Clean Hands campaign.”3 After the Clean Hands campaign, prosecutors and magistrates (mainly from Milan) achieved historical rates of approval, and political parties lost voter confidence. The Christian Democrats, a perennial government power, and the Socialists were dissolved. New political parties were created to take their place.4 1 Wikipedia: “Politics of Italy”. 2 Ibid. 3 Kessler (2004). 4 Ibid. 2 Recent Economic Performance "Italy has very serious economic problems. It needs an injection of free-market, liberal, economic reforms." -Alberto Alesina, Chairman of Harvard Economics Department5 Italy’s long run performance, measured by growth in GDP per capita, appears on-par with peer countries since 1960 (Exhibit 1). However, a closer look at the last 15 years seems to indicate that Italy is falling behind (Exhibit 2). Italy’s annual growth in GDP per capita from 1990 to 2004 is a mere 1.29%, compared with the 1.52% of Euro-12 and the 1.90% achieved by the U.S. This is why The Economist refers to Italy as “Europe’s laggard.”6 Why is this happening? The proximate cause pointed out by most onlookers is productivity. Data indicates that Italy is not only failing to increase its productivity, but is even becoming less so: labor productivity fell by 0.1% annually in the period 2000-04.7 EXHIBIT 1: Real GDP per capita, 1960-2004 EXHIBIT 2: Real GDP per capita, 1990-2004 (1960=100) (1990=100) 350 135 Euro-12 Euro-12 130 OECD OECD 300 Italy 125 Italy USA USA 250 120 115 200 110 150 105 100 100 3 9 5 7 9 2 60 63 66 69 72 75 78 81 84 87 90 9 96 9 02 90 91 92 93 94 9 96 9 98 9 00 01 03 04 00 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 19 19 19 19 19 19 19 19 19 19 20 20 2 20 20 Source: World Bank Development Indicators Source: World Bank Development Indicators In 2005, Italy had a fiscal deficit of 4.3% of GDP. Authorities are targeting 3.5% for 2006 and below 3% by 2007 (which is the Euro Zone maximum limit). This adjustment will be achieved mostly by expenditure cuts and strict implementation of budget controls. Total governmental 5 Alesina (2006). 6 The Economist (Nov 2005). 7 As measured by GDP per hour worked. Groningen Growth and Development Centre. 3 outstanding debt exceeds 100% of GDP. While the fiscal deficit and overall debt levels have not increased the interest rate so far, but are likely to do so in the coming years.8 Inflation has been an enormous issue in Italy’s past. The country struggled with chronically high inflation throughout the 1980s and early 90s. With the adoption of the euro in 1999, however, the country gave up monetary autonomy and now enjoys a strong, stable currency. The Italian population has remained constant at 58.1 million for the last 3 years. Nevertheless, labor force participation has increased, due to population replacement by foreign immigrants. Immigration is a “new phenomenon” in Italy9, the country having been for many years a net supplier of emigrants. Unemployment rates have fallen from 11.4% in 1998 to 7.7% in Q3 2005, the result of a successful government initiative to reform the labor market and wages in 2000.10 Differences between Northern and Southern Italy An interesting characteristic of Italy is the significantly different economic performance in northern regions versus the southern ones. Northern Italy has a significantly higher level of income and lower rate of unemployment (see Exhibits 3 and 4). Furthermore, Northern Italy is among the richest regions in all of Europe, when measured by disposable income (see Exhibit 5). EXHIBIT 3: Regional GDP per Capita 2002 EXHIBIT 4: Regional Unemployment Rate 2002 26 3.7 27 3.8 3.4 26 5.1 30 26 3.4 25 29 6.3 3.3 23 4.4 25 4.8 22 19 5.7 6.2 12.6 26 8.6 14.0 17 15 15 18.5 21.1 16 15.3 14 24.6 Regional GDP Regional per capita 2002 15 Unemployment (Thousand Euro) Rate 2002 (%) 20.1 8 IMF (March 2006). 9 Bertozzi (Nov 2002). 10 IMF (Feb 2006). 4 Source: Eurostat Source: Eurostat EXHIBIT 5: Regional Disposable Income, Europe 2002. 2002 REGIONAL DISPOSABLE INCOME In Red: Higher than 15.000 euros per year. In Grey: No Data. Source: Eurostat Italian Clusters Exhibit 6 shows the composition of Italy’s biggest clusters in terms of export value, according to the International Cluster Competitiveness Project (ICCP). Included in the graph are 12 clusters, all of which had an export value of more than $10 billion in 2003. Italy’s agricultural and metal, mining and manufacturing clusters have experienced the most growth over recent years. Italy’s largest clusters, production technology, hospitality and tourism, and automotive, have been stagnant or declining. Other findings include: • Exports of goods, including automotive, are sent mostly to Europe (72%). • Italy’s natural resources exports account only for 0.5% of its GDP and 2.4% of exports. • Italy has the most industrially-diversified exports in the ICCP sample, measured by the lowest percentage of exports concentrated in the Top 50 Industries (42%). • Italy has significant strength at the cluster level in world markets (Table 1): Seven Italian clusters are among the top 3 in the world, and 15 are in the top 5 (from a sample of 42 clusters), giving Italy a 17% and 36% share.